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Retiring early raises a series of questions around both income and spending. You will need to manage your portfolio for longer-term drawdowns, an early end to new earnings, and a long wait for Social Security to kick in. You will need to manage your spending around new needs, particularly health insurance, long-term care insurance and a largely fixed income.
But with certain considerations, it looks like you have the right assets in place. You will need some investments, since without growth your portfolio likely isn’t enough to pay for your lifestyle through a lengthy retirement. But you won’t need aggressive or unrealistic returns, putting you in a comfortable position to enjoy the good life today.
Here are a few things to think about, in addition to talking through your plan with a financial advisor.
This portfolio should last you for a long time, said Matt Willer Managing Director of Capital Markets, Partner, at Phoenix Capital Group Holdings, LLC, provided you invest it wisely. Fortunately, wisely doesn’t have to mean speculatively.
“Interest rates [today] allow investors today to comfortably generate 5-6% annual yields with virtually no risk… Assuming all the savings are taxable, and not in qualified accounts, this translates to at least $100-120k in annual gross interest income, and post taxes is still beyond sufficient to meet the $6,000 after tax expense requirement,” said Willer.
You can increase this even more by accepting modest risk into your portfolio. A blended portfolio, with a good mix of bonds and stocks, will often return an average 8% – 11% return said Willer. This can not only provide a generous retirement income and lifestyle, albeit one that will require some risk-management plans but will give you a hedge against inflation.
Hedging inflation should be a major priority, and national inflation and your personal inflation may not always be the same thing.
The Federal Reserve sets a benchmark inflation rate of around 2%, typically accepting any number between 2% and 3%. That rate alone will double your costs of living roughly every 30 years. Your personal spending power may erode even faster, said, Vijay Marolia, Managing Partner of Regal Point Capital, because of the costs associated with how and where you live.
This is personal inflation, the idea that the costs you pay for your life and lifestyle may grow more quickly than the national averages. For example, say that you rent an apartment in a popular city. Historically, your housing costs will increase much faster than 2%. If you enjoy travel, then your entertainment costs have surged over the past two years. Meat eaters have seen their grocery bills rise faster than vegetarians, and pedestrians aren’t as individually worried about gas prices.
All of this can mean that your household’s costs might not match the national CPI.
For example, said Marolia, assume that you have 5% returns from an income-generating portfolio. After taxes that will leave you with $6,250 per month, meeting your current needs.
“Don’t get too excited, because what looks like a $250 per month surplus may not remain as such; it’s only a 4% margin. If one experiences a personal inflation rate of only 5%… than this eats the entire surplus and some. Why? Because at 5% inflation, monthly expenses rise to $6,300 per month, or $50 less than you need,” Marolia said.
This isn’t a dealbreaker, you still have enough money saved up to manage this risk. Just make sure that you do manage it.
A financial advisor can help you map out budget projections for your retirement.
Personal inflation is a particularly important issue for early retirees.
The reason to retire at 55 is so that you can enjoy your lifestyle. It would defeat the entire point if you priced yourself out of your standard of living. So make sure that you invest for the kind of growth you will need to stay comfortable, not just barely making it on a fixed budget.
Beyond that, it’s important to remember that early retirement adds a host of new issues to your retirement planning. Two of the most important are health care and Social Security.
First, you will need to anticipate health insurance. Medicare won’t kick in until age 65 and, until then, most people rely on their employer for insurance coverage. By retiring early you will need to buy your own coverage. Unless you currently pay for insurance, this will probably add about $500 to your anticipated monthly budget.
Even once Medicare does kick in, you will still need to budget for gap and long-term care insurance, so don’t count on that extra spending to fall off.
Second, make a plan for Social Security. One of the good things about having a well-funded retirement account is that you can delay taking Social Security, which will make those benefits more generous in the long run. Indeed, based on your numbers, collecting Social Security age at 70 can be a significant part of your inflation hedge. Just make sure you include this in your overall plan, because that money won’t roll in for another 15 years.
At age 55 with $2 million in the bank, you are well positioned to retire early. Just make sure that you anticipate the complicated issues around early retirement, including long-term inflation hedges and health insurance.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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