If you’re like many people in the workforce, you’ve probably fantasized about retiring early. But how do you know when it’s the right time?
Do you know how much money you need to cover your expenses throughout retirement? Where will this money come from? Have you considered what your day to day life would be like once you clock out of work for the last time?
Our Unplanned Retirement
When my wife, Allison, and I retired in our early 40s in 2015, we hadn’t thought about any of those questions. We actually retired by accident. We both got laid off from our Tech startup jobs in San Francisco within a month of each other. And while we didn’t know it at the time, that was to be the start of our early retirement.
What began as a 3-month break, turned into a 6-month sabbatical, and then morphed into a 9-month pseudo-gap year. It was right around the 9-month mark that we finally looked more closely at our numbers and realized we didn’t need to go back to work. More importantly, we didn’t want to go back to work. Final verdict: we were now early retirees!
While it ended up working out well for us, in hindsight we should’ve planned it out a little better. If were to do it all over again, we would go through a checklist of considerations before pulling the plug on our careers as employees.
So, what are some of the things you should consider before taking the leap? Let’s take a look…
The most important consideration before quitting your day job is to make sure you have enough money saved up. You don’t want to realize you’re short of cash 10 or 20 years into your retirement.
1) Calculate Your FI Number
How much money do you actually need? The general rule of thumb is to have 25x your yearly expenses in savings and investments (not including Real Estate or other property).
This is your FI Number (for Financial Independence). You want your FI to be at least 25, but IMHO it’s even better to be at 30+. This rule is derived from the often cited 4% Rule, which came about from the Trinity study. It states that:
“a person has sufficient savings in assets if 4% of his/her assets are sufficient to cover a year's expenses.”
Here’s how to determine your FI number: Where Are You on the Road to FI?
We didn’t know about any of these “rules” when we retired, but we soon discovered many other early retirees and retirement experts discussing them. Fortunately, our FI was well above 30 when we retired, so that gave us some peace of mind. However, we wanted to be a little more certain, so we went the next step…
2) Monte Carlo for the win!
While the idea of a visit to the deluxe Monte Carlo casino sounds like a whole lot of fun (and was something we did while on our 3-month break), a Monte Carlo Simulation is actually a more in-depth analysis you can do on your finances to look at a variety of outcomes. This analysis typically takes into account how long you expect your retirement to last, your savings balance (with % of stocks, bonds, and cash), and annual expenses.
The Monte Carlo simulation runs a large number (generally 10K - 100K) of potential market scenarios given your specific factors. Based on these simulations, you’ll see how likely it is that you’ll have enough money to last throughout retirement.
You can have this analysis done by a financial analyst or do it yourself with an online version. Vanguard has a very easy to use and effective Nest Egg Calculator that will run 100K market scenarios.
If you use a financial analyst, they can run the analysis with your specific investment portfolio to get a more accurate prediction. We worked with an analyst at Vanguard, who ran our finances through 10,000 possible scenarios. According to Vanguard, there is a 99% that we will not outlive our money if we live to 99 — whew, what a relief!
Make sure you have a plan for covering your health expenses. We use a high-deductible plan through Covered California, a healthcare marketplace for residents of California.
You can check with your own state or use a service like eHealth to search for options. You never want to go without health insurance completely. You could be the healthiest person in the world and still get hit by a bus that runs a red light.
4) Drawdown plan
You also want to make sure you have a plan to withdraw money from your savings and investments to cover your living expenses. Fortunately for us, we were able to contribute to taxable accounts over and above our retirement accounts.
This means we can draw from the taxable accounts without any penalties (other than long-term capital gains taxes). If you only contributed to tax advantaged retirement accounts (e.g. 401(k), IRA), then you have to be a little more creative to avoid penalties.
One of the most popular strategies to access money from your retirement accounts is called the Roth Conversion Ladder. It’s a very doable tactic, but just make sure to keep up with any changes to the tax codes that could affect this strategy.
