Friday, May 23, 2008

Financial Readiness For Early Retirement

In 2007, we made a big life decision and I retired in my forties. Since we were a single income family, an important part of the process was to determine whether we were financially ready for me to retire. In hindsight, I am confident we made the right decision, even with the economic uncertainty that exists today. Looking back, here are the elements that enable us to say "yes" to an early retirement decision.

  • Satisfied with lifestyle. We were happy with our lifestyle, which we consider comfortable and not extravagant. We don't expect any major increase in lifestyle expenses (e.g. more expensive home) and we're not big fans of acquiring things to signal wealth (e.g. expensive cars).

  • Only needed 80% of income. When I was working, we were saving about 20% of my salary and living off the rest. In addition, we had no debt other than the mortgage for our house. Making lifestyle and spending choices from the very beginning helped us do this.

  • Saved 20 times income. In my earlier research, I estimated that savings (e.g. taxable accounts, 401Ks, and IRAs) equal to 20 times my salary would be needed to retire early. I later confirmed the amount via my financial advisor, who used a Monte Carlo analysis to arrive at the same conclusion.

  • Good health and good health insurance. We are fortunate to be in good health. Also, I qualified for my company's retiree health insurance, which is the same coverage as for employees, but at a slightly higher cost. It would have been tough to retire without this benefit.

  • Of note, our situation is different than most retirees since we have a three year old child. However, we still feel that meeting the above criteria will enable us to have a good lifestyle in retirement for the next 40 years. Of course, even though we are confident in our analysis (and assumptions), there are no guarantees in life and we are prepared to return to work if needed.

    For more on Reaping the Rewards, check back every Friday for a new segment.

    This is not financial or retirement advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

    No comments: