Want to Retire Early? Start Early.
By Christina Nellemann
(originally ran in the Reno Gazette-Journal July 2003)Many workers are tempted in their daily lives to retire early and leave the workforce behind. What these employees may not realize is that the planning for early retirement should begin with their first job, not during a middle age job crisis.
When it comes to retirement, the vast majority of Americans are woefully unprepared, financial planners warn, and are in for some nasty surprises when they quit the working world. When it comes to early retirement most Americans are not even considering the option. You should be worried if your retirement planning begins in your early 30s. Starting even a few years later can mean huge increases in the monthly savings needed to reach your goal.
Kay Dunham, a financial advisor with Wachovia Securities, said the biggest mistake people make in planning for retirement, early or otherwise, is not starting early enough.
“There have been 50-year-olds who have come to me and want to retire early at 55,” she said. “But by then it’s too late.”
Retirement planning should start with your first job and at least 10% of your pay should go to that plan. Dunham said even college students who are working part-time should try to put away at least 3 to 4 percent of their pay.
“Start very young and pay yourself every paycheck. At the highest level max out the contributions to your employee plan, then always have an IRA as well and then a regular savings plan and contribute to them every year,” Dunham said. “Pay yourself first by automatically deducting money out of your paycheck. But keep it out of your hands. Once it’s in your hands…it’s gone.
When contributing regularly to your retirement it will begin to add up. In 2003, a 401(k) plan offered through your employer allows you to put away as much as $11,000. An Individual Retirement Account allows you to put away as much as $3,000. Both of these options use pre-tax dollars.
What will you need to retire early? For realistic goals, the theory is to be able to live on 75 to 80 percent of your former salary. That means a 30-year-old today who wants to draw the inflation-adjusted equivalent of $60,000 a year in retirement would need a nest egg of about $3.5 million when he retires at age 65. Dunham believes that someone making $150,000 a year can easily live on 75 percent of their pay, but someone making $40,000 will find it to be more of a stretch.
Steve Bigham, a statistician for the City of Reno, is planning on using his public employee retirement plan to retire in 12 years at age 55 with 75 percent of his former pay. He feels confident that it will be enough to support him, his wife and their children.
“Any time you have a change there are some concerns,” Bigham said. “I believe I’ve budgeted well and we’ll have enough money, but that’s never a guarantee.”
Bigham believes by that time his house will be paid off, but is worried that inflation could take a large chunk of his retirement savings. However, his plan for early retirement doesn’t mean giving up full-time work completely.
“I would just like to do something different,” he said. “I would like to explore other occupational opportunities. Working for fun, like at a golf course.”
Some people have been able to sidestep this 75 percent theory. Paul Terhorst, a former accountant from San Francisco, retired at age 35. In his book Cashing in on the American Dream: How to retire at 35, Terhorst tells the tale of his quest for early retirement and how he and his wife now live work-free on about $24,000 a year generated by savings of only $500,000. They live simply, traveling most of the time and living the rest of the time in a small townhouse in Buenos Aires, Argentina where they also have their health plan.
Other people may be able to live on a lower percentage as well by bringing down their expenses as much as possible. Take into consideration having a paid-off house, grown children living on their own, all assets paid for and no debt and that 75 percent may begin to dwindle. Some people are able to live on 40 to 50 percent of their former income.
Taking an early retirement was appealing when the stock market was booming. Around 1997 and 1998 Dunham met with numerous clients who planned to retire young within 5 or 6 years. After the crash, she doesn’t see too many people interested in early retirement anymore.
“They didn’t get in quickly enough to preserve their money,” she said. “The one thing you must do if you are planning on early retirement is to diversify.”
Dunham is also an advocate for living beneath your means, keeping track of your expenses, developing good money handling skills and staying away from high-interest credit cards. Cars and homes being an exception, she said that if you can’t pay cash for something you don’t need it.
The benefit of early retirement, said Dunham is the opportunity to live your dreams. But you should find a meaningful way to fill your days. Jumping headfirst from full-time work to full-time leisure may be a shock to the system. Some people choose to ease into retirement by going down to a shorter workweek, working part-time or becoming a contract worker. Also be sure that your spouse and children know what your plans are. The last thing a spouse may want underfoot is a bored adult.
