MONEY early retirement

Do This If You Want to Retire Early

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I’m married, and we are in our early to mid-50s with just under $700,000 in savings. My husband makes around $55,000 a year, and I make $135,000 a year. We would really like to retire before 65 (our full retirement age for Social Security is 67). I have a pension that will pay out $1,132 a month with a 50% survivor’s benefit for my husband. But we’re not sure whether we can pull it off. I max out my 401(k) but never seem to have any extra money to put into savings. How we can get to where we want to be? – Elizabeth, Lisle, Illinois

A: Achieving your dream of early retirement may be doable. But you’ll need to step up your savings and control your expenses, says Ray Lucas, senior vice president of planning at of Integrated Financial Partners. “It all comes down to the lifestyle you want to lead,” says Lucas.

First, let’s take a look at where you are now. If you are saving the max amount of $18,000 annually in your 401(k)—not including catch-up contributions, which we’ll get to in a moment—that’s 13% of your salary or 10% of your combined incomes. If you continue saving at that rate and get a 6% annual rate of return, you’d have about $1.1 million in five years at age 60.

That sounds like a tidy sum, but it may not go as far as you think over a long retirement. Let’s assume you want to replace 75% of your pre-retirement income, which would come to $140,000. It helps that you have a pension that will give you $13,000 a year. And there’s also Social Security—the average annual benefit for a couple who claim at full retirement age is $25,000 a year. But to provide an additional $100,000 in annual income, you will need to save at least $3 million. Assuming a 3.5% withdrawal rate, that portfolio would likely last you until age 95, or 35 years.

Even if you wait till 65 to retire, you are on track to amass “only” $1.6 million. So you will need to dramatically boost your savings rate to meet those goals, says Lucas. That may be tough since you say you are already have trouble putting away more.

But even if you can’t reach those savings targets, you may be able to enjoy a comfortable lifestyle on less than a six-figure income—most people do. In which case an early retirement is still very possible.

The first step is to analyze your retirement spending needs. Start by completing an expenses worksheet such as this one, which covers everything from your mortgage and property taxes to eating out and buying groceries. Be sure to factor in health care costs too. You can’t enroll in Medicare till you’re 65, so if you retire earlier, you will need to buy private health insurance for a few years. Also take into account whether you will be helping anyone else out financially, such as children or an elderly parent.

Next, make a full assessment of all your sources of income. Use a retirement calculator to see how much income your savings and pension will provide based on the year you want to retire. And be sure to consider the best possible claiming strategies for Social Security—married couples often have more options for taking Social Security, such as file-and-suspend, which can boost their income. The Social Security calculator available online at Financial Engines will run thousands of scenarios to help you identify the best choices.

And even though you may find it difficult, look at ways to increase your savings. In your 50s, you can make catch-up contributions to your 401(k), which can raise your total savings to $24,000 a year. Be sure to jump on opportunities to do bursts of savings—socking away big chunks of money when large expenses fall away, such as paying for college for your kids. And practice now for retirement by living on a smaller budget, which will enable you to sock away more.

If none of this gets you closer to your goals, consider working another year or two or taking on a part-time job after you retire. Another smart move may be to downsize to a smaller home or relocate to a lower-cost area, which will enable you to build your portfolio—plus, the lifestyle will be easier on your budget after you stop working.

“Retiring early often means making trade-offs, now and later,” says Lucas. “But with smart planning and disciplined saving, you can make it a reality.”

Want to fast-track your retirement savings? Check out MONEY’s Ultimate Retirement Guide

MONEY retirement income

3 Retirement-Crushing Unforeseen Circumstances

thunderstorm on golf course
Derris Lanier

And what do about them.

Planning for retirement is a challenge for everyone because you have to find money to set aside in savings, invest that money well, and then figure out how to make ends meet once you stop working. Even when everything goes right, retirement planning isn’t easy, but the real test comes when unforeseen circumstances might ruin all of your plans.

Fortunately, you can deal with the unexpected rather than letting it crush your retirement hopes. Let’s take a closer look at three of the most common problems that people have trouble foreseeing and what you can do to avoid them or handle them when they come up.

