With skyrocketing health care costs and fairly stagnant economic growth, nearly everyone these days worries about whether they can afford their golden years -- even those with a solid balance sheet.
A recent Gallup poll finds that when asked to rank their top eight financial fears, more than half of Americans say not having enough money for retirement is foremost in their minds.
Following that concern are two related worries: 53 percent fear they won't be able to pay medical costs as a result of a serious illness or accident, and 48 percent worry they won't be able to maintain the standard of living they enjoy.
But a surging stock market recovery over the past few years has propelled more baby boomers into dreams of being able to fund an early exit from the workforce.
"The market has increased significantly since 2007, says Carrie Schwab-Pomerantz, author of "The Charles Schwab Guide to Finances After Fifty" and senior vice president at Charles Schwab & Co. "People who held on are really in the money."
Time is money
If you plan to retire early with income from your investments, you'll need a decent portfolio of after-tax money saved. You can withdraw from that first, while waiting until you are eligible for Social Security and a pension, if you have one. You'll also give your retirement account more time to grow tax-free.
Schwab-Pomerantz says typically retirees should stay within the 4-percent rule for withdrawals. So if you have $2 million in a portfolio, you could withdraw $80,000 per year. However, that's a simplistic rule that doesn't take into account everything about your personal situation or the fluctuations of the market. She provides some additional tips for early retirees:
- "You really should create a budget for expenditures and have a bucket for essential and nonessential expenses," she says. Nonessential are the ones that can wait or be eliminated if the market dips and you have to pull back on spending.
- The 4-percent withdrawal rule, she adds, assumes you have at least 20 percent to 40 percent of your portfolio invested in equities. If you're an early retiree, you'll want to be at the higher end of that percentage so your portfolio can continue growing even as you withdraw. She would even recommend a smaller withdrawal rate if you're an early retiree -- try to stay under 3 percent so your money lasts longer.
- "Have cash equal to at least a year of essential expenditures," she says. That way, if the market falls, you'll have reserves to dip into while it recovers.
- One of the most effective ways for early retirees to get income from their after-tax portfolio in a low-yield environment is through rebalancing, she notes. As you reallocate equities to maintain your original allocation, sock some of those gains into your cash accounts.
- The old rule of thumb still stands, Schwab-Pomerantz says: To calculate the amount you'll need to retire, at any age, figure approximately 25 times your current earnings to supplement Social Security and other reliable means of income, such as a pension.
Those who are nervous about retiring are probably the same ones who have been cautious in their planning and that's a good thing, says Schwab-Pomerantz. It means they have a better chance of success because they're not jumping in without taking into account future expenses and the amount of time they'll need an income from investments.
In addition to working out the numbers, it pays to assess your risk tolerance, she adds, because you'll need to take more if you plan on a longer retirement.
Can you retire early?
If you've diligently saved in both after-tax and pretax accounts and now you want to retire early, take a look at some specific money management strategies on asset allocation and withdrawal strategies from three experts.
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