A letter published online by an ‘early’ retiree who encountered health difficulties has generated a lot of negative comments regarding early retirement. I thought it might be helpful to provide you with my perspective on the subject. Retiring early often means that there is NO paid work and that your assets are the only source of income for all living needs. The income from those assets needs to be able to support your chosen lifestyle for your entire life. For this reason, it is essential that this planning be completed with details based on your life and potential worse case scenarios. In this letter there seemed to have been little planning for healthcare, unexpected market changes, and potential disability which are essential in any retirement plan and particularly in one that would need to last 40+ years. The negative outcome for this early retiree might have been prevented with comprehensive retirement planning and annual adjustments.
Of course, the assets to support early retirement need to be much higher if retiring before age 65 when Medicare healthcare becomes available. In addition, retiring before age 59.5 needs to include significant non-retirement assets (or a willingness to annuitize retirement assets) to avoid a 10% early withdrawal penalty for retirement accounts. Early retirement must also account for retirement cash flow distributions over very long periods (longevity investment planning) which requires a careful combination of investment strategies to ensure that cash is available regardless of market behavior. A portfolio that needs to provide support for long periods of time must include sufficient growth potential with protections against the likely downturns.
If you are contemplating early retirement and have not yet discussed it with us, then let’s create planning scenarios for your situation and see how and if your assets will support your ideal ‘early’ retirement life.
Edi Alvarez, CFP®
BS, BEd, MS