1. Having to retire before you expected.
There’s a big gap between how long most people expect to work and how long they actually do work. The reason is simple: Unforeseen circumstances come up that prevent you from working into your 60s or beyond. In some cases, a health condition stands in the way of being able to stay in your job. For others, corporate moves lead your employer to cut back on staffing, and high-priced older employees often find themselves the first to go. Even if you’re fortunate enough to get a severance package, it might not last long enough to get you to the age you expected to retire.

The first thing to do when you have to retire unexpectedly is to look at your actual and potential income and expenses, working to maximize money coming in and cutting unnecessary costs. Getting part-time work is sometimes an option to help supplement income from investments or other sources, and looking at whether Social Security or other pension income might be available to you before full retirement age is worth the effort.

After you have a handle on what you’re taking in and what you’re spending, the next step is to figure out a longer-term strategy to make ends meet on your new budget. If you have enough, you’re good to go. If not, you can look at some of the resources for retirees on limited incomes can use to help make ends meet until more typical retirement benefits become available.

2. Dealing with a badly timed stock market drop.
Everyone understands the stock market rises and falls in cycles over the years. Yet when it comes time to plan for retirement, this basic fact can be very hard to deal with. If the market drops right after you retire, you could find yourself with a far smaller retirement nest egg than you had expected.

There are several ways you can address this risk. One is to use specialized financial instruments designed to provide money later in your retirement, ensuring a basic income even if your money doesn’t go as far as you had expected. For instance, a deferred income annuity allows you to pay a premium now in exchange for a guarantee of future payments from an insurance company once you reach a certain age.

Also, easing back on your stock market exposure as you age can help insulate your assets from a falling market. As you’ll see below, though, there are sometimes reasons for keeping the portion of your money in stocks higher than you might think. Still, if you’re willing to give up some potential future growth — and you have the assets to do so — then being slightly more conservative can offer a good solution to any unforeseen market moves that could put you in dire straits.

3. Not having the income you’d expected to get from your investments.
Recently, many retirees have found that they can’t generate the income they need from their savings. Bank products pay almost no interest, and it’s hard to do much better in traditional fixed-income investments like bonds.

There are ways to get more income from your investments, but you have to be careful about how much you rely on them. In recent years, many investors have shifted into dividend-paying stocks, with superior yields compared to bonds, bank CDs, and savings accounts. After six years of a bull market, though, some investors have forgotten just how hard stocks can fall. For that reason, shifting entirely into risky investments just to get more income isn’t a smart way to go. Nevertheless, a diversified mix of income investments that includes not just bonds, but also dividend-paying stocks, real-estate investment trusts, royalty trusts, and other niche investment assets can limit your risk while giving you the income you need.

Retiring well takes effort, and dealing with unforeseen circumstances makes it even harder. Nevertheless, with some forethought, you can put yourself in the best position possible to deal with unexpected surprises and come out on top.

Read next: 4 Ways to Bridge the Retirement Income Gap

More From Motley Fool:

MONEY early retirement

Why Retiring Early May Be More Affordable Than You Think

You don't need a whopping pile of cash.

How soon can I retire?

For some, this question is as tantalizing as it can be vexing. After many years of saving and planning for a secure, fulfilling, and comfortable retirement, it’s natural to wonder, “How much is enough?” From my experience helping people answer this question over 25 years as an adviser, researcher, and writer, the answer is quite often, “Less than you may think.” Obviously, it depends on many factors. But a key takeaway is that what you believe and how you think about the financial resources already available to you is likely what matters most of all.

Consider the situation of one typical client; let’s call her Sally. She recently turned 59 and earns $114,000 as a corporate manager with 27 years’ experience. She loves her work and assumed she’d do it for another five to seven years. Her career has been rewarding, but there have also been challenges along the way, including becoming a single mom to her two children. But the kids are now launched (more or less), and since becoming an empty-nester Sally has pursued outside interests that have added new balance and meaning to her life.

