5 Ways to Tell if You Are Ready to Retire Early

Early retirement comes with extra risks that require careful planning to overcome.

5 Ways to Tell if You Are Ready to Retire Early
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By Joe Udo

Early retirement sounds pretty good when you're stuck in a cubicle counting down the hours until the weekend. If you don't enjoy your job anymore and are looking forward to spending more time pursuing your own agenda, early retirement can be ideal. The challenge is that you need to save up for it and make that money last for several decades. Here are the financial milestones you should achieve before taking early retirement:

You have retirement cash flow. You need to calculate how much income you will have after leaving your job. Social Security benefits typically can't be started until age 62 at the earliest. If you retire before that, you will need income from somewhere else. You can withdraw from your 401(k) or Roth IRA, but you need to decide how much to withdraw per year and make sure you don't deplete your retirement fund too quickly.

Get into the habit of tracking your cash flow while you're working, and practice living on your retirement budget for 12 months. It's even more important to control your spending in retirement because you'll have a fixed income. Monitoring your spending will allow you to understand where your money is going and help control lifestyle inflation as the years go by.

You know how your expenses will change. Certain expenses can be eliminated when you retire such as commuting costs. But some retirees end up spending more money annually after they quit working. Many people want to travel now that they have the time, and that will significantly increase your expenses unless you travel creatively. Other people spend money on hobbies they have been putting off for many years. A retirement budget needs to take into account all the activities that you would like to do as well as the usual bills.

You have retirement health insurance. Medicare won't kick in until you're 65, and you'll need to fund your own healthcare until then. You can keep your employer-sponsored health insurance for up to 18 months under COBRA, but you will probably have to pay a lot more than you used to while working. If your spouse is still working, then it's usually a much more affordable option to get coverage though his or her employer. The Affordable Care Act provides another option for early retirees, and you can shop for health insurance at your state's health insurance exchange. After retirement, your income will probably be lower, so you might qualify for tax credits to help cover the premiums. However, health insurance isn't cheap, and you might get sticker shock if you don't do your research before retiring.

You have no debt. If you have consumer debt, then you're probably not ready to retire early. It's also a good idea to pay off your mortgage before retirement so your monthly expenses will be reduced. Downsizing or relocating to a more affordable area can be a good option to reduce or get rid of a mortgage.

You have adjusted your portfolio. You need to make sure your asset allocation is properly targeted to meet your risk tolerance. Some early retirees have all their assets in stocks. That might be fine when you're still working because you can add money when the market is down. But that asset allocation probably needs to be adjusted after retirement. An early retiree also needs to be careful not to shift too much money into bonds because you need stocks for growth. When you're nearing retirement, reassess your risk tolerance and update your asset allocation accordingly.

You have achieved financial freedom. One way to estimate if you're ready for early retirement is to divide your investable assets by your annual expense. I call this the financial freedom ratio. If your financial freedom ratio is above 25, then you're in pretty good shape. You can use the 4 percent rule to withdraw from your portfolio, and chances are good that your money will last for 30 years or more. Of course, if you retire very early, then you probably need to be a bit more conservative and withdraw less until you're near 65, the normal retirement age.

If you have a healthy portfolio balance, no debt and a plan to deal with health care, then you might be ready to retire early. Try tracking your cash flow and living on your retirement budget for a while before pulling the plug. Once you retire, then you need to keep a good handle on your cash flow to make sure you don't overspend. Early retirement is a dream for many people, but it takes diligent saving and careful planning to make it real.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.

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Johnny Jay

I followed all the necessary steps so I could retire early. My home was paid off 10 yrs early using extra cash toward principle bal. Started with $100 extra each month to my mortgage payment. As time when on more cash was available so I increased the amt. to $200 more each month and in a very short time I seen the mortgage balance drop like a rock in water. By the time I reached $300 more per month I realized that I was able to save 10 yrs. worth of payments & over $14,500 in interest alone. When I finally reach the point where the balance was under $3,000, I asked the mortgage company for a final payoff that would be valid for at least 30 days. They gave me the figure in writing & within 20 days had a cashiers check mailed & 10 days later my mortgage papers stamped "PAID in FULL" arrived. I have been debt free ever since except for the monthly nuisance bills which never stop.(elec, gas, water,taxes,garbage, etc.).

There was 1 thing that I did not expect to happen to achieve early retirement. A severe illness that forced me to quit work early at age 56. I was diagnosis with LEUKEMIA. It was not a deadly version but immediate treatment was necessary. I started chemo & applied for S.S. disability insurance. There was sufficient medical proof of my illness and 4 1/2 months later I was receiving disability checks. It was rough going for awhile, 20 straight months of chemo treatment, another 18+ months of recovery time and by the time I turned 60 I was in complete remission of my Leukemia & the doctor said that I could go back to work if I wanted on a limited basis. I said NO.
I spent almost 30 yrs. in the casino industry & made lots of money. I used a portion to pay off my mortgage early & invested most of it in top quality stocks that pay strong & steady dividends. I did the smart thing by reinvesting all those dividends for added shares and it all paid off in the long run. Now that I am 65 and fully retired I stopped reinvesting about 50% of those stocks & now taking the dividends in cash as monthly living expenses along with my monthly Social Security Disability checks. The other 50% stocks are still being reinvested since I don't need all that cash. Besides, many of them are in a IRA & Roth-IRA so tax issues are not a problem.

