Updated: 6/6/2012 1:07 PM ET|
The 'secret' to early retirement
Want to quit the work force 2 to 5 years ahead of the crowd? The formula is surprisingly simple, if you have the discipline and don't start too late.
Industry surveys and coffee shop talk alike are full of alarming stories about how a growing number of those nearing retirement age will need to keep working past 65. Financial inadequacy is the culprit, especially on the heels of a recession that cut deeply into savings.
But what about those who have no desire, or ability, to work well into their 70s? Is there a way not just to retire "on schedule," but to leave the work force two years, five years or more ahead of schedule?
It can be done, though not everyone has the wherewithal to do so -- and the closer you are to retirement, the harder it is to accomplish.
- Calculator: Am I saving enough for retirement?
The key to a successful early retirement is realizing that "everything centers around spending policy," says Jonathan Satovsky, the chairman and CEO of Satovsky Asset Management in New York.
"If your spending rate is under 3%, you can pretty much weather any storm, as long as you are not speculating and putting everything on red," he says. "But as your spending rate creeps past 5%, you are forced to take more risk, and you need the world to cooperate to be able to insulate yourself from the chaos."
A crucial step is to craft a realistic post-retirement budget -- an honest assessment of future spending needs. Doing so requires more than the "guesstimate" many use to predict their future finances. All assets -- retirement accounts, Social Security, real estate and a general portfolio -- need to be tallied with realistic expectations for future gains and losses. Inflation, though held in check recently, has to be considered as imminent. A reasonable assumption, 3%, will erode savings at a compounded rate.
Reducing expenses can mean selling a home and downsizing. It can include moving to another state -- or even outside U.S. borders -- to reduce the cost of living and medical expenses.
Redefining your vision of "retirement" may also be needed.
"Among those who want to retire early, the ones I've seen who are most successful build a little bit of flexibility into their system," says Brent Burns, the president of Asset Dedication, a portfolio engineering firm that works with independent financial advisers and their clients on strategies for retirement income predictability.
"Maybe they mostly, but don't fully, retire. They go back and do a little consulting or part-time work. They also build a plan around their baseline expenses: 'Here's the things we really need to cover, and we'll only do the extra things when we can afford them.' Those are the people who can most successfully go ahead, retire early and start to enjoy the good life. But there's a qualifier to it."
Anxiety over having enough saved can sometimes yield a pleasant surprise for would-be early retirees.
More from TheStreet:
- 5 money mistakes made in the name of love
- 10 top financial and legal moves for couples
- 5 financial red flags for couples
"We see two camps," Burns says. "There are the people who figured they would have to work forever, who were really frugal, they saved and live a moderate lifestyle. It turns out they can go ahead and retire. They can go ahead and accelerate things.
"Then there are the ones who just never really did any planning and they end up in scramble mode. There are a number of people out there who have been making a lot of money, but living a lifestyle (that reflects it)," Burns continues. "For the folks that haven't been squirreling away, there's not a lot we can do. It's a shame, and I hate to see it, but from an investment standpoint, there's not much we can do."
Controlled spending is only part of the picture. Just as important is ensuring a suitable income stream. Social Security and drawing down on 401k's or IRAs will be a baseline. But especially as people live longer and more productively, establishing a suitable lifetime income stream is crucial. That necessity has been among the selling points, for instance, in the current wave of annuity products promoted by firms such as Fidelity, MetLife, John Hancock, Prudential, Genworth, New York Life and Allianz.
For people escalating their retirement date, their portfolios need to protect them from running out of money.
Burns is a proponent of using individual bonds as a safe "paycheck portfolio," with careful use of equities to ensure long-term appreciation.
"Most people aren't so frugal that they can spend whatever the yield curve is," he says. "They need some exposure to equities."
Burns advocates bond laddering, dividing investment dollars evenly among bonds that mature at regular intervals. He stresses the value of individual bonds over bond funds.
"By using individual bonds to build an income portfolio, you can build a time buffer," he says. "The person who wants to retire now, they have to keep their spending in check. And they need to give themselves time to let equity markets do what they do, which is occasionally go down -- sometimes a lot -- but go up more than they go down if you are able to hold them for a long time and not make dumb decisions at the wrong time. If you are just pulling money out of your portfolio and there's no real structure to the income piece, it gets really scary, and that's when people make the wrong decision at the wrong time."
"A big advantage for an individual bond is that when interest rates start to rise you already know your worst-case scenario," he adds. "Your worst-case scenario is the yield to maturity and then you get your principal back. Whereas with a bond fund you can lose money."
More from TheStreet:
VIDEO ON MSN MONEY
My best advice is to start as early as possible. I started at age 23 and have never put in less than 10%. When the market started tanking in October 2008, I put in the max of 30% until around December of 2009. When I get a raise, I increase my contributions by that percentage.
I'm 32, I've never made over 45k, and I've got just over 120k in my retirement account. The power of compounding cannot be overstated. Start early and be aggressive when you're young.