One of these is photography. Turns out Sally has a real talent; in fact, she’s already been paid for some of her work. All this has helped her realize she’d much prefer trading her job for a part-time career in commercial photography. “But there’s no way,” she tells herself. “I’m only 59; people can’t retire that early these days. And my mortgage won’t be paid off until I’m 65.”

Lately, though, Sally has begun to get impatient. She looks forward to more time for herself and photography much sooner than seven years from now. She could use accumulated vacation time to take much of the summer off, but she’d still have to return to work full-time come fall. Or does she? Let’s look more closely.

Sally lives comfortably on her $5,700 monthly take-home pay after deducting taxes, benefits, and her 15% 401(k) contribution. She makes a $1,500 payment (principal plus interest) against her remaining $110,000 mortgage and saves another $500 for travel. Her retirement savings include $575,000 in her 401(k) and $150,000 in an after-tax brokerage account. Her company pension would pay $1,500 monthly, and Social Security credits will provide a $2,500 monthly benefit if she works into 2022 ($2,250 if she goes part-time now).

Though Sally clearly has an exciting vision for her life’s next chapter, several key questions remain. At the age of only 59, how much sustainable after-tax income is available? How should she bridge the gap to Social Security? How can she afford discretionary extras that are sure to arise, especially in the next 10 to 15 years? And what about future health care costs?

The key to letting Sally consider retiring to this new life is understanding that not all her expenses must be sustained for her entire future. She won’t have that mortgage payment forever, nor will she likely travel as much beyond her mid-70s; cutting out the mortgage payment and the $500 saved monthly for travel will knock $2,000 off her monthly expenses. Some research convinces her to add back $550 for health insurance (later Medicare and a supplement) plus out-of-pocket needs, and another $250 for long-term care insurance. So in today’s terms, she’ll have to sustain only a $4,500 monthly income for life, not her current $5,700.

So how can Sally get rid of her mortgage? One option is to pay it off with a lump sum from her brokerage account. The problem with draining that account so quickly, however, is that most of her remaining money would be in her taxable 401(k)—money that, upon withdrawal, would be subject to ordinary income taxes likely higher than the capital gains rate on money pulled from her brokerage account. A better option, which Sally will explore, is to refinance into a new 30-year mortgage. Based on a back-of-the-envelope calculation, she’d pay $550 monthly. That would bring her core monthly lifetime expenses to $5,050.

Sally could also stop treating travel as a monthly expense. Instead, she could cover it by carving out a $100,000 ‘travel fund’ from her brokerage assets, supplementing it with photography earnings in good years. Together, this could provide $6,000 to $8,000 of yearly travel (or other discretionary expenses) for at least 12 to 15 years when she’s in her 70s.

So in retirement, Sally will need to cover $60,600 in annual expenses—$5,500 per month.

What she’ll really need, though, is $70,000 total income, since she’ll also have to cover federal and state income taxes.

How can she do that? Start with her pension, which will cover $18,000. Seven years from now, when she reaches her full retirement age of 66, she plans to start taking Social Security, which would give her another $27,000 in annual income. Between now and then, she plans to come up with $27,000 annually by tapping $125,000 of her retirement savings (invested conservatively) at the rate of $18,000 a year and netting $9,000 a year from her photography business.

For the final $25,000 a year she needs in lifetime income, she’ll draw upon her remaining $500,000 in retirement savings. That means pulling out 5% of the initial amount annually ($25,000 divided by $500,000). If Sally is willing to cut back on expenses during tough economic times, this withdrawal rate will work over a 40-year period, as shown by research here and here.

Financially, Sally is ready for early retirement—and so are many who dream about it. Although diligent saving is a prerequisite, you don’t necessarily need a whopping pile of cash. What you do need is some planning, some creativity, some flexibility, and an understanding that you may have to draw upon multiple financial resources.