The moral to this long & true story: Invest as early as you can & stick with it. Consider that investment as a bill that must be paid each month (PAY YOURSELF FIRST). Not knowing what the future will hold always be prepared. Live within your means and plan for a happy and Healthy retirement for many years. I got lucky to retire early. A terrible illness that I fought & beat helped me to obtain S.S. checks sooner than expected(5 yrs earlier) and with my investments already in place made retirement my easier. I don't wish anyone a terrible illness but I do wish everyone will start saving & investing early so they might retire early with a solid income flow.
I wish everyone"GOOD HEALTH & HAPPINESS". GOD BLESS to all. J.J.

June 18 2014 at 1:25 AM Report abuse +1 rate up rate down Reply

Retiring early? That sounds like a pipe dream for most people these days. I read more people think they can't retire until 70 or not at all! So much for the American dream of enjoying your golden years. We can thank Republicans for making it easier for corporations to dump pension plans for one. Watch your back on Social Security and Medicare. They want to rip us off on that too and give us lousy vouchers!

If you want to travel or do anything special don't wait until retirement! Many do and either can't afford it after they do or are not healthy enough to do it. The time to do such things is while you are earning an income. Stop wasting your vacations for your ungrateful employer and go! Life goes back really fast and employers don't care about you. A lot like Republicans.

June 17 2014 at 10:14 PM Report abuse rate up rate down Reply

If you can retire at 62, do it and take the money. If you are afraid of running out of money, realize that retirement is not as expensive as you think. No more commuting, eating out with the colleagues, etc. You can also cut your expenses considerable if you are smart. Staying fit is obviously the most important as it will keep you healthy, happy, and limit healthcare costs. I would also look at limiting driving/car costs as they are a real killer in this country. You are probably spending way too much on auto insurance, first off...I would look to spend no more than $25 on car insurance (check Insurance Panda). Your gas/fuel costs are probably thru the roof too. For that, check out the GasBuddy app. It usually helps me fill up my gas tank for less than $20. The elderly aren't usually as high-tech as young people, so chances are they don't know about these services. That is what is best for most people.

You have to live to be over 80 before you'd start to see a benefit from waiting. Since the government knows the average life span is less than that, liberals know to trick contributors into delaying benefits.

June 17 2014 at 1:37 PM Report abuse rate up rate down Reply
1 reply to zigitelekus's comment

Liberals trick contributors into delaying retirement? Really? How do you figure it's liberals? It's conservatives who want to eliminate social security and medicare and replace it with lousy vouchers! Get real, who are you trying to deceive? Yourself?

June 17 2014 at 10:06 PM Report abuse -1 rate up rate down Reply

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Money determines whether you retire early, I've invested since I carried my first golf bag, and cut my first lawn. Education, luck, hard work, and investing 17% of our income, every month, including when I earned $212 monthly, and $54 combat pay in the military. has allowed us to retired early.

No granite counters, no spa, no stainless appliances, just comfortable living below ones means, gets it done.

June 17 2014 at 1:36 PM Report abuse +3 rate up rate down Reply

The biggest unknown facing retirement, the escalating food prices and medical care, up and beyond your social security coverage. Staying healthy is job one.

June 17 2014 at 11:39 AM Report abuse +2 rate up rate down Reply

On social security and medicare or soon to be, thank a democrat. If you want to end these 2 fine programs vote republican. Before you all forget, social security is your private account. The more you pay in the larger your monthly check will be. So if you are working for minimum wages or below, your monthly social security check will be small too. alfrank, most government handouts have been eliminated a long time ago. Think......

June 17 2014 at 10:44 AM Report abuse -4 rate up rate down Reply
2 replies to toosmart4u's comment

Freestuff4mefromU, what an id!0t for thinking your own private account. ROTFLMFAO

June 17 2014 at 1:31 PM Report abuse +3 rate up rate down Reply

The Dems came up with SS so as they could use it as their own personal piggy bank!

June 17 2014 at 6:36 PM Report abuse -1 rate up rate down Reply

The question remains with Barthold as when he's going to find employment rather than sit on his duff collecting Government Handouts as he has been for years.

June 17 2014 at 7:52 AM Report abuse +1 rate up rate down Reply
1 reply to alfrankenfool's comment

If he wants sit on his duff ad collect the money he paid into social security that his business. Social security benefits are earned. Contrary to what the talking heads on FOX tell you.

June 17 2014 at 11:08 AM Report abuse -4 rate up rate down Reply
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June 17 2014 at 1:33 PM Report abuse +3 rate up rate down