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Q&A About Early Retirement: Is It a Pipe Dream or Possible Reality?

Posted by Michael D. Machen, CPA, CVA on Oct 21, 2015 11:16:31 AM

After fighting the rat race for years, many Americans dream of an early retirement. For instance, you might be contemplating such a move on your own, or perhaps your company is preparing to make you an early retirement offer. Whether or not you can afford to retire early, or really want to, may depend on the answers to the following questions.

Q: Are you ready financially?

A: Some people begin planning for retirement when they are young, intending to call it quits before they hit their mid-to-late 50s. In that case, early retirement may be just what they are looking for. But if you have been putting off retirement planning, you may not be financially prepared to stop working right now.

Q: Will the money hold out?

A: If you plan to retire at age 55, it’s very possible you may have to depend on a fixed income for the next 25 years or more. Consequently, you will have to consider how much income you will need during that time period and where it’s going to come from. If you feel that you currently have enough money to live on, ask yourself how it will hold up over time.

With the help of an experienced adviser, you can develop an investment program that, at the very least, keeps pace with inflation.

On the other hand, if it seems likely that you may be forced to tap into your company retirement plan before age 59½, you probably should avoid early retirement. In general, tax-deferred assets, such as 401(k) plans and other employee-sponsored retirement plans, should be allowed to grow without interruption for as long as possible. What’s more, tapping into the plan before age 59½ could result in a 10% tax penalty for early withdrawals.

Q: What about the future?

A: Take time to imagine the kind of lifestyle you’ll be living as an early retiree. Will the loss of a regular paycheck force you to cut back on certain activities you have enjoyed, such as elaborate vacations? Does it mean possibly having to relocate to an area where the cost of living is less expensive? Will retirement bring you relief or a sure ticket to boredom? These issues deserve serious consideration when making plans for your retirement.

Know that you will likely face some difficult decisions. For instance, if early retirement will force you to change to a less-satisfying lifestyle than what you have now, you might choose to keep working for a few extra years, maybe on just a part-time basis.

For more information on business advisory services, please contact Michael D. Machen, CPA, CVA at (334) 887-7022 or please feel free to leave us a message below.

Topics: Retirement Planning

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