MONEY real estate

The 30 Most Livable Cities for Baby Boomers

Wisconsin State Capitol and the State Street pedestrian mall, Madison, Wisconsin
Walter Bibikow—Getty Images/age fotostock Wisconsin State Capitol and the State Street pedestrian mall, Madison, Wisconsin

Apparently, Wisconsin is the place to go for an active, enjoyable life after age 50. At least, that’s what a new livability index from AARP says.

Apparently, Wisconsin is the place to go for an active, enjoyable life after age 50. At least, that’s what a new livability index from AARP says. The index ranks cities, down to the neighborhood, based on several factors that make an area desirable to the 50-plus population. AARP broke the rankings into three population categories (10 cities in each), and there are six Wisconsin cities on the list, more than any other state. (Minnesota came in second with four.)

Labeling a city “most livable” is a pretty subjective assessment — people who love New York may not be crazy about living in Fargo, N.D., for example, but both are on this list. AARP tried to find cities that included many of the factors important to Americans aged 50 years and older. The rankings are based on analysis by the AARP Public Policy Institute and other experts of 60 community factors in seven categories: housing, neighborhood, transportation, environment, health, engagement and opportunity. The analysis included responses to a national survey of 4,500 Americans in that age group about what’s most important for them to have in their communities. Each of the cities on this list stands out in many of the 60 factors AARP analyzed, making them suitable for residents with a variety of tastes.

Large (Population 500,000 and Higher)

  1. San Francisco
  2. Boston
  3. Seattle
  4. Milwaukee
  5. New York City
  6. Philadelphia
  7. Portland, Oregon
  8. Denver
  9. Washington, D.C.
  10. Baltimore

Medium (Population 100,000 to 500,000)

  1. Madison, Wis.
  2. St. Paul, Minn.
  3. Sioux Falls, S.D.
  4. Rochester, Minn.
  5. Minneapolis
  6. Arlington,Va.
  7. Cedar Rapids, Iowa
  8. Lincoln, Neb.
  9. Fargo, N.D.
  10. Cambridge, Mass.

Small (Population 25,000 to 100,000)

  1. La Crosse, Wis.
  2. Fitchburg, Wis.
  3. Bismarck, N.D.
  4. Sun Prairie, Wis.
  5. Duluth, Minn.
  6. Union City, N.J.
  7. Grand Island, Neb.
  8. Kirkland, Wash.
  9. Marion, Iowa
  10. West Bend, Wis.

When thinking about a new location, there are several things to consider, beyond what the community has to offer. For starters, you may want to look at job opportunities and the unemployment rate, and if you’re considering buying a home, see if you can afford property in the neighborhood you find desirable. Livability may be challenging to quantify, but affordability is a bit more black-and-white. Financial stability should always be a large factor in making big life decisions.

More from Credit.com

This article originally appeared on Credit.com.

MONEY retirement planning

4 Ways to Set Yourself Up for Early Retirement

Carlos and Jessica Gomez
Scott Council Carlos and Jessica's real estate purchases have put their daily finances at risk.

Knocking off at 55 is hard but not impossible. Here's what one young family needs to do to reach their goal.

Carlos O. Gomez, 38, wants to retire at 55. To that end, the high school assistant principal from Oceanside, Calif., puts $11,100 of his $106,000 salary into retirement accounts that include a pension expected to pay $52,000 a year. With another $68,100 he and his wife, Jessica Grimmett-Gomez, 34, have saved, he’s tried all kinds of growth strategies—from cautious (a fixed annuity at 3%) to risky (two Roth IRAs in Ford stock).

He’s also bought three rental properties over three years, though he now realizes that using $25,000 to buy the last in July was a mistake. The couple have very little cash. And with Jessica, a former dental assistant, staying home with their two toddlers, they don’t have a lot of wiggle room in their income for emergencies. As a result, they’ve racked up $6,300 on credit cards, partly due to expenses on the rentals. “I was trying to make sure we’d have income in retirement,” Carlos says sheepishly, “but I got overzealous.”

150402_PRO_Gomez_graphic
Money

Here are 4 things the Gomezes can do to get back on track.