For me, the secret was knowing "how much is enough!". I determined what I wanted to be able to do in retirement and then determined how much it would cost to do it. I allowed for an inflation rate of 3.5 to 5% annually and for a life span of 25 years beyond my retirement date. Finally, I allowed myself a margin or error of 15% on all of the above including accumulate investments and based on this formula, my wife and I retired in 1982. Obviously, my life span has exceeded the 25 years I allowed and 4 stock market crashes since 1982 have damaged my income projections but we have still been able to live a very comfortable life style including a new luxury auto every 5 years, 30 day cruises twice a year, and other upper middle class living advantages. What we did can be done but it is not easy and involves reasonable expectations for the future and saving and investing to achieve those expectations.
Well if you retire be sure you have something to occupy your time with besides taking naps. There is no way to know how to keep up with inflation thou. You can be in great shape financially but medical problems can still wipe you out.
I have been retired for a while but still think working part time would be a good thing. If you have a passion for something before you retire be sure to get ready to do it. Also if you have a mortgage in this market it probably would be better to walk away and rent a place. That way you don't have to worry about maintaining it. Being a landlord is no bargain no matter what anybody says. Real estate just isn't keeping it's value for years to come I believe. Realtors and agents really aren't your friends anymore than bankers. So walking away may be the easiest solution but get a place rented while your credit is good.
Being old in this day and age is no bargain and 60 plus is not the new 40 plus it is just bs. Yes retiring gives you lots of time after a while the work world is just a past life. We all end up no matter how healthy you are with problems eyes and hearing I think is the most common. Also this connected world is leaving everybody unconnected peoplewise and nobody young has time for the old because they are caught up in the work cycle of life.
The best thing is your life has given you many good memories and you have a long term partner in your life to enjoy your retirement with hopefully. Also definitely try to stay out of debt once you are retired. The less stress the better enjoyment of retirement.
Duh! Save as much as you can the first 10 years after college, if you went to college.
Buy quality and avoid trendy expenses.
Spend as little on cars as possible since car payments are like setting money on fire. It's gone.
If you marry, make sure both of you understand the family finances and agree on how to spend. This is the most important.
Barring market collapses, you'll retire earlier.
Additionally, belt tightening, and a large enough nest egg to cover a few hundred a month in the red until Social Security kicks in allowed me to retire early. But because I've honed my skills over the years at getting the most for my money, it hasn't meant living like a hermit.
For example I treated seven of us to the International Auto Show on Sunday. Sunday was family day so the two kids got in free and I got the five other $10 tickets on Groupon for $5 each. What would normally cost $70 on Saturday cost $25 on Sunday. Restaurant.com has coupons for $100 off per table for $40, so we can try out a decent restaurant or two each month for $10 or so per person (you base the tip on the full cost). And store brands and warehouse/discount/dollar stores mean I save 1/3-1/2 on food and clothing.
It was Not my choice to retire early, but being laid off by a large company just before I could
receive my full penison and benefits..
Think they were on a out sourcing and greed kick..But with No Jobs to be had, whala,! I was
New dress code, No Gray Hair..
Will be glad to see Barrys laser beam effort on jobs for Americans to happen, but not
holding my breath till it comes about..?
I caution against listening too much to the advice of many people on here who just want to brag and don't offer any real insight. I deal with the terminally ill, and I can tell you this: You will never meet a more bitter person than the one who scrimped and saved all their life only to find out they have a terminal disease shortly after they retire and thought they would now enjoy the "good life."
Life is about balance. Each individual's circumstances are different, and what works for a "corporate type" who likely made in excess of six figures his whole life may be pure foolishness to someone who makes considerably less.
What I can say is that you should strive to spend money on that which matters most to you. Sit down with yourself and figure out what honestly makes you happy in the here and now. And then decide how much you can spend on those things while still being a responsible, self-sufficient citizen. Too many people let their decisions (financial or otherwise) be determined by impulsive emotions when they would have been better served by honest self reflection. Some buy buy buy in an attempt to fill an emptiness whereas others deny deny deny themselves joy in the here and now in an attempt to assuage anxiety and reach some future utopia that may never come.
Diversify and get paid. Counting SS, Pensions and dividends the whole thing generates 260 paydays a year. Not bulletproof but real close to it.
This article is just another redo of the same information with a different talking head. My concern is that this kind of blather (ie. living at under 3% of your portfolio) merely scares people and that's unfortunate since some people will probably take this guy as someone who knows more than anyone else.
It's been proven for years that you can start at 4% and add the amount of annual inflation and be okay. Of course it's very smart to withdraw as little as possible when the market is tanking and draw more when it's good (like what we have today). The key, as unoriginal as this article, is to diversify and move that diversification ever more to conservative as you age. Read a book like "The Elements of Investing" or something else that is close to the philosophy of Bogle (Vanguard's genius) to help guide your diversification and keep you on track.
I retired four years ago at 54 after being laid off from a management position. I know first hand that being reasonable with your spending and staying conservative (avoid financial people like, well, the guy being quoted here) and create your portfolio primarily using ETFs and mutual funds true to your diversification model and you should do well.
One tip from an early retiree: Retirement is especially wonderful on sunny days.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
RECENT ARTICLES ON EARLY RETIREMENT
Saving just a single month of expenses may take longer than you think. See how your savings rate affects how quickly you can build a solid emergency fund.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'