Preparing to (Maybe) Live the Dream: The Reality of Retiring Early

Let’s first get the hard part out of the way: Is it possible for people to retire early? Yes. Absolutely. Okay, let’s now explore how an early retirement can become a reality for many working Americans.

Believe it or not, most people don’t particularly love working. That’s why we call it “work.” As a result, many Americans would prefer not to work, which means an early retirement—i.e., not working—is an aspirational goal for these people. Are you one of those people? If so, it’s best to consider what an early retirement, or preparation for early retirement, will look like.

What does “early retirement” even mean? For some, it means retiring as early as humanly possible, which might mean retiring tomorrow. More realistically, it’s best to settle on some actual dates. There are four primary age milestones that we use to determine “early retirement”:

Age 59 ½--Distributions before this age from qualified accounts such as a 401(k) or IRA are subject to a 10% early withdrawal penalty

Age 62—You are entitled to begin receiving your monthly Social Security benefits, albeit at a permanently reduced rate

Age 65—You become eligible for Medicare

Age 67—You are entitled to your full Social Security monthly benefits       

These dates are simply referenced points; you may retire anytime you wish, but these dates might place constraints on if or when you can comfortably retire.

Now, whether you retire at age 50 or age 70, the same question applies equally: Will you have enough retirement income to comfortably last you the rest of your life? In simpler, starker terms, will you run out of money before you die?

That all depends. Most people will receive a combination of retirement income from Social Security and their 401(k)/403(b)/pension/IRA assets. This combination will be your “nest egg”. The question to ask yourself isn’t really, “Can I retire early?”. The question to ask yourself is actually, “What does my nest egg need to be worth the day I retire that allows me to live comfortably the rest of my life?” The answer to this question will ultimately determine if early retirement is a realistic option.

How do you answer this question? There are three factors to consider:

  1. Your annual living expenses during retirement
  2. Your approximate life expectancy
  3. Your retirement assets’ expected rates of return during retirement

These are not terribly difficult questions to answer, so, once answered, we work backward to figure out an approximate sum. We, then, see where you are today as far as savings goals, and we work towards reaching your ultimate goal going forward.

This method is used for people planning to retire at all different ages. Here is a scenario to consider:


Person A

Current age: 40

Current 401(k) balance: $500,000

Expected rate of return: 6%

Current monthly contributions to 401(k): $600

Estimated monthly expenses during retirement: $3,000

Life Expectancy: 95


                                                                               Retire age 55                                Retire age 65


Years left to save for retirement                               15                                               25            

Years retirement income will be required               40                                                30

Years private health insurance will be required     10                                                 0

Years before penalty-free 401(k) distributions       4 ½                                                  0

Years before Social Security may begin                   7                                                  0

Estimated 401(k) value at retirement                       $1.37 million                             $2.55 million       

As you can see, early retirement poses some significant challenges, chief among them being that this person has fewer years during which to build the nest egg and more years in which they will need to the nest egg to last. Moreover, Social Security and 401(k) income won’t even be available for many years once early retirement begins.

So, have we sufficiently crushed your dreams of early retirement? That wasn’t our intention; we simply wanted to illustrate the challenges. If you are still determined for that early retirement dream, we will certainly offer some helpful solutions.

The scenario we provided assumes one constant: the monthly savings amount into a 401(k). If retiring early means fewer years to save into your 401(k) and more years to rely on your 401(k), an obvious solution is to save more into your 401(k) to compensate for the lost years of accumulating value. An early retirement will almost certainly require you to become a super-saver between now and your planned retirement year.

To tackle the other big challenge of early retirement—the restrictions on Social Security benefits and early 401(k)/IRA withdrawals—you will need additional sources of retirement income beyond these two. In the scenario above, the person will need income for at least 4 ½ years from some other source until they can dip into their 401(k) assets. What additional sources might be options? Large cash holdings and/or taxable accounts are possible options. In other words, if this person retires at age 55, they would require plenty of liquid assets not held in qualified retirement accounts to provide income until the 401(k) assets can be accessed without penalty.

Bottom line: early retirement can be achieved. Early retirement also poses some fairly significant challenges. To overcome these challenges, major savings goals need to be pursued between now and your ideal retirement date. There are things you can do today that make your early retirement dream a reality. As always, let us help you achieve those goals.     

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.

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