1. Keep a Cushion
San Diego financial planner Scott Kilian says the couple’s priorities should be paying off credit card debt and saving three months’ expenses ($21,000) in cash. They can free up $1,000 a month by trimming retirement savings and reallocating discretionary spending to achieve both in about two years.

2. Sell the Rentals Later
With $78,000 tied up in equity, “another real estate crisis could impact their net worth dramatically,” Kilian says. That said, the units are producing $338 in net income a month. So Kilian suggests waiting to sell until they have trouble finding tenants.

3. Mix the Mix
Their nest egg is now 60% in equities, 40% fixed income. Kilian says they can boost returns by going 80%/20%. They can surrender the annuity in his 403(b) at no penalty and divvy the money among stock and bond funds, then sell the Ford stock to buy the diversified Vanguard Total World fund.

4. Delay the Date
To quit at 55, Carlos needs $1.3 million, as his state pension makes him ineligible for Social Security. That means saving $55,000 more a year—which is unlikely. But if they up their annual savings to $33,000, he can quit at 62. Once the cash fund is built and debt paid, they can redirect the $1,000 a month. And if Jessica returns to work full-time—which she said she’ll consider—they can hit the goal.

More Money Makeovers:
30 Years Old and Already Falling Behind
4 Kids, 2 Jobs, No Time to Plan
Married 20-Somethings With $135,000 in Debt—and Roommates

 

MONEY 401k plans

The Secrets to Making a $1 Million Retirement Stash Last

door opening with Franklin $100 staring through the crack
Sarina Finkelstein (photo illustration)—Getty Images (2)

More and more Americans are on target to save seven figures. The next challenge is managing that money once you reach retirement.

More than three decades after the creation of the 401(k), this workplace plan has become the No. 1 way for Americans to save for retirement. And save they have. The average plan balance has hit a record high, and the number of million-dollar-plus 401(k)s has more than doubled since 2012.

In the first part of this four-part series, we laid out what you need to do to build a $1 million 401(k) plan. We also shared lessons from 401(k) millionaires in the making. In this second installment, you’ll learn how to manage that enviable nest egg once you hit retirement.

Dial Back On Stocks

A bear market at the start of retirement could put a permanent dent in your income. Retiring with a 55% stock/45% bond portfolio in 2000, at the start of a bear market, meant reducing your withdrawals by 25% just to maintain your odds of not running out of money, according to research by T. Rowe Price.

150320_MIL_TameMix
Money

That’s why financial adviser Rick Ferri, head of Portfolio Solutions, recommends shifting to a 30% stock and 70% bond portfolio at the outset of retirement. As the graphic below shows, that mix would have fallen far less during the 2007–09 bear market, while giving up just a little potential return. “The 30/70 allocation is the center of gravity between risk and return—it avoids big losses while still providing growth,” Ferri says.

Financial adviser Michael Kitces and American College professor of retirement income Wade Pfau go one step further. They suggest starting with a similar 30% stock/70% bond allocation and then gradually increasing your stock holdings. “This approach creates more sustainable income in retirement,” says Pfau.

That said, if you have a pension or other guaranteed source of income, or feel confident you can manage a market plunge, you may do fine with a larger stake in stocks.

Know When to Say Goodbye

You’re at the finish line with a seven-figure 401(k). Now you need to turn that lump sum into a lasting income, something that even dedicated do-it-yourselfers may want help with. When it comes to that kind of advice, your workplace plan may not be up to the task.

In fact, most retirees eventually roll over 401(k) money into an IRA—a 2013 report from the General Accountability Office found that 50% of savings from participants 60 and older remained in employer plans one year after leaving, but only 20% was there five years later.

Here’s how to do it:

Give your plan a shot. Even if your first instinct is to roll over your 401(k), you may find compelling reasons to leave your money where it is, such as low costs (no more than 0.5% of assets) and advice. “It can often make sense to stay with your 401(k) if it has good, low-fee options,” says Jim Ludwick, a financial adviser in Odenton, Md.

