Are You Trapped In Early Retirement Extreme Logic?
With today’s economic challenges seeming so endless, is an early retirement goal too extreme for most people? The desire to retire early is a common one but with the stresses of job overload, widespread job losses and the increased cost of food, housing and health care is early retirement practical, financially speaking. It’s easy to forget that planning for retirement is a logical action but a financial action also.
People are mentally ready but whether they are financially ready is a whole different story. Mental preparation for early retirement is easy, being financially ready is the hard part. It’s easy to trap yourself in early retirement extreme logic without the financial wherewithal to get there. Where do you stand? Are you trapping yourself in early retirement extreme logic without the finances to make it work? Or are you making sound judgements about your finances? Making the right financial moves and asking the right questions could make the difference between achieving any retirement goals you may set for yourself. But you must start with a plan.
Retirement And Good Living Needs A Plan
Working from a plan always simplifies things. Start with a 1 year financial plan and then move into a 5 and 10 year plan. If you are just starting your career you can develop a 15 year financial plan and adjust it as your career progresses. Just be careful to not project too far out. Regardless of the length, the first step in developing your financial plan is to ask yourself a few questions and stay focused on the answers to those questions. Have you asked yourself they key questions?
Planning Your Financial Focus
#1 – What Will You Do In Retirement?
Before you know the amount of money necessary to retire early, you will need to determine what you will be doing during your retirement years. Many people yearn for the day when they can throw away their alarm clock, avoid all traffic jams and disconnect themselves from chaos just to relax day in and day out. Believe it or not, even that takes planning.
So what does your future look like? Your options are endless.
Will you continue to work part-time after you retire from your full time job? If so, where? Will you explore new hobbies? If so, what are they? Will you garden, travel or spend more time with your family? Is your family ready for you? Will you downsize your home? Downsizing could mean lower property taxes and sometimes lower utility bills. Will you move out-of-state? Again, moving out-of-state could lower your cost-of-living in general. Will you do volunteer work? These are some of the key decision you need to make before you determine how much money you will need in retirement.
Long before you retire you need to estimate your expenses. That sounds obvious, but projecting expenses can be harder than it sounds (especially if you are working on a 10 or 15 year plan). It is easy to underestimate your actual expenses if you do not take the time to think about them. Tracking expenses is tedious but if you brush it off you will miss the opportunity to plan.
Start by tracking every dime you spend for a month. Be sure to include: your housing costs, food, utilities, gasoline and other transportation costs, clothing, entertainment, auto and home insurance costs, property taxes, health care costs and any hobbies you currently engage in. One expense that you should not list because you should not have during your retirement years is your mortgage. That should be paid off before your retire. But one cost that you need to consider is the cost of inflation. That will definitely change over time, decreasing the value of your purchasing power.
Next, train yourself to cut back on any unnecessary spending. Try living on a retirement budget for at least a year before retiring. Imagine what you will be doing and the expenses involved in those activities, then live under those financial limits. If you cannot live within those financial limits, you either need to save more money before retiring or eliminate even more expenses.
#3 – How Long?
There are a few points to be made on how long you will be in retirement. All concerns that effect retirees at all ages, preservation of capital, outliving their money and expert recommendations.
Preserving Your Money
If you retire young it is easier to recoup investment losses. But once retired, most people want to stay retired; not be forced back into the workforce just to make up for investment losses. So once you get closer to retirement you want to become more focused on preservation of capital. If your investments have performed well, you want to lock in that growth. Secondly, you want to prevent any future losses to your investments. The best way to do that is to keep your investments balanced, not too risky, not too conservative and monitor them often.
Outliving Your Money
Outliving ones money once retired is a scary position to be in and one that worries most retirees. This concern is real because except for family medical history, how could you know how long you will live? With that in mind, your best financial move is to get in the habit of spending like a pauper not a king (before and during your retirement years).
Recommendations About Your Money
We’ve all heard the recommendations financial experts make about needing 75 -80% of pre-retirement income for your retirement years. Be careful, those figures can be misleading because those benchmarks all depend upon many personal factors. Your percentage of pre-retirement income depends upon your age at retirement, your medical history, family history, daily living expenses, income and investment performance. Which is why you need to track your personal expenses and live under a retirement budget to determine your personal pre-retirement income need.
Economic challenges do not disappear when we retire, they just change. And with the proper pre-retirement planning your life does not have to change much once you retire. But for that to become a reality you need to take the first steps before you toss your alarm clock and disconnect from the work force. Determine what you will do in retirement, count your retirement money and protect that money.