Published April 16, 2013
No. 1: You Are Emotionally Ready to Quit Working
Both the big picture and the fine details of your financial and emotional states are important to consider when assessing your readiness for early retirement. If you're not emotionally ready to quit working, you may not be ready to retire.
"What are you planning on doing that will continue to allow you to enjoy your life, allow you to stay active mentally, emotionally and spiritually?" asks Richard Reyes, a CFP professional and coach with The Financial Quarterback in Maitland, Fla. "In retirement, every day is Saturday."
Being ready financially is a no-brainer. Jeff Currie, an adviser with Icon Financial Services in Boise, Idaho, offers this quick assessment of financial readiness: "no debt, a good pension that includes health insurance benefits, good savings and low expenses. All of these factors can lead to a person retiring early. In most cases, the early 50s is about the most realistic and early I have seen. It usually involves an inheritance to boost a person's normal assets."
While some tend to associate retirement with a specific age, "It's really about getting your budget and liabilities under control, then having a clear understanding of the resources available to create the desired and consistent retirement income you need," says Sean Lee, a financial adviser with SPL Financial in Salt Lake City.
No. 2: You Followed a Retirement Budget for 6 Months
Expenses may drop in retirement, but not as much as you might think. That's why crafting a post-retirement budget and living off that budget for six months before you retire can help you decide whether your budget is realistic and whether you can stick with it.
Treat this exercise as a serious trial run, says Amy Rose Herrick, an investment adviser in St. Croix, U.S. Virgin Islands. "If you can't do this for six months without raiding savings or tapping credit cards to live, you are not ready yet," she says.
To put that post-retirement budget together, you need to understand what your cash flow will be like after retirement, says Helen Hogan, an investment adviser with Sunset Financial Services in Red Bank, N.J. "How much money do you need every month, including the quarterly and annual expenses, the unexpected and hidden expenses?" she asks.
It's important to factor inflation into your budget, says Jamie Patrick Hopkins, an assistant professor of taxation at The American College of Financial Services in Bryn Mawr, Pa. "Inflation is low now, but it could easily go up to 5%," he says. "Fifteen or 20 years of that type of inflation can really eat into savings and increase expenses."
No. 3: You Have Reliable Health Insurance Coverage
Because Medicare doesn't kick in until age 65 and health insurance costs are rising faster than inflation, it's important to have a reliable, consistent source of health insurance. While health care reform will make health insurance more widely available, that coverage may get expensive. For many would-be early retirees, affordable coverage is most likely to come from a former employer.
"Having adequate health insurance and other insurance coverage including life, disability and long-term care is a factor in whether you can retire early," says Harrine Freeman, CEO of H.E. Freeman Enterprises in Bethesda, Md. A policy with low deductibles and copays that covers prescriptions, doctor visits, hospitalization, dental and vision will help keep out-of-pocket expenses as low as possible.
No. 4: Your Children Are Financially Independent
Children, especially in their college years, are expensive. To retire with children who are still financially dependent, there needs to be enough savings to cover college expenses, says Don Cummings, a financial adviser with Blue Haven Capital LLC in Geneva, Ill.
"Are there children with special needs who may be living in the household or perhaps on their own who will continue to be an expense?" he asks. "What about parents with similar needs?"
Hopkins notes that divorce can torpedo the most well-crafted retirement plan, leaving both parties with fewer assets, more expenses -- including legal fees -- and an extended period of financial uncertainty. While it's not possible to necessarily predict divorce, marital harmony about retirement dates, goals and spending lends stability to the family situation as retirement is contemplated.
No. 5: Your Debts Are Paid Off or Nearly Paid Off
One big sign that you are not ready to retire early: You still owe money to creditors.
Paying debt from a retirement budget cuts into what you can spend in retirement on doing the fun things that you've waited years to do, not to mention paying for necessary items such as utilities, taxes, food and home maintenance.
"My guidelines for early retirement include asking clients first whether their home is paid off," says Curtis Chambers, a financial adviser with Chambers Financial Group in Clearwater, Fla. "If it is not, then retirement is not on the radar screen. Second, do they have debt? If they have debt, they are probably not ready to retire."
No. 6: Your Portfolio is Big Enough to Withstand Losses
Because everyone's standard of living is different, there's no magic amount that automatically qualifies you for early retirement. That being said, a portfolio that is large and diversified by asset class can protect you in bad markets. If it's composed of different types of tax-deferred and tax-free assets, your portfolio is more likely to throw off enough income to sustain a long retirement than one that isn't.
"I tend to look at income that can be generated from a portfolio and use a 4% withdrawal rate. And I look at things like rental properties or business ownership that may generate other income," says Cummings. "In addition to that, we look at the potential for additional funds from business sales or inheritances and the size of the 401(k), deferred compensation plans, 403(b), pension, and guesstimate the amount of income that will generate when an individual turns 59 ½."
One gauge of whether or not you are ready to retire is the amount you have saved as a multiple of your income. According to Fidelity Investments, you should have saved at least eight times your pre-retirement income by age 67 to ensure a secure retirement. If you want to retire earlier than that, you should probably shoot for more.