retirement

6 signs that you are ready to retire early

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1. You're emotionally ready to quit working
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1. You're emotionally ready to quit working | Philipp Nemenz/Getty Images

1. You're emotionally ready to quit working

You may dream of retiring long before a traditional 60-something retirement age, but be careful about making that leap too soon.

"In retirement, every day is Saturday," says Richard Reyes, a certified financial planner and coach with The Financial Quarterback in Maitland, Florida. "What are you planning on doing that will continue to allow you to enjoy your life, allow you to stay active mentally, emotionally and spiritually?"

If you're not emotionally ready to quit working, you may not be ready to retire.

Remember, both the big picture and the fine details of your financial and emotional states are important to consider when assessing your readiness for early retirement.

Here's what else to take into account when deciding to retire early.

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2. You can live on your retirement budget | Hero Images/Getty Images

2. You can live on your retirement budget

Needing to be financially ready is a no-brainer.

Expenses may drop in retirement, but not as much as you might think. That's why crafting a post-retirement budget and living off that budget for six months before you retire can help you decide whether your budget is realistic and whether you can stick with it.

Treat this exercise as a serious trial run, says Amy Rose Herrick, an investment adviser in St. Croix, U.S. Virgin Islands. "If you can't do this for six months without raiding savings or tapping credit cards to live, you are not ready yet," she says.

To put that post-retirement budget together, you need to understand what your cash flow will be like after retirement, says Helen Hogan, an investment adviser with Securities America Advisors in Red Bank, New Jersey.

"How much money do you need every month, including the quarterly and annual expenses, the unexpected and hidden expenses?" she asks.

It's important to factor inflation into your budget, says Jamie Patrick Hopkins, an associate professor of taxation at The American College of Financial Services in Bryn Mawr, Pennsylvania. "Inflation is low now, but it could easily go up to 5 percent," he says. "Fifteen or 20 years of that type of inflation can really eat into savings and increase expenses."


3. You have reliable health insurance | Hero Images/GettyImages

3. You have reliable health insurance

Because Medicare doesn't kick in until age 65 and health insurance costs are rising faster than inflation, it's important to have a reliable, consistent source of health insurance.

Obamacare may be an option for you, but that coverage has an uncertain future. For many would-be early retirees, affordable coverage is most likely to come from a former employer.

"Having adequate health insurance and other insurance coverage including life, disability and long-term care is a factor in whether you can retire early," says Harrine Freeman, CEO of H.E. Freeman Enterprises in Bethesda, Maryland.

A policy with low deductibles and copays that covers prescriptions, doctor visits, hospitalization, dental and vision will help keep out-of-pocket expenses as low as possible.


4. Your children are financially independent | Hinterhaus Productions/Getty Images

4. Your children are financially independent

Kids, especially in their college years, are expensive. To retire with children who are still financially dependent, there needs to be enough savings to cover college expenses, says Don Cummings, founder of fee-only investment management company Blue Haven Capital in Geneva, Illinois.

"Are there children with special needs who may be living in the household or perhaps on their own who will continue to be an expense?" he asks. "What about parents with similar needs?"

Hopkins notes that divorce can torpedo the most well-crafted retirement plan, leaving both parties with fewer assets, more expenses -- including legal fees -- and an extended period of financial uncertainty.

While it's not possible to necessarily predict divorce, marital harmony about retirement dates, goals and spending lends stability to the family situation as retirement is contemplated.

ADVISER SEARCH: Need help getting to retirement early? Find a financial adviser today.


5. Your debts are (nearly) paid off | Uwe Krejci/GettyImages

5. Your debts are (nearly) paid off

One big sign that you are not ready to retire early: You still owe money to creditors.

Paying debt from a retirement budget cuts into what you can spend in retirement on doing the fun things that you've waited years to do, not to mention paying for necessary items such as utilities, taxes, food and home maintenance.

"My guidelines for early retirement include asking clients first whether their home is paid off," says Curtis Chambers, a financial adviser with Chambers Financial Group in Clearwater, Florida. "If it is not, then retirement is not on the radar screen. Second, do they have debt? If they have debt, they are probably not ready to retire."

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6. Your portfolio can withstand losses | Chris Ryan/Getty Images

6. Your portfolio can withstand losses

Because everyone's standard of living is different, there's no magic amount that automatically qualifies you for early retirement.

But a portfolio that is large and diversified by asset class can protect you in bad markets. If it's composed of different types of tax-deferred and tax-free assets, your portfolio is more likely to throw off enough income to sustain a long retirement than one that isn't.

"I tend to look at income that can be generated from a portfolio and use a 4 percent withdrawal rate. And I look at things like rental properties or business ownership that may generate other income," says Cummings.

"In addition to that," he says, "we look at the potential for additional funds from business sales or inheritances and the size of the 401(k), deferred compensation plans, 403(b), pension, and guesstimate the amount of income that will generate when an individual turns 59 1/2."

One gauge of whether you are ready to retire is the amount you have saved as a multiple of your income. According to Fidelity Investments, you should save at least 10 times your pre-retirement income by age 67 to ensure a secure retirement. If you want to retire earlier than that, you should probably shoot for more.

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