Investor Education | Can you afford to retire early?
After working for years in a pressure cooker, many Americans dream of retiring to a life of leisure. Can you manage to retire early? For instance, you could be contemplating such a move on your own, or your company might make an early-retirement offer. Whether you can pull it off or if it is just a pipe dream may depend on the answers to the following questions.
Q. Are you ready financially?
A. You may have begun planning for retirement when you were young, intending to call it quits before you hit your mid– to late-50s. In that case, early retirement may be just what you are looking for. But if you’ve been putting off retirement planning, you may not be financially prepared to stop working right now.
Q. Will the money hold out?
A. If you plan to retire at age 55, it’s very possible you may have to depend on a fixed income for the next 25 years or more. Consequently, you have to consider how much income you will need during that time period and where it will come from. If you feel that you have enough money to live on currently, ask yourself how that amount will hold up over time.
With the help of an experienced adviser, you can develop an investment program that, at the very least, keeps pace with inflation.
On the other hand, if it seems likely that you may be forced to tap into your company retirement plan before age 59½, you should probably avoid early retirement. In general, tax-deferred assets,
such as 401(k) plans and other employer-sponsored retirement plans, should be allowed to grow without interruption for as long as possible. What’s more, tapping into the plan before age 59½ could result in a 10% tax penalty for early withdrawals.
Q. What about the future?
A. Take time to imagine the kind of lifestyle you’ll be living as an early retiree. Will the loss of a regular paycheck force you to cut back on certain activities you have enjoyed, such as elaborate vacations? Does it mean possibly having to relocate to an area where the cost of living is less expensive? Will retirement bring you relief or a sure ticket to boredom? These issues deserve serious consideration when making plans for your retirement.
You will likely face some difficult decisions. For instance, if early retirement will force you to change to a less satisfying lifestyle than what you have now, you might choose to keep working for a few extra years, maybe on just a part-time basis.
The more you can talk about your retirement concerns with someone you trust, the easier the decisions should be. Don’t hesitate to seek professional guidance.
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