Retire Early

December 1, 2001
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People who succeed in leaving work early plan ahead.



Like many workers, you may be hoping for an early retirement. Bailing out of the workforce at a young age is an increasingly common hope, but few workers make the choices beforehand to make this formidable objective a reality.

What choices? The people who succeed in leaving work early make an early decision about precisely how and when they want to retire, researching how much it will cost and planning specifically how they will afford it. If the hustle and bustle has you thinking seriously about jumping the job track, consider making the following choices to prepare.

Visualize Your Retirement

It is hard to stay serious about a goal year after year—much less create a detailed plan to achieve it—without deciding exactly what you want.

The fact is, many people who crave early retirement think about having time off, but they don’t really picture how they’ll spend the rest of their lives.

Create a tangible target at which you can aim. Decide at what age you want to retire and how exactly you expect to spend your days. Be as detailed as you can. Determine whether you want to live in a small coastal town, travel the world, go back to school or start a new business. Defining your dream will help you set your course, stay motivated and avoid unhappy surprises.

Estimate Your Expenses

One of the benefits of visualizing your retirement lifestyle is that it can help you estimate your expenses more accurately. That, in turn, can provide a solid goal for your investment plan.

In making your estimate, create a detailed retirement budget showing outlays for housing, groceries, dining out, transportation, travel, hobbies and activities, entertainment, insurance, health care and other items. A common rule of thumb is that you’ll need 80 percent of your annual income today to retire comfortably, but your custom budget may show that you’ll need less or perhaps more. Then, of course, you will need to adjust this amount for inflation, before and after you retire.

Plan To Replace Your Paycheck

In your first few years of retirement, you may have to rely on income sources other than retirement plans and Social Security. These could include a company pension if you have one, investment income, a new career or a part-time job.

At age 59 1⁄2, you can make penalty-free withdrawals from your IRAs, 401(k) and tax-deferred annuities. Social Security is available at reduced benefits at age 62 and at full benefits at ages 65 and 67, depending on when you were born. Up until the recent passage of the Senior Citizens’ Freedom to Work Act of 2000, Social Security recipients age 65 to 69 lost $1 in benefits for every $3 of earnings over the annual cap. The law repealed limits on how much income workers who have reached full retirement age can earn and still receive Social Security benefits. However, there is still a reduction in benefits of $1 for each $2 earned for those who are under full retirement age and are receiving benefits.

Adjustment to full retirement age (FRA) may change your retirement date. For people who reached age 62 in 2000, the FRA was 65 and two months. Others may have to wait longer. The age at which you are eligible to receive full retirement benefits is gradually increasing to 67. Generally, the FRA for those born between 1937 and 1942 will be in their 65th year, those born between 1943 and 1954 will reach their FRA in their 66th year, and those born after 1955 will have to wait until they are 67.

Retirees who choose to receive benefits before their full retirement age will continue to have limits placed on the income they can earn and still collect Social Security benefits. For those under age 65 throughout 2001, the earnings limit is $10,680 in annual income. For those people exceeding that limit, Social Security benefits are reduced by $1 for every $2 earned. But the current $10,680 limit will increase each year, based on changes in the average earnings of all employees in the country.

You can stay informed of your status with new Social Security statements. The Social Security earnings statement is now being sent annually to all workers age 25 and older, three months before their birth month. The statement provides an easy way to determine if your earnings are accurately recorded.

Besides helping you plan your retirement, the new Social Security benefit statement can help you:

  • Know what benefits are available to you and your family if you become disabled.
  • Determine if you have sufficient insurance to protect your family if you die.
  • See how your Social Security benefits fit in with your investments and savings. You can find more information on recent Social Security changes by visiting the Social Security Administration website at www.ssa.gov.

    If you anticipate a gap between the above income sources and your estimated expenses, now is the time to maximize your investments to build the needed funds. Depending on your situation, you may focus on tax-deferred retirement plans and annuities, tax-free Roth IRAs, taxable investments or a combination of all three.

    Start Now

    Whatever your age, starting to plan and invest now rather then later could make early retirement much more attainable thanks to the power of compounded earnings over time. Keep in mind that the value of your securities will fluctuate.

    An easy way to begin is to discuss your early retirement vision with a knowledgeable financial advisor who can help with planning and suggest investments that are best for your time frame and risk tolerance.

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