More than a third of 401(k)s have automatic withdrawal options, according to Aon Hewitt. The plan might transfer an amount you specify to your bank every month. A smaller percentage offer financial advice or other retirement income services. (For a managed account, you might pay 0.4% to 1% of your balance.) Especially if your finances aren’t complex, there’s no reason to rush for the exit.

Leave for something better. With an IRA, you have a wider array of investment choices, more options for getting advice, and perhaps lower fees. Plus, consolidating accounts in one place will make it easier to monitor your money.

But be cautious with your rollover, since many in the financial services industry are peddling costly investments, such as variable annuities or other insurance products, to new retirees. “Everyone and their uncle will want your IRA rollover,” says Brooklyn financial adviser Tom Fredrickson. You will most likely do best with a diversified portfolio at a low-fee brokerage or fund group. What’s more, new online services are making advice more affordable than ever.

Go Slow to Make It Last

A $1 million nest egg sounds like a lot of money—and it is. If you have stashed $1 million in your 401(k), you have amassed five times more than the average 60-year-old who has saved for 20 years.

But being a millionaire is no guarantee that you can live large in retirement. “These days the notion of a millionaire is actually kind of quaint,” says Fredrickson.

Why $1 million isn’t what it once was. Using a standard 4% withdrawal rate, your $1 million portfolio will give you an income of just $40,000 in your first year of retirement. (In following years you can adjust that for inflation.) Assuming you also receive $27,000 annually from Social Security (a typical amount for an upper-middle-class couple), you’ll end up with a total retirement income of $67,000.

In many areas of the country, you can live quite comfortably on that. But it may be a lot less than your pre-retirement salary. And as the graphic below shows, taking out more severely cuts your chances of seeing that $1 million last.

150320_MIL_Withdrawals
Money

What your real goal should be. To avoid a sharp decline in your standard of living, focus on hitting the right multiple of your pre-retirement income. A useful rule of thumb is to put away 12 times your salary by the time you stop working. Check your progress with an online tool, such as the retirement income calculator at T. Rowe Price.

Why high earners need to aim higher. Anyone earning more will need to save even more, since Social Security will make up less of your income, says Wharton finance professor Richard Marston. A couple earning $200,000 should put away 15.5 times salary. At that level, $3 million is the new $1 million.

MONEY early retirement

5 Ways to Know If You’re on Track to Retire Early

150313_RET_Track_1
David Madison/Getty

More than any numerical calculation, your financial behaviors are a reliable indicator for early retirement.

Interested in retiring early? How do you know if you’re on track? The usual answer is a financial formula: A given amount of savings, plus some investment return, equals a certain lifestyle, for a certain number of years. It’s simple math. Or is it?

In fact, it’s extremely difficult to predict your financial trajectory far into the future. Numbers can be deceiving. How about a different approach? These five career and financial behaviors may be the best indicator for whether you’re on track to retire early.

Do you love your work?
It might seem ironic to begin a discussion of early retirement with whether or not you like your job. After all, isn’t the point of retirement to stop working? Yet, in my experience, the only way to create the value needed to acquire the assets to retire early is to be great at what you do. And it’s hard to be great at something if you don’t love it. How else will you be motivated to put in the hours required for learning, practice, and mastery? Even in retirement, you may not want to stop being productive. But you’ll have the opportunity to do it in your own way, on your own schedule.

Do you value your time more than things?
Another prerequisite for early financial independence is valuing your free time more than owning things. Many modern professionals could retire in their 50’s if they saved more of their income rather than spending it. But temptations abound, and the instant gratification of another purchase is easier to taste than freedom a decade hence.

Ask yourself whether the things in your life are worth the years of labor you trade for them. Expensive houses, cars, and vacations are big-ticket items that can drain away earnings. Taking on debt to pay for them compounds the problem. We all need some luxuries. But requiring the best in everything is a financial burden. Valuing your time more than things will keep you from that trap.

Are you saving at least 30% of your salary?
There are few absolutes in the early retirement equation. High earnings are nice. A frugal lifestyle is helpful. But, when you really dig into the math, what matters most is your savings rate—the amount of your earnings, as a percent, that you save instead of consuming. That single number captures all the relevant factors for financial independence: how much you make, spend, and invest. It’s the single most important numerical factor in whether you can retire early, and it’s independent of your salary.

