For many, the idea of living a work-optional lifestyle can sound far-fetched. Traditional retirement begins at 65, and even then, many Americans struggle to make ends meet.
But did you know that with time on your side and careful planning, achieving a work-optional lifestyle may be easier than you think?
Tech professionals are often in a good starting position to eventually make work optional, thanks to their competitive salaries, equity compensation, and other benefits. If you’re curious about what it might take to retire early, here’s an inside look at the process most people go through before making work optional.
First, Define Your Goals
You need to give yourself a reason or purpose for making work optional. Once you leave your nine-to-five behind, what will you do to fill your time? Perhaps you’d like to relocate to a new city or country and enjoy traveling and exploring. Or maybe you’re looking forward to returning to school, getting an additional degree, and pursuing a new passion project.
Some people who retire early have no intention of leaving work behind altogether. They enjoy taking on part-time jobs, contract work, or less stressful positions that bring them joy.
Depending on when you choose to retire early, you could be facing 40, even 50, years ahead of you to enjoy. Make the most of them by setting goals and creating a plan for what you’ll do with your financial independence.
Be Realistic in Your Savings Goal
Take inventory of the recurring expenses you’ll continue to be responsible for paying once you’re no longer working.
These might include:
- Health insurance
- Other insurance policies (life, auto, disability, pet, etc.)
- Mortgage or rent
- Debt (student loans, car loans, personal loans, credit cards)
Once you have an idea of your monthly financial obligations in retirement, use that estimate to calculate how much you’ll need (at minimum) to maintain your current quality of life. If you plan on not working for 10 years, calculate your estimate by 120 (for 120 months over 10 years).
How do you feel about that number? Do you think it’s achievable at the rate of saving you’re at today? Or do you need to consider pushing back your retirement date, maybe easing into it with a part-time job?
Try to be realistic as you start crunching numbers and thinking about the finish line. You’ll need to start saving diligently and ensure that your portfolio aligns with your timeline toward early retirement.
Overcome Internal Objections
It’s not uncommon to feel hesitant about quitting work cold turkey. But there’s no reason you have to. Many people find it emotionally and financially more comfortable to wind their work life down slowly by finding other forms of income to rely on.
This could include a part-time job, contract or freelance work, or even passive income like owning a rental property.
Prepare for the “Gotchas” of Retiring Early
There are some hidden challenges to retiring earlier than the traditional retirement age. The most obvious is that you need more money, and you need it sooner. This is often the first hurdle people consider when deciding to leave the workforce early.
But in addition, keep in mind that you’ll have fewer resources to rely on, and you may find it more complex than you think to leave work behind for good.
When you retire at a traditional age (around 65), you have several government-supported benefits to help ease you into financial independence. Social Security, Medicare, and tax-deferred retirement accounts — are all resources you may not have access to, depending on your retirement age.
Instead, you’ll need to tap into other savings and investment accounts to cover your expenses before you’re able to use these traditional retirement tools.
Hard to Leave
Think long and hard about whether or not you’re ready to leave the rat race behind. You may think you’re sick and tired of working long hours or feeling chained to a desk. But the reality is we all need purpose in our lives — and often, that purpose is directly tied to our work. When you say goodbye, you may find the transition more challenging than anticipated.
Work With a Professional to Determine If Work-Option Is Possible
If early retirement is a priority for you, you will have to develop a unique approach to saving and investing to help you achieve that goal. This may involve some trade-offs, like directing any pay raises, bonuses, or windfalls (such as selling employer stock, or receiving an inheritance) toward your nest egg instead of purchasing a vacation home, or taking on additional debt or expenses.
These trade-offs can be tough to navigate on your own! When you partner with a fee-only financial planner, you can work together to create a plan that prioritizes early retirement while balancing your other lifestyle goals. Together, you can create a strategy that:
- Diversifies your portfolio away from having an over-concentration in employer stock to reduce your overall risk
- Minimizes the impact taxes have on your nest egg as you grow
- Allows you room to explore alternate career options instead of a “traditional” retirement
- Organizes a withdrawal strategy for creating cash flow during early retirement
The details of your unique strategy will be specific to your situation and goals for this next chapter in your life. For some, the path to early retirement will be paved with high incomes and big stock paydays. Others may need to make more tradeoffs along the way to make their dream a reality.
What else do you need to be aware of as you work toward early retirement? Here are 7 things you need to keep in mind before stepping off the hamster wheel.
- Creating a successful retirement income formula – While your paychecks stop, your monthly bills don’t!
- Balancing between good debt & bad debt (or no debt) – In the best-case scenario, you’d be able to retire with no debt. But, if that’s not the case, it’s important to ensure you have a plan to pay off your debt before retiring.
- Managing your retirement savings portfolio – It’s critical to stick with your retirement savings plan through both the good market times and the inevitable bad. Your retirement plan grows with you during the different phases of your savings journey.
- Protecting the value of your employer stock – Ensure not too much of your savings is tied into your company’s stock. A diverse portfolio offers you the lowest amount of risk.
- Decide when you’ll begin collecting Social Security– It’s not always the best strategy to begin collecting Social Security right away. If you’re able to delay, there’s an opportunity to increase your annual benefits.
- Planning for the “work-optional” lifestyle transition – While leaving your high-paced career early might seem appealing, the grass isn’t always greener on the other side.
- Decide how you’ll pay for health care – This will likely be one of the greatest expenses you will see once you leave the workforce. How will you bridge the gap between your employer-sponsored healthcare plan and Medicare?
Please reach out to me if you’re ready to knock out this checklist and retire early! I specialize in creating custom financial plans based on your financial circumstances, values, and goals. I look forward to helping you strive towards retiring early.