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How to Determine if You Can Retire Early

Retiring early can be done with the proper plan in place. Adviser Beau Kemp of Sensible Money outlines steps to consider.

By Beau Kemp, CFP

High returns in equity markets combined with the abnormalities the workplace has experienced in the past year and a half are leading more people to ask the question, “Can I retire now?”

If you are younger and asking this question, you’ll have more challenges in your retirement plan than a typical retiree who retires at age 65. Retiring early can be done with the proper plan in place, but it comes with unique challenges.

The first step in any retirement plan is to think about the lifestyle you want to live. Many retirees go through a psychological struggle once they realize how much free time they have. Also, your idea of early retirement could simply mean leaving your current job and working part-time somewhere.

The lifestyle you want has a direct impact on the budget you build. For example, if you want to go on lavish vacations then obviously, you’ll have more expenses to account for. At Sensible Money, we emphasize the importance of understanding your go-go, slow-go, and no-go years. Your go-go years are your most active and expensive, so the younger you are the longer you’ll have to account for these.

You need to make sure you account for everything when building your budget. Do your research on what your health care premiums will cost. Using a higher inflation rate for the beginning part of your plan also helps to account for your go-go years. The longer the retirement the greater the inflation impact. Another expense I have seen people forget or underestimate are future auto purchases that account for inflation.

Now that you know your budget, you can work backwards to calculate how much money you need in your various accounts. I split up the accounts in two categories – your early retirement assets and your “typical” retirement assets. Typical retirement assets should not be touched until age 55 or 59 ½, depending on the account. Some examples are a 401(k), Roth IRA, and traditional IRA. Early retirement assets are what will bridge the gap from your early retirement to when you can start to withdraw from your retirement accounts. This could be investments in a taxable brokerage account or income from rental properties. So, depending on when you want to retire, you may have to plan for two retirements – your “early” retirement and your “typical” retirement.

If your desire is to retire early, it can be done but it’s not going to happen by accident. You must plan accordingly while you are accumulating assets to set yourself up for the smoothest transition possible.

About the Author: Beau Kemp, CFP®

Beau Kemp, CFP®, is a financial planner at Sensible Money. He started as an intern while finishing his final semester at Northern Arizona University and has enjoyed seeing the impact a financial plan has on a person’s life ever since.

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