If you save at the often-recommended rate of only 10%, it will be about 40 years before you can retire. But accelerating that process is possible. It all depends on your resources and motivation. I saved approximately one-third of my salary, plus bonuses, during the peak earning years. That allowed me to retire at age 50 If you’re able to save 50% of your earnings, you could retire in less than 15 years!

How do you achieve those high savings rates? Increase your earnings by self-improvement. Cultivate a healthy, low-cost lifestyle with free fun and a few carefully chosen luxuries. Max out retirement savings and get company matches.

Do you track your financial “vitals”?
Every early retiree that I know got there in part because they quantify and track things. Rocket science is not required: If you can make a list of numbers and add them, you have most of the math skills needed for early retirement. Here are three vital financial signs to watch:

  • Monthly expenses reflect your lifestyle back to you: Are your daily spending decisions taking you towards financial freedom, or further away?
  • Quarterly net worth tracks your progress to financial independence: Are you growing your assets, or digging yourself into debt?
  • Annual portfolio return measures your investing skill: Are you matching the broad market return? (That’s good enough for early retirement.) If not, try a low-cost, passive indexing approach.

Do you have a potentially profitable passion?
Here’s a secret about early retirement: Like much of life, it’s risky. If you need a perfectly predictable, secure existence, then keep your job. But most early retirees aren’t leaving their career to lie on the beach or play golf full time. Most of them are setting off to pursue other passions. And many of those pursuits have income potential. Whether it’s blogging, guiding, or volunteering at a nonprofit, anybody with extensive experience, who is serving others, will generate value. Oftentimes that winds up paying, which reduces the risk of early retirement.

More than any calculation, your financial behaviors are a reliable indicator for early retirement. I’ve just reviewed five important ones. With these behaviors in place, relax and enjoy the ride. Find happiness every day in meaningful work and prudent living. That will lead to financial freedom, on a schedule that is right for you.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

For more help calculating your needs in retirement:
The One Retirement Question You Must Get Right
How to Figure Out Your Real Cost of Living in Retirement
4 Secrets of Financial Freedom

TIME

This Is How Long It Will Be Before You Can Retire

Stop working at 55? Fat chance

First, the good news: After creeping up incrementally since the 1980s, the average retirement age seems to have leveled off — at least, for men. The bad news: It’s probably later than you want to hear, and women’s average retirement age will probably continue to rise.

New research from the Center for Retirement Research at Boston College says that, as of 2013, the average retirement age for men was 64, and roughly 62 for women.

Alicia Munnell, director of the Center for Retirement Research and author of the new study, says financial incentives to delay drawing Social Security, the shift from pensions to 401(k)s and the unavailability of Medicare until the age of 65 all are part of the reason behind the increase.

The recession and its aftermath yielded two more counterbalancing trends: Many older Americans delayed retirement after their 401(k)s shrunk, but others who were laid off had a hard time reentering the workforce.

This isn’t the situation any longer, Munnell says. “By 2015, the cyclical effects have worn off,” she says. “The impact of the various factors that contributed towards working longer… largely have played themselves out,” she says.

At least, this is the case for men. “Male labor force participation has leveled off and, consequently, so has the average retirement age,” Munnell says.

Things are a little different for working women, whose historical retirement trends vary from men’s because women didn’t start entering the workforce in large numbers until the second half of the 20th century.

“Women’s [labor force] participation seems to have increased,” Munnell says. “This upward shift in the curves is reflected in the recent upward trend in the average retirement age.”

And this trajectory towards a later retirement is likely to continue, at least for a while, she says. “I think that it will continue to increase until it becomes very close to the average for men.”

But aside from the chance to earn a bigger Social Security benefit and shore up your nest egg, Munnell says there are advantages to the economy if more people keep working longer, calling this an “unambiguously positive” trend.

“The more people who are working, the bigger the GDP pie and the more output available for both workers and retirees,” she says.

