What is Early Retirement Planning?
Retirement most simply put is the ability to sustain your lifestyle without gainful employment. Traditionally, planning for retirement would suggest continuing to work and save until your 60’s when you would then have access to benefits such as Social Security Income, Medicare, and the ability to use your retirement accounts free of penalty, before making the decision to transition out of the workforce.
Early Retirement is unique and is exactly why the “Financial Independence” program exists. We believe that it’s important to enjoy life and to follow your dreams. If you have accumulated the financial means, or are on a path to doing so, then retiring younger than you imagine is achievable. Early retirement is attainable by creating a source of perpetual income through your portfolio, and with proper financial planning focusing on many critical areas, and continued guidance this can be done at most any age.
Things to Consider:
- Is financial independence on your mind? If retiring early and focusing more on things you are passionate about is a goal of yours, here are some points to consider, as well as why it is important to have a professional on your team.
- Early Retirement means less time saving and more time spending. To be truly financially independent at a younger age, you will need to accumulate wealth on a more expedited pace than traditionally done and must consider utilizing additional sources of income to supplement your retirement. After transitioning into retirement, you will undoubtedly have more free time. This naturally means there will be more of an opportunity to spend money compared to earning money. A sense of discipline and accountability is critical when becoming financially independent, having a financial professional on your team can help keep you on track for success and adapt to an ever-evolving economy.
- Inflation risk is a big factor in planning an early retirement. As time goes on, your purchasing power will naturally decrease. Your income, as time progresses will need to adjust for inflation to maintain the same standard of living. Being financially independent means, your portfolio will need to produce sustainable income, and growth to account for increasing inflation rates. If one were to consistently draw down their portfolio at a greater pace than its growth potential, then it would be difficult to sustain a lifelong income.
Here’s an example: Suppose you are an individual, age 45 with a $5,000,000 portfolio. Through financial planning it is determined that your desired annual income is $200,000, and you wish to retire at this point and live off your current assets. In the current environment, let’s assume it is suitable to assume a 2% annual inflation rate.
Through this basic example, by creating a diversified portfolio which will generate a 6% average annual rate of return, you should be able to utilize the $5,000,000 portfolio as a perpetual income source. Through achieving a 6% average annual rate of return, the portfolio should not deplete after annually withdrawing 4% ($200,000) of the portfolio and accounting for a 2% increase in income annually due to inflation.
*This example should not constitute a guarantee or expectations of future returns or planning outcomes. Investing in securities involves significant risks (Investment, Market, Inflation and others). Please see our ADV for the full list of Advisory Services.
- Planning for the unexpected: Everyone has dreams, but how many can say things went accordingly to those plans? The same is true for planning an early retirement. You can anticipate how much money you may need every year to live your life, but you cannot anticipate the unknown. As they say, the only thing certain, is uncertainty!
Creating a tiered portfolio for growth, income and liquidity is necessary in building a strong financial foundation. This can help protect you from a longer than expected downturn in the market, a large unexpected expense, or even major medical issues, all of which if occurred, are proven to have damaging effects on a long-term plan.
- Inflexibility of traditional retirement planning: Traditionally, retirement plans are built around when one would begin utilizing government benefits; to include Social Security income, and Medicare benefits, paired with the use of retirement accounts free of early withdrawal penalties. These are benefits one generally contributes to in their working years and has the right to utilize later in life. There are also restrictions as to when an individual can begin receiving these benefits.
If you plan to retire early there are many things to consider and plan for if you expect to be successful.
* You may have an extended period when you will not be able to use the above-mentioned benefits depending on your age.
* If Medicare is unavailable to you for a period by retiring at a younger age, that could potentially mean the need to self-fund medical coverage for a certain timeframe.
* By retiring early, there is a risk of not earning the proper credits to maximize Social Security benefits or saving properly into retirement accounts which could make a substantial difference in current and future tax liabilities.
* To retire young, and be successful in doing so, you will likely need to consider alternative investment vehicles apart from traditional retirement savings accounts to save in to.
The above concerns may all appear to be issues which could discourage someone from retiring early. Through proper planning and identifying the potential risks and addressing them with a financial professional knowledgeable in early retirement planning can help offset any concerns from achieving your goal of retiring early.
Craft asset management does not provide accounting or legal services; however, we can work closely with your accountant, attorneys or other professionals. Please contact us for a complete description of our Financial planning and asset management services.