“We all dream of retiring early with a fantastic pension and no money worries,” said Victoria Lewis, a financial adviser with the Spectrum IFA Group in Paris, France. You just have to put the right plan in place.
What counts as early retirement? In the United States, the
average adult retires at 61, according to a Gallup poll. In Australia, men
retiring within the last five years were 61.5 to 63.3, on average, and women
were 59.6, according to the Australian Bureau of Statistics. Whereas in Japan,
the average worker retires at 69.1, and in Luxembourg, the average retirement
age is 57.6, according to the Paris-based Organisation for Economic
Co-operation and Development.
Based on those averages, financial experts consider an early
retirement age to be under 55, and typically between age 50 and 55. But in some
countries, like India, for instance,
where two-thirds of the population is 35 or younger, this, more youthful
working population has its goal set to retire earlier “at 45 or 50,” said
Lovaii Navlakhi, founder and chief executive officer of financial planning firm
International Money Matters in Bangalore. Here is some advice on making it
happen:
What it will take: Dropping out of the workforce years
before everyone else, means you have to be completely debt free, with savings
equal to about 25 times the income you wish to achieve in retirement, taking
any government pensions or payments into account.
A basic financial rule of thumb maintains that you can
withdraw about 4% from a retirement portfolio per year — or 1/25th of the
balance. That means you should be able to safely withdraw about $40,000 per
year from a $1,000,000 retirement portfolio — added to whatever you might be
receiving (or expecting to receive later) from the government. Earnings and interest
will presumably make up the difference annually, making it possible to withdraw
4% a year indefinitely. (Market fluctuations may affect this, of course.)
How long do you need to prepare: It depends on how dedicated
you are to your cause, and how quickly you can pay off any outstanding debts
(including paying off your mortgage) and accrue the required savings. For Pete,
a US blogger who writes at MrMoneyMustache.com (and prefers not to give his
last name to protect his family’s privacy), he and his wife were able to retire
at about age 30 after nine years of serious savings and low lifestyle expenses.
Darrow Kirkpatrick, an engineer in New Mexico in the US who
writes at CanIRetireYet.com, decided to focus on retirement while still working
in his mid-30s and was able to retire at age 50. A financial professional can
help you determine what kind of timeline is realistic.
Do it now: Start immediately. Early retirement becomes an
impossible dream for many people purely because they didn’t plan for it early
enough.
“People don’t really start thinking
about retirement until their 40s,” said Helen Hogan, an investment adviser with
Sunset Financial Services in Missouri in the US. “The earlier you start, the
better, because of the power of compound interest.”
Downsize your lifestyle. The mantra for early retirement
should be save more and spend less. The less you spend now on housing, cars,
and holidays, the more disposable income you have for debt and savings.
Consider whether you really need the fourth bedroom, the luxury car, the deluxe
TV package and dinner out twice a week.
“It is definitely all about reducing
your living expenses, or as I like to put it, ‘living slightly less
ridiculous-than-average lifestyles,’” said Pete of MrMoneyMustache.com. (Part of
the reason Pete and his wife were able to retire so early was that they pared
expenses down to about $25,000 a year, he said.)
Pay off your home. Think about how much money you’re
spending every month on your mortgage. “On average, mortgage payments take up
30% of your disposable income,” said Brett Evans, executive director of Atlas
Wealth Management in Southport, Australia. The sooner you make the last payment
on your property, the faster you can throw money into savings—and the less
you’ll need to live on in retirement.
Do it later: Work a little. For many early retirees,
“retirement” doesn’t mean the total absence of employment. It’s common for
people to quit a full-time position but maintain a small business on the side
or work part-time at something they love for supplemental income.
“They’ve racked up their years of
service, and maybe they have enough money to work part-time and just slow
down,” Hogan said. “The plan is that they’ll work for another 10 to 15 years,
but at a much slower pace.”
Don’t forget about family. If you have a spreadsheet of
expected retirement expenses, make sure family expenses are included. “I remind
people that grandchildren and children take a lot of retirees’ money,” Hogan
said. “I have told clients, ‘You need to stop giving the kids money because you
can’t afford it.’”
Do it smarter: Make sure you’re ready. Do you have a plan
for your retirement? And are you really prepared to say goodbye to your working
life? “Some people get depressed after retiring because they miss the office,”
Hogan said. “They really need to think about what they’re going to do with
their time.”
Give it a test drive. Live on your proposed retirement
“salary” for 12 months to make sure it’s manageable—before you make the leap.
You’ll be able to tell if your numbers are realistic, and you can push even
more cash into savings while you’re doing so. “Make it a game,” Hogan said.
“Save as much as you can.”
BBC Kate Ashford
7 April 2014