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6 Signs You’re Ready to Retire Early

Re-posted from 6 Signs You’re Ready to Retire Early

They’re questions nearly all young and middle-aged workers have asked themselves: Should I leave my job and retire early? What would I need? How do I know I’m ready?

If you’re considering retiring early, you’ll forego not only the headaches of working, but also the additional money earned that could have made your retirement even more comfortable. To help you decide, here are six signs you may be able to retire early instead of continuing to work.

1. Your Debts Are Paid Off

If your mortgage is paid off and you don’t have any loans, credit lines, large credit card balances or other debt, you won’t have to worry about making large payments during retirement. This leaves your savings and retirement income available to enjoy life after work, and free to use in the event of an emergency, rather than having it tied up in paying off large bills.

2. Your Savings Exceed Your Retirement Goals

You planned, set a goal for retirement savings and now your investments meet or exceed the amount you were hoping to save. This is another good sign you could take early retirement. However, keep in mind that if you do leave work several years before you planned to, your savings must be enough to cover these additional retirement years. If you didn’t set up your retirement savings plan for an early retirement, you will need to recalculate the length of your savings, including these additional years. Also, depending on your age, you may not yet be eligible for Social Security or Medicare. Your savings will need to cover your expenses until you reach the eligible age.

“Think ‘Rule 25.’ Prepare to have 25 times the value of your annual expenses,” says Max Osbon, partner at Osbon Capital Management in Boston, Mass. “Why 25? It’s the inverse of 4%. At that point, you only need to achieve a 4% return per year to cover your annual expenses in perpetuity.”

3. Your Retirement Plans Don’t Have an Early Withdrawal Penalty

No one likes to pay unnecessary penalties, and early retirees going to a fixed income are no different. If your retirement savings include a 457 plan, which doesn’t have an early withdrawal penalty, retiring early and withdrawing from the plan won’t cost you extra in penalties; but take note – you’ll still pay income tax on your withdrawals.

There’s also good news for wannabe early retirees with 401(k)s. If you continue working for your employer until the year that you turn 55 (or after), the IRS allows you to withdraw from only that employer’s 401(k) without penalty when you retire or leave, as long as you leave it at that company and don’t roll it into an IRA. However, if your 59th birthday was at least six months ago, you’re eligible to take penalty-free withdrawals from any of your 401(k) plans. These policies generally apply to other qualified retirement plans besides a 401(k), but check with the IRS to be sure yours is included.

“There is a caution, however: If an employee retires before age 55 [except as noted above], the early retirement provision is lost, and the 10% penalty will be incurred for withdrawals before age 59-1/2,” says James B. Twining, CFP, founder and CEO of Financial Plan, Inc., in Bellingham, Wash.

A third option for penalty-free retirement plan withdrawals is to set up a series of substantially equal withdrawals over at least five years, or until you turn 59-1/2, whichever is longer. Like withdrawals from a 457 plan, you’ll still have to pay the taxes on your withdrawals.

If your retirement plans include any of the above penalty-free withdrawal options, it’s another point in favor of leaving work early.

4. Your Healthcare Is Covered

Healthcare can be incredibly costly, and early retirees should have a plan in place to cover health costs during the years after retiring and before becoming eligible for Medicare at age 65. If you have coverage through your spouse’s plan, or if you can continue to get coverage through your former employer, this is another sign that early retirement could be a possibility for you. Take a look at the cost of an ambulance ride, blood test or monthly, non-generic prescription to get an idea of how quickly your health costs can skyrocket.

Another option for early retirees is to purchase private health insurance. If you have a Health Savings Account (HSA), you can use tax-free distributions to pay for your out-of-pocket qualified medical expenses no matter what age you are (though if you leave your job, you won’t be able to continue making contributions to the HSA). It is too early to say how health insurance and its costs will change and how affordable private healthcare will soon be, given President Trump’s and the Republican Congress’s goal of repealing the Affordable Care Act. Keep in mind that COBRA may extend your healthcare coverage after leaving your job, though without your former employer’s contributions to your insurance coverage, your costs with COBRA may be higher than other options. To learn more, see What You Need to Know About COBRA Health Insurance.

5. You Can Currently Live on Your Retirement Budget

Retirees living on fixed incomes including pensions and/or retirement plan withdrawals usually have lower monthly incomes than they did when they were working. If you have already practiced sticking to your retirement income budget for at least several months, then you may be one step closer to an early retirement. If you haven’t tried this yet, you may be in for a shock. Test out your reduced retirement budget to get an immediate sense of how difficult living on a fixed income can be.

“Humans do not like change, and it is hard to break old habits once we have become accustomed to them. By ‘road-testing’ your retirement budget, you are essentially teaching yourself to develop daily habits around what you can afford in retirement,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”

6. You Have a New Plan or Project for Retirement

Leaving work early to spend long days with nothing to do will lead to an unhappy early retirement, and can also lead to increased spending (shopping and dining out are sometimes used to fill the time). Having a defined travel, hobby or part-time employment plan or even the outline of a daily routine can help you ease into early retirement. Perhaps you’ll replace sales meetings with a weekly golf outing or volunteering, and add daily walks or trips to the gym. Plan a long-overdue trip, or take classes to learn a new activity.

