So, You Want to Retire Early? Do These Five Things First!

It’s been three years since Laurie and I decided to retire early to enjoy the good life in Sarasota, FL! Those three years have been the best years of our lives, and we can wholeheartedly recommend the joys and benefits of early retirement. But before you decide to follow our lead, you need to do five things first. Here’s my advice for anyone who is thinking about retiring early!

Happy Fourth of July weekend everybody! As I usually do on the anniversary of my retirement, I'll be taking a bit of a diversion from my normal food, wine, and spirits related blogging to talk about retirement and the retired life.

Retiring can be a scary thing. Transitioning from working full-time to a life with nothing but free time can be jarring for those who see their work as an essential part of who they are as a person. Without work, what will you do and how will you fill your days? And then there’s the transition from bringing home a salary every week to being on a fixed income and living on what you have saved instead of new earnings. Will you have to adjust your standard of living to afford retirement? Can you weather the ups and downs of the markets without reaching for medication to sedate you? And do you have enough saved to last without running out of money?

And finally, will you be able to afford the cost of health care as you age, along with the cost of long-term care should you eventually need to move into an assisted living facility or nursing home? All of these issues are important ones to think through before you pull the trigger on retirement, but there are also other issues that are unique to those thinking about retiring early that need to be addressed as well. So, for those of you hoping to retire soon, and especially those of you hoping to retire early, here are lessons learned from our experience retiring early – what I refer to as my five key retirement planning considerations.

Key Consideration # 1 - Develop a Personal Plan for Retirement

Anyone considering retirement needs to take the time to think through what they will actually do with their time once they retire. Those who haven’t gone through this exercise are likely to be unhappy and unsatisfied in retirement, and often return to working full-or-part time to address their discontentment.

I recommend creating a “Get a Life Tree”, a way of mapping out what you want to do, and how you might spend your time in retirement. Take a piece of paper and start making branches from the center. Each branch represents an area of interest that you will pursue in retirement. For example, my “Get a Life Tree” included four branches: reading and education; wine and food; travel; and other stuff. For each main branch, you then draw additional branches which represent more detailed ideas for what you want to do.

For example, for my wine and food branch, I had additional branches that included creating and writing a weekly a food, wine, and spirits blog; becoming a restaurant reviewer for Google and other reviewer sites; writing and publishing a cookbook; taking wine courses on-line; hosting wine-tasting dinners for friends and family on a regular basis; and exploring as many restaurants as possible in the Sarasota area. It turns out that Laurie and I have done (or are in the process of doing) all of these in retirement, and that’s only one of my four branches!

Doing this exercise also provides important insights on your priorities and lifestyle preferences that will drive your monthly retirement budget.

Key Consideration # 2 - Cost of Healthcare in Retirement

Healthcare costs in retirement will likely be the area where you will spend the most money by far (many of you won’t believe me when I say that, but trust me, it’s true!). And if you plan to retire early, you will need to have a plan for covering your healthcare costs between the year you retire and when you start receiving Medicare benefits at age 65. For example, I was 59 years old when I retired, which means I had seven years before was eligible for Medicare when I retired (and Laurie had considerably more than that).

We were somewhat lucky in that the company we both worked for allows those retiring from the company to continue on the healthcare plans that they offer employees, but without any of the cost-sharing we benefitted from as active employees. So, we were able to keep our same healthcare plan, but had to pay the full cost, which dwarfs any of our other monthly costs in retirement, including housing. Premiums for dental and vision care are separate additional costs. Oh, and don’t forget about long-term care insurance, which I believe is absolutely necessary for financial stability in retirement, but which is also quite costly, especially if you don’t start paying premiums until you retire. Again, figuring out all of these costs and whether you can afford them throughout your retirement turns out to be a key input for your monthly retirement budget. Speaking of, …

Key Consideration # 3 - Monthly Living Expenses in Retirement

Most folks assume that they will be able to significantly reduce their expenses once they retire – that’s a dangerous assumption. While there are many areas where you will be able to reduce costs in retirement (like for instance, downsizing your home or moving to an area with a cheaper cost of living), many of your costs in retirement are likely to be higher than during your working years (like healthcare costs for example).

