Choosing to retire early from your job is a huge decision to make, especially when it comes to your finances. How do you know if you are financially ready to retire? Before deciding to retire early from your job, it is important to make sure you are financially ready to do so. If you are thinking about whether it is time to retire, these key signs will help you decide whether the time is right to leave the workforce.
1. You Are Debt-Free
First and foremost, are you debt-free? If you are thinking about retiring early, all of your debts and liabilities should be paid off. This includes your credit cards, personal loans, mortgage, and any other debts. Once you clear your debt, you will be that much closer to being able to retire.
What if you currently have debt, but would still like to retire early? Your priority should be to attack that debt. If you have multiple debts, consider following the “snowball method” to debt pay-off, whereby you pay the monthly minimum balance on all of your debt and put any extra money you have toward paying down the balance of the debt with the highest interest rate. From there, you work through your debt until it is all paid off.
If you have tried the debt snowball method or another method of paying off your debt but have not succeeded and need more help, contact a debt relief company like cwdebtrelief.com. Whether it is credit card consolidation, debt consolidation, debt settlement or another form of debt relief, a debt relief company can work with you to help you pay off your debt. Once your debt is paid off, you can focus entirely on saving and investing to prepare yourself for retirement.
2. You Know What Your Annual Expenses Will Be and Stick to That Budget Now
Once you retire, unless you decide to pick up a job, you will have to live off of the money you have saved and invested to date. Your monthly income will likely be less than what it was when you were working, so to retire and ensure that you have enough money saved to last the rest of your life, you have to know how much you will spend in retirement and you should begin to live off of that amount now.
You should not retire with only a guess as to what your annual expenses will be. Instead, you should calculate this figure ahead of time. While this will be an estimate, it is always better to have an educated estimate than to go into retirement blindly.
The second part of this sign that you are ready to retire early is if you are already living within your planned retirement budget. Have you made changes and adjustments to your pre-retirement lifestyle so that you are spending today just as you would during retirement? If so, you will more likely be able to stick to your budget once you are retired.
If you have already done these two things – calculated your annual retirement budget and stuck to that budget for some time already, all signs point to the fact that you are ready to retire.
3. You Have Enough Money Set Aside
After you have calculated your anticipated annual expenses in retirement, the key sign that you are ready to retire is whether or not you have enough money saved and invested to maintain that lifestyle and those expenses for the rest of your life.
How do you calculate this? A good rule of thumb is the “Rule of 25,” whereby you take the value of your annual expenses and multiply that by twenty-five. This amount is the inverse of 4%, which is the percentage many investment professionals say you can safely withdraw from your investments every year to cover your annual expenses forever.
For example, if you anticipate your annual expenses during retirement will be $30,000, then, if you follow this principle, you must have twenty-five times that amount ($750,000) invested to withdraw $30,000 (4% of your portfolio) every year. Once you have this amount saved, it is a good sign that you are financially ready to retire, no matter what your age.
4. You Can Access Your Savings and Investments – Without Getting Penalized
The government assumes that most people will retire at age sixty-five or perhaps a few years earlier. For this reason, some of the tax-advantaged investing accounts you have probably participated in over the years penalize you for withdrawing money from them before a certain age. For example, if you want to withdraw from your 401(k) plan and certain other qualified retirement plans, you will likely be penalized if you do so before the age of fifty-nine and a half.
If your retirement planning will rely on withdrawing from your tax-advantaged investing accounts, understand that you might not be able to access these early without incurring a penalty. This means that it is a good idea for most of us to diversify our savings and investments.
Those who keep their money in various types of accounts, including some that are available to withdraw from at any time and any age, are better equipped to retire early. Being able to access the money that you need during retirement, without getting penalized, is a sure sign that you are well on your way to being able to retire early.
5. You Can Afford Healthcare
Healthcare is an enormous expense in retirement that cannot be ignored. Most people receive their health insurance through their employers, so when you are thinking about retiring, healthcare costs will no longer be paid by your employer and so must be considered and worked into your budget. Medicare can likely cover some of your health expenses, but that is only available once you reach age sixty-five, so if you are thinking of retiring early, the brunt of healthcare costs will fall on you.
Additionally, long-term care is another expense you will likely need to pay for later down the line during retirement. For this reason, disability insurance and long-term care insurance are often recommended to help cover some of these costs, but the insurance itself is an additional cost you will face.
You should take into account these healthcare costs when planning for your retirement budget, as this is one expense you do not want to cut. If you have calculated and planned for these expenses and worked them into your budget, and you still have enough money set aside and invested to pay your annual expenses in retirement, that is a strong signal that you are financially ready to take the plunge and leave the workforce.
Are You Financially Ready to Retire?
Hopefully, these tips have opened your eyes up to what it takes to retire early. These signs are all indicators that you are financially ready to take the leap and retire early, all while being financially responsible.