Over my career as a financial advisor and radio show host I’ve talked with many people who are late into their 60s or even 70s and still working. So when I wrote my book, You Can Retire Sooner Than You Think, I felt the need to educate people about the possibility of retiring in their late 50s or early 60s. Ever since my book was published last spring, though, I’ve heard about more and more people trying to retire at the super early age of 50!
While that wasn’t originally what I meant with “retiring sooner than you think,” that doesn’t mean it’s impossible. Business owners, entrepreneurs and lottery winners might feel confident about this move, but for a hard working American with a more traditional 9 to 5 job it can sound more like a daydream than a reality.
Ultimately, it comes down to calculating exactly what you’ll need for retirement (don’t forget about inflation), and then looking at your savings to see if you can retire without Social Security or a pension since neither are typically available until at least age 62. An easy way to get started is by using Capital Investment Advisors’ retirement calculator.
When evaluating if early retirement is financially feasible for you, remember that your assets need to produce some source of residual or perpetual income. I think of it in the following easy to remember acronym, RIDD.
If you want to get RIDD of your 9 to 5 job you should have Rent, Interest, Dividends and Distributions.
Let’s break this down.
When I say rent, I’m talking about someone paying you rent. Generally speaking, a $150,000 home should produce about $1,000 a month. If you own this home without a mortgage, then that money can go straight into your pocket.
Interest, Dividends and Distributions all feed into my method of income investing. For a quick refresh:
– Dividends from stocks
– Interest from various types of bonds
– Distributions from a variety of investments that don’t fit neatly into the stock or bond category
Depending on how you weight each category, an income producing portfolio should be able to produce an annual “cash flow” in the 4 to 5 percent range.
Based on my $1,000-Bucks-A-Month Rule, someone at “normal” retirement age retirees (62-65), can plan on a 5 percent withdrawal rate from their investments. However, younger retirees in their 50s should plan on withdrawing a lower number than 5 percent per year, typically 4 percent or less. The reason for this is because if you retire in 50s, there is simply too long a time horizon to start withdrawing 5%- it’s just too early.
In years that the market and interest rates are in a normal historical range, the 5% withdrawal rate works well (again, if you are normal retirement age or an older retiree). But you must be willing to adjust your withdrawal rate in any given year if market forces work against you. You may need to take less in those years and be flexible enough to adapt to what’s happening in our economic environment. This might mean that you can take a little extra in the good years, but it’s critical to understand that you might need to take less in the years that aren’t as good.
When calculating what you’ll need in your early retirement be sure to include the cost of your medical insurance. You’ll need to cover that cost at least until you reach 65 and are eligible for likely lower cost of Medicare.
An additional perk to phasing into retirement is the possibility of being offered health insurance through your employer. While there are a lot of different rules and regulations around who does and does not have to offer health insurance, generally speaking if you start working for a company in 2016 with over 50 employees and work at least 30 hours a week then you should be offered health insurance.
Super early retirement is not an easy thing to achieve; however, it’s entirely possible for those who are determined and plan ahead. It’s important to start early with saving and invest in assets that will continue to pay you over time.
If you’re thinking about getting onto the path for early retirement, but you have trouble with putting together a detailed budget, just remember TSL. That’s Taxes, Savings and Life. If you put 30 percent of your gross income towards taxes, 20 percent towards savings, and then just live off of 50 percent, then you should increase your chances of a very early retirement.
Read the original article here.