Many of us dream of leaving the workplace while in our 40s or 50s instead of sticking it out until age 65. In fact, the 2011 Employee Benefit Research Institute's Retirement Confidence Survey found that 16 percent of retirees left the work force before age 55, and another 15 percent did so before turning 60. Early retirement is a tempting goal, but it can be tough to achieve.
"Retirement is ultimately a mathematical equation involving current income, current expenses, savings rate and future expenses," says Robert Brokamp, a certified financial planner and senior advisor for The Motley Fool newsletter Rule Your Retirement. "The more you can make now, and the more of that money you save, the sooner you can retire."
There are four major obstacles to early retirement:
- You have less time to earn money. If you start working at age 20 and retire at 65, you have 45 years to produce income. If you retire at 45 instead, you have only 25 years to achieve the same results.
- Your investments have less time to compound. Just as early retirement gives you less time to earn money, it also gives that money less time to grow. That means a smaller nest egg when you call it quits.
- You'll be drawing on your savings longer. The average American lives to be nearly 80. If you retire at 65, your savings need to last 10 to 20 years; if you retire at 45, they need to last more than twice as long.
- You'll skip some of the traditional perks of retirement. If you retire at 45, it'll be years before you have access to Medicare or Social Security. You'll also face stiff penalties if you tap your retirement accounts early.
This is not to say you shouldn't plan to retire early. It's a laudable goal, and one I've set for myself. But if you're serious about early retirement, you need to be particularly smart with tomorrow's money, today.
Brokamp suggests that for many, semi-retirement, in which you continue to work part-time or seasonally, is a good compromise. "Semi-retirement is less strain on your retirement portfolio and might give you access to other benefits, such as health insurance," he points out.
Though semi-retirement may be more realistic than early retirement, it's still not for the faint of heart. You have to work hard to make it happen. You'll need:
- Ample savings. Semi-retirees plan far in advance, building a large nest egg before they make the leap.
- Modest living. "The less you can live on now, the sooner you can retire," Brokamp says. "I often say that living below your means is like saving for retirement twice."
- Ongoing work. Though semi-retirees don't have full-time jobs, they keep working for a variety of reasons. The added income means they don't have to tap into their savings as soon (or as deeply), and the work gives them the chance to spend time with others while doing something worthwhile. According to the Retirement Confidence Survey, 23 percent of retirees worked for pay in 2011.
- Purpose. Most important, semi-retirees tend to pursue projects and passions that align with their core values, which makes those extra years of work that much more meaningful.
The bottom line: Whenever you decide to do it, retirement can be whatever you want it to be. You can go back to school, travel the world, work part-time on a pet project or write the great American novel. But in order to afford any of these things then, the time to start planning is now.
To learn more about semi-retirement, pick up a copy of Bob Clyatt's tip-packed book Work Less, Live More. It's full of case studies and practical suggestions. Better yet, check it out from the library, and bank the price of the book in your retirement savings.