retirement

6 signs that you are ready to retire early

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No. 2: You can live on your retirement budget
No. 2: You can live on your retirement budget | Andersen Ross/Getty Images

No. 2: You can live on your retirement budget

Needing to be financially ready is a no-brainer.

Jeff Currie, an adviser with Currie Financial Group in Boise, Idaho, offers this quick assessment of financial readiness: "no debt, a good pension that includes health insurance benefits, good savings and low expenses. All of these factors can lead to a person retiring early. In most cases, the early 50s is about the most realistic and early I have seen. It usually involves an inheritance to boost a person's normal assets."

While some tend to associate retirement with a specific age, "It's really about getting your budget and liabilities under control, then having a clear understanding of the resources available to create the desired and consistent retirement income you need," says Sean Lee, a financial adviser with Elevated Financial in the Salt Lake City area.

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 6 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 6 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 assistant 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%," he says. "Fifteen or 20 years of that type of inflation can really eat into savings and increase expenses."

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