MONEY retirement planning

How to Balance Spending and Safety in Retirement

piggy banks shot in an aerial view with "+" and "-" slots on top of them
Roberto A. Sanchez—Getty Images

Every retirement withdrawal method has its pros and cons. Understanding the differences will help you tap your assets in the way that's best for you.

You’ve saved for years. You’ve built a sizable nest egg. And, finally, you’ve retired. Now, how do you withdraw from your savings so your money lasts as long as you do? Is there a technique, a procedure, a product that will keep you safe?

Unfortunately, there is no perfect answer to this question. Every available solution has its strengths and its weaknesses. Only by understanding the possible approaches, then mixing them together into a personal solution, will you be able to move forward with an enjoyable retirement that balances both spending and safety.

Let’s start with one of the simplest and most popular withdrawal approaches: spending a fixed amount from your portfolio annually. Typically this is adjusted for inflation, so the nominal amount grows over time but sustains the same lifestyle from year to year. If the amount you start with, in year one of your retirement, is 4% of your portfolio, then this is the classic 4% rule.

The advantages of this withdrawal method are that it is relatively simple to implement, and it has been researched extensively. Statistics for the survival probabilities of your portfolio, given a certain time span and asset allocation, are readily available. This strategy seems reliable—you know exactly how much you can spend each year. Until your money runs out. Studies based on historical data show your savings might last for 30 years. But history may not repeat. And fixed withdrawals are inflexible; what if your spending needs change from year to year?

Instead, you could withdraw a fixed percentage of your portfolio annually, say 5%. This is often called an “endowment” approach. The advantage of this is that it automatically builds some flexibility into your withdrawals based on market performance. If the market goes up, your fixed percentage will be a larger sum. If the market goes down, it will be smaller. Even better, you will never run out of money! Because you are withdrawing only a percent of your portfolio, it can never be wiped out. But it could get very small! And your available income will fluctuate, perhaps dramatically, from year to year.

Another approach to variable withdrawals is to base the amount on your life expectancy. (One source for this data is the IRS RMD tables.) Each year you could withdraw the inverse of your life expectancy in years. So if your life expectancy is 30 years, you’d withdraw 1/30, or about 3.3%, in the current year. You will never run out of money, but, again, there is no guarantee exactly how much money you’ll have in your final years. It’s possible you’ll wind up with smaller withdrawals in early retirement and larger withdrawals later, when you aren’t as able to enjoy them.

What if you want more certainty? Annuities appear to solve most of the problems with fixed or variable withdrawals. With an annuity, you give an insurance company some or all of your assets, and, in exchange, they pay you a monthly amount for life. Assuming the company stays solvent, this eliminates the possibility of outliving your assets.

Annuities are good for consistent income. But that’s also their chief drawback: they’re inflexible. If you die early, you will leave a lot of money on the table. If you have an emergency and need a lump sum, you probably can’t get it. Finally, many annuities are not adjusted for inflation. Those that are tend to be very expensive. And inflation can be a large variable over long time spans.

What about income for early retirement? It’s unwise to draw down your assets in the beginning years, when there are decades of uncertainty looming ahead. The goal should be to preserve net worth until you are farther down the road. If your assets are large enough, or the markets are strong enough, you can live off the annual interest, dividends, and growth. If not, you may need to work part-time, supplementing your investment income.

Every retirement withdrawal technique has drawbacks. Some require active management. Some can run out of money. Some don’t maintain your lifestyle. Some can’t handle emergency expenses or preserve principal for heirs. Some may be eroded by inflation.

That’s why I believe most of us are going to construct a flexible, “hybrid” system for living off our assets in retirement. We’ll pick and choose from the available options, combining the benefits, while trying to minimize the liabilities and preserve our flexibility.

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

For more help calculating your needs in retirement:
The One Retirement Question You Must Get Right
How to Figure Out Your Real Cost of Living in Retirement
4 Secrets of Financial Freedom

Your browser is out of date. Please update your browser at http://update.microsoft.com