If you can easily think of realistic, non-work-related ways to enjoyably pass your days, early retirement could be for you. In the same way that you test-drive your retirement budget, try taking a week or more off work to spend your days as you would in retirement. If you become bored with long walks, daytime TV and hobbies within a week, you’ll certainly get antsy in retirement.

The Bottom Line

When it comes to deciding if you should retire early, there are several signs to watch for. Being debt-free, with a healthy retirement account that will support your extra years not working is critical. In addition, if you can withdraw from retirement accounts without penalty, get access to affordable healthcare coverage until Medicare kicks in and have a plan to enjoy your time not working while living on a retirement budget, you just may be ready to retire early. The best way to be sure you can successfully make the transition is speaking with your financial professional.

Read more: 6 Signs You’re Ready to Retire Early | Investopedia
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How soon can I retire?

Reposted from “How Soon Can I Retire?”

TIME FOR SAVINGS. Watch and coins copy space concept for saving fund, financial, banking, investment, money or other your content. Malaysia coins. – How soon can I retire? June 1, 2017

 NEW YORK (CNNMoney) — “How do I calculate the earliest possible date I can retire — my “take this job and shove it!” date — beyond which working is my choice and earnings are gravy?” — Jason, New York

Like Jason, many of us are counting down to the day we can say “shove it!” to a job we hate and pursue our own interests. But most people wrongly assume that day won’t come until our 60s or 70s. Lots of people are taking the concept of “early retirement” to new extremes by becoming financially independent in their 50s, 40s, or even 30s.

While the concept of “retirement” may sound boring to some people, early retirement guru Brandon of the Mad Fientist blog prefers to call it “freedom.”

“Retirement makes you think of [old people] moving to Florida,” he says. “But really, retirement is freedom. Freedom to do what you want to do with your time, freedom from jobs you don’t like, freedom from bosses you don’t like.”

Brandon, who only uses his first name for privacy reasons, is part of an online movement of early retirement enthusiasts who preach that retirement is attainable for anyone at almost any age. It’s just a matter of calculating how much it costs for you to live, and saving up enough to support yourself for the rest of your life.

First, understand the math.

There are many schools of thought on how to calculate your number, depending on your spending and age.

“Traditional late-retirement advice aims to maximize lifetime consumption and what people therefore look at is either saving a million dollars or saving 10-15% of all income over some 40 years on the job,” explains Jacob Lund Fisker, author of the book and website Early Retirement Extreme.

But for those who want to retire much sooner than age 65, he says, that conventional advice does not apply.

“The goal [for early retirement] is to save 25-35 times one’s annual expenses. Once this goal is reached, one is financially independent and working is a choice.”

The early retirement rule is simple: For every $1,000 you spend a year, you need to invest $25,000 to $35,000.

The more money you save, the more you’d have to spend. Similarly, and key to many young retirees, the less money you spend each year, the less you have to save and the sooner you can retire.

This breaks down to spending, Fisker says. “The easiest way to find $1,000/year in the budget is to start the few largest expenses — namely, housing, driving, and eating. It’s easier to make a few decisions about a few big items than constantly make decisions about many small items.”

But how do you make the money last for decades? A common rule of thumb is what’s known as the “4% rule.” “This equation multiplies your spending by 25 to give you how much you need to save. If you need $40,000 per year, multiply that by 25 a year, you get a million bucks,” explains Fisker, “$40,000 is 4% of a million.”

But that assumes your money consistently earns at least 4% a year. Some experts think the rule is flawed and could cause some early retirees to run out of money.

Fisker takes an even more conservative approach with his equation: Annual expenses should be less than 3% of your invested savings. So for that same $40,000 a year in income, you’d need $1.3 million invested. (Fisker also has other tips on calculating how much money you need to retire.)

And of course, it never hurts to start planning early.

“Less than a decade of delayed retirement savings can cost someone $1 million in forgone savings,” says financial adviser Barbara O’Neill. “People who start saving at age 34 and accumulate $1 million at age 67 could have saved $2 million had they started at age 25, assuming an 8% average annual return.”

Or, they could have just retired much sooner.

Second, figure out when you’ll get there

So now that you have a general idea of the amount you need to call it quits, it’s time to figure out how long it’ll take you to get there.

A million dollars may seem like a big number, but the more you can save, the faster you’ll reach your goal. Say you’re 25 and you want to retire by 45. Investing $1700 a month will get you to a million in 20 years, assuming an 8% return. Too steep? Learn to live on less and you won’t need a full million. Or be less ambitious about your retirement age. Saving $675 a month will get you there by age 55. This CNNMoney calculator can help you figure out how long it’ll take.

Or try the FI Tracker on the Mad Fientist blog. This online app allows you to track your progress toward financial independence by calculating your net worth, expenses, savings, and countdown to retirement.

If this all feels too overwhelming, you can always find a Certified Financial Planner to walk you through the steps and coach you through your best path toward retirement.

“My best advice to someone trying to figure out if they can retire is to spend some time with a CFP to help them make one of the biggest decisions in their life,” says financial planner Howard Pressman. “You really only get one shot at this and it’s worth doing it right.”

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