While making sure you have enough savings is probably the most important criteria for retiring early, there are other important factors to consider as well...
5) Projects & Plans
One of the reasons many people are hesitant to retire is that they think they’ll be bored. Their work lives provide them with constant activity, projects, interactions with others, and stress (both good and bad).
So when you leave the workforce, you will be responsible for creating your own projects and plans (short- and long-term) to keep you fulfilled and content.
One thing you’ll most likely add to your agenda is travel. Allison and I have traveled more in the past 3.5 years than we did in the previous 15 years! We’ve gone to Europe, Central & South America, SE Asia, and China.
We are always planning our next trip. We’re just about to embark on a 6-week trip to the Eastern U.S. to go to each of our 30-year high school reunions (mine is in Columbus, OH and Allison’s is in NYC), sandwiched by 2 weeks in Orlando for FinCon (where I’ll be speaking) and Disney World!
In addition to travel, you can work on a wide variety of projects: start a side business, write a book, learn a language, volunteer, or run a marathon!
6) Unfinished Business
Before you quit your job forever, think about whether there’s anything you want to accomplish or take care of before leaving it behind. Is there a big project you want to complete? Or a milestone or challenge that you would regret not tackling?
Every once in a while I’ll think about whether I should go back to the workforce, either in my previous career or in some new career path. But then I look back at my career achievements (running million dollar online ad campaigns, managing teams of talented individuals, being promoted to VP), and I realize that I pretty much wrapped up everything I thought that I needed to do. I also remember some of the reasons I left that world -- the jam-packed subway cars, office politics, and differing priorities with company leadership.
Your work life is probably very regimented. You get up, eat breakfast, commute to work, drink coffee, do a bunch of work stuff (meetings, emails, projects, more meetings), commute home, eat dinner, watch TV, and go to bed. Rinse and repeat every day!
Once you retire, you’ll want to come up with new routines. It doesn’t have to be the same everyday, but it will keep your life structured if you have a general daily or weekly routine. For us, it means having a general schedule for our workouts, walks, projects, entertainment, shopping, dining, etc.
When you’re working, much of your identity is wrapped up in what you do for a living. You’re a doctor, teacher, software engineer, etc. After you retire, you need to figure out what your new identity is going to be.
Allison and I struggled with this for a little while. Are we simply early retirees now, or are we self-employed (since we work on Retire By 45 on the side)? Or are we now on the path to some new chapter in life?
However you want to define it, you’ll just need to think about how you want to identify with your new early retirement life. Learn to be you, not your job.
9) Social network
For many people, another positive to working is that it provides a built-in social network. You become friends with many of your co-worker and clients. You work on projects together, deal with similar issues and challenges, and perhaps socialize outside of work as well.
Once you retire, you need to work a little harder to maintain those social connections and create new ones. For us, that has meant getting more involved in our community, going to more parties & events, making plans for dinner and coffee dates, and just trying to stay more connected with people we care about.
For some people, they like getting a “break” from their spouse or family each day when they go to work. But busy work schedules can also take a toll on your relationships, especially if you come home stressed and distracted each day. When Allison worked at eBay, her 2+ hour round trip commute made her quite irritable and sleep-deprived.
I would say that for the two of us, our relationship has actually improved since we both retired. Even though we’re together almost 24/7 now, it’s been great working together on our projects, plans, and routines. It takes a little getting used to at first, but you may be surprised how fulfilling your family life can become after retirement.
Checklist for Your Early Retirement
Let’s now summarize all of this into a handy dandy 10-point checklist. Go through this list to see how close you are to being able to go for it and retire early:
Calculate your FI
Conduct a Monte Carlo Simulation
Determine a plan for healthcare
Figure out your drawdown strategy
Compile a list of projects & plans to work on
Complete any unfinished work business
Design a daily / weekly routine for retirement
Think about your new identify
Build out your social network
Consider your family relationships