Well before we retired, Laurie and I created a detailed retirement budget that included essential living expenses (things like housing, medical, transportation, food) and discretionary living expenses (things like travel, dining out, hobbies). We identified the areas where we anticipated spending less, and those where we might spend more and developed estimates for each. For example, we knew we wanted to retire in Sarasota FL, so we looked at the housing market there, and developed an estimate for our housing costs based on our plans to downsize and specific communities we were interested in living. We also looked at homeowner’s insurance rates (they are considerably higher in Florida than in all other parts of the country) as well as property tax rates. We then estimated our housing costs in retirement and incorporated those into our retirement budget.

Then, we conducted a “stress test” by actually living on the discretionary portion of our retirement budget for six months while we were still working. This allowed us to get a sense for how difficult it would be to keep on budget in retirement, as well as adjustments we might want or need to make to ensure our planning factors for expenses were realistic. So how did we do? Pretty good, actually, but we were way off in some categories, so adjustments were required.

Key Consideration # 4 - Cash Savings Going into Retirement

Trust me on this one – you will need a good amount of cash reserves going into retirement, and especially if you plan to retire early. How much you need is based on your risk-tolerance levels, and what you are comfortable with. Experts usually advise people to have at least 3 months of living expenses in liquid cash savings. Laurie and I have relatively low risk tolerance levels so in consultation with our financial advisor, we decided to ensure we always have at least one full year of living expenses in cash available in a high earning money market account if needed.

Having sufficient cash reserves available as an emergency fund is critically important in the event of a “Black Swan” event (think the COVID pandemic) that negatively impacts markets and investment accounts for retirement. Everybody’s risk tolerance is different, so the amount you are comfortable with is a personal choice, but you should think through that choice carefully and then save that amount so you have it going into retirement.

Key Consideration # 5 - Sufficiency of Retirement Income for “End of Plan” Goals

Finally, you absolutely have to think through the sufficiency of your existing and planned retirement income to ensure your income will be adequate to support your retirement years until you pass away (known as “end of plan”). This is especially important if you plan to retire early, but anyone who is planning to retire needs to go through this exercise.

At its simplest level, this includes first adding up all your income sources in retirement (pensions, retirement accounts like IRAs and 401Ks, anticipated Social Security payments, potential inheritances, and any other sources of income). You will have to estimate some of these, but many of them can be calculated more precisely (like Social Security payments for example, which you can get from the Social Security Administration). There are on-line tools that allow you to input these estimated income sources and other variables (i.e., what age you plan to retire, how long you think you will live, how much you plan to spend each month in retirement, whether you have long-term care insurance and if so, how much it pays out, etc.) and then they calculate how long your income sources will last before you run out of money.

Laurie and I wanted to get expert help with this important task instead of relying on on-line tools, so we worked with our Fidelity financial advisor team to develop the inputs, and then they ran the numbers through Fidelity’s retirement planning tool that uses past market performance and Monte Carlo simulation to estimate three scenarios and how much money we would have left at “end of plan” (our end of plan was that we will both live to the ripe old age of 95 for each). The three scenarios included: Markets perform significantly below average, markets perform below average, and markets perform on average based on past performance over the past 50 years. They advise NEVER to plan on above average market performance so that isn’t one of Fidelity’s options for their retirement planning calculator.

Seeing these simulations play out for each of these scenarios with estimates for how much we would have left at the end of plan gave us great confidence and peace of mind that we were making the right decision to retire early and that we had the resources to do so. I would strongly recommend getting the help of a financial expert/advisor for this important task – it’s too important to leave to chance and the cost is well worth the peace of mind of knowing you have enough to live on through retirement.

So, there’s your free retirement advice – I hope it was helpful and provides you with enough information to at least start thinking about retirement if you haven’t already and even better yet, start thinking about EARLY retirement if that might be an option for you!