“You can’t spend your days sitting around in the recliner,” she said. “You’ll die.”
She may be right. According to a study by Dr. Derek Cook and colleagues from London's Royal Free Hospital School of Medicine and St. George's Hospital Medical School, middle-aged men who took early retirement were twice as likely to die in the five years after they finished work than those who remained employed. The reason for this, Dunham said, was that men, in general, spend their workdays in a structured environment. When that structure abruptly ends, they find themselves with a lot of time on their hands. Women have traditionally filled their days with both full-time work and housework.
When still working, begin introducing new interests into your life or continue cultivating the interests you have now. Imagine your days with no full-time work, what will you do? The hobbies you have now could be your full-time work in the future.
Gerry McCarroll, 56, from Reno, retired from her job as an Associate Planner for the City of Sparks at age 54.
“I worked for the City for 21 years, but I had also worked for the City of Reno and Washoe County previously. All of those entities are under the Public Retirement System of the State of Nevada,” she said. “An individual can retire at any age if they have 30 years in the retirement system. I had an accumulated total of 30 years, which included a small amount of time that I 'bought' from the system.”Her early retirement came at a time when her workplace became a political arena and a less positive place to work in.
“For a period of time I had a horrible supervisor who made my life miserable”, she said. “That was a major impetus for retiring early. I will have to say however, that for the last two years prior to retiring I had a wonderful supervisor who is now a fellow retiree and a great friend and colleague.”
McCarroll’s retirement was funded mostly through her employer’s plan.
“I had a Deferred Compensation Plan through the City of Sparks which gave me a nest egg,” McCarroll said “Also, once I retired I began a systematic withdrawal from my deferred compensation account which I now invest in mutual funds. So, it's an ongoing thing.”
Even with full-time freedom in her grasp, McCarroll is busier than ever. She cares for her two, little grandsons, works about 10 hours a week at a local firm and teaches part-time at TMCC. Her best advice for someone wanting to retire early is to have a plan on how to get there and an additional plan on what to do after early retirement.
“I would be very bored if I didn't have something to do every day,” she said.
If you are getting a late start in your retirement planning there are a few options for you. You can work longer, accept a much lower standard of living after retirement or live now as if early retirement is your biggest goal.
“The best thing about being retired is that I don't have to get up at 5:15 every morning”, McCarroll said. “In fact, I rarely set my alarm clock. It's also great to have a very generous retirement benefit automatically deposited in my checking account every month. I guess the very best thing is having a great deal of freedom. My life is very full and I am grateful for it.”
Sidebar Information:
• Take a realistic look at how well you're preparing for retirement. Consult a financial representative and work to create a long-term plan that you can monitor. If you don't know where you're going, how can you know if you're off track? View retirement assets as part of your overall asset allocation.
• Make early retirement a top priority if it is something you are interested in. Many who have successfully saved have perceived their monthly contribution to savings in the same light as their phone bill: something that must be paid.
Take advantage of all tax-deductible savings plans such as IRA's, employer-sponsored plans, or other company pension or profit-sharing plans. With the current tax law, there are a number of new ways you can withdraw the money in retirement.• Practice living on what will become your retirement income five years before your retirement date. You should also think about long-term investment, even after early retirement.
• Maximize the potential value of your retirement money. If it is in line with your goals, objectives, and risk tolerance, consider moving your money out of cash reserves and into an investment account quickly. Don't wait until the end of the year.
• Diversify your nest egg. Your egg can also include expected Social Security benefits, pension funds, individual retirement accounts and equity in homes, businesses and other assets all of which can account for a significant chunk of an individual's retirement needs.
• To get an estimate of your expected Social Security benefits, call 1 (800) 234-5772 and ask for form SSA-7004, personal earnings and benefit estimate statement or visit the Social Security website at www.ssa.gov.
Helpful websites:
www.retireearlyhomepage.com
www.ssa.gov
www.smartmoney.com/retirement/
