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Could you discuss some pros and cons of early retirement? And how do I evaluate whether I can afford to retire early?
-- Judith Grout, Sun Valley, Calif.
I don't think many people will have trouble contemplating the pros of an early retirement. The upsides of cutting out of work early are the basis for much of our daydreaming, the pleasant reveries that get us through difficult days.
What's not to like? After decades of work, you get to unshackle yourself from your 9-to-5 (or, as is often the case these days, 8-to-6) ball-and-chain of a job and get a chance to do all the things you'd like to do.
Hiking the Himalayan foothills, taking a cruise through the Norwegian fjords, fly fishing in Montana or Vermont, donating time to your favorite charity.
The cons of early retirement
Alas, harsh reality often intrudes on this pleasant idyll.
First, there are lifestyle and emotional issues. Some people are just so focused on breaking away from their jobs that they don't think through how they'll actually spend their time. As a result, after an initial period of euphoria, one can begin to feel listless and disengaged.
Similarly, some people look forward to revisiting an interest or activity they'd dropped earlier in life -- painting, taking up a musical instrument, perhaps -- only to find that they don't have enough skill in that area to make the activity fulfilling to them.
Then there are the financial issues. Retiring early means you'll need to generate an income large enough to support you for 20, 30 even 40 or more years. That's a daunting without that regular paycheck (not to mention raises) coming in.
Sure, starting at age 62, you'll be able to tap Social Security, but you'll receive a reduced benefit. Which means you're going to have to rely on other pensions, if you're among the decreasing number of people who get traditional corporate pensions these days, and whatever retirement savings you've managed to accumulate in 401(k)s, IRAs and other retirement accounts.
That task -- turning your savings into a reliable income that will support you for a long retirement -- is a challenge for all retirees, but it's especially daunting for early retirees because they'll be making withdrawals from their savings for a longer period.
Not surprisingly, that increases the chance that they may run out of money before they run out of time. And we haven't even gotten into the health insurance expenses you may have to incur if you retire before age 65 when Medicare kicks in.
How do you know if you're ready?
Which brings us to the second part of your question. How do you evaluate whether you're financially prepared to call it a career?
There's only one way: go over the numbers.
Unless you're pretty certain you've got a medical condition or set of genes that dictates you're going to check out early, I'd say you should plan on being around until at least 90 and preferably to 95. In fact, it doesn't hurt to plan on living to 100.
Remember, you would rather overestimate your life span than underestimate it. The last thing you want to do is live to 90 but run out of assets at 85. So for people retiring at, say, 55, that means planning on a good 40 years or so in retirement.
Look at the numbers
You need a pretty big nest egg to support you over that length of retirement. Let's say, for example, you require a retirement income in today's dollars of $45,000 a year. And let's assume you can count on $15,000 from Social Security.
Assuming you won't also be getting monthly checks from a company pension, that means your retirement portfolio will have to throw off $30,000 a year in real dollars (in other words, your income would increase by the inflation rate each year so you maintain steady purchasing power.)
To support inflation-adjusted withdrawals over a period of 30 to 40 years, I would say that, as a rule of thumb, you need a portfolio roughly 25 times the amount you withdraw that first year of retirement.
So, in other words, if you needed $35,000 of inflation-adjusted income from your investments, you would need a portfolio of about $875,000. Actually, you'd need more since the earliest you could collect Social Security benefits would be 62. (That's not to say you should start collecting at 62. For more on the pros and cons of taking Social Security early vs. holding off for a larger benefit later on, click here.)
You might be able to get by with a smaller nest egg, but that would increase the chance that your portfolio might run dry while you're still alive.
As I said, this is just a rule of thumb. You can get a better sense of how long your portfolio might last at different levels of withdrawals by checking out T. Rowe Price's Retirement Income Calculator. For estimating Social Security benefits, you can check out one of the Social Security administration's benefit calculators.
Think about your lifestyle and budget
So before checking out of your current job for a life of leisure, I recommend you go through such an analysis. And don't just guess at the retirement income you'll need. The more specific you can be, the better sense you'll have of whether you're truly prepared.
Your best bet is to do a retirement budget using a worksheet like the one available at the "Turning Saving Into Retirement Income" area of the "Retirement Countdown" section of the TIAA-Cref Web site.
While you're at it, I also suggest you think about the lifestyle aspects of early retirement. Give some serious thought to what you want to do in retirement and how you'll actually fill the hours of the day without the demands of a job. I like to call this exercise "lifestyle planning," and for more on how to do it, click here.
If you do all this and find that you're ready emotionally and financially to push the eject button from your career early, then I say go for it. But if you're not quite ready on either front, better to put if off for a few years than make the leap into retirement and land with a thud.
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Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."