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Retiring early raises a series of questions regarding both income and expenses. You'll need to manage your portfolio around longer-term drawdowns, an early end to new income, and a long wait for Social Security to kick in. You will have to manage your expenses according to new needs, particularly in terms of health insurance and long-term care. insurance and a largely fixed income.
But after some consideration, it seems like you have the right assets. You'll need some investments, because without growth, your portfolio likely won't be enough to fund your lifestyle over a long retirement. But you won't need aggressive or unrealistic returns, which will put you in a comfortable position to enjoy the good life today.
Here are some things to think about, in addition to discussing your plan with a financial advisor.
This portfolio should last you a long time, said Matt Willer, managing director of capital markets, partner at Phoenix Capital Group Holdings, LLC, provided you invest it wisely. Fortunately, wisely does not necessarily mean speculative.
“Interest rates [today] allowing today's investors to comfortably generate 5-6% annual returns with virtually no risk… Assuming all savings are taxable and not in qualified accounts, this translates to at least $100-120,000 of annual gross interest income, and post-taxes are still beyond sufficient to meet the $6,000 after-tax spending requirement,” Willer said.
You can increase this amount even further by accepting modest risk in your portfolio. A mixed portfolio, with a good mix of bonds and stocks, will often produce an average return of 8 to 11 percent, Willer said. This can not only provide you with a generous retirement income and lifestyle, although this will require some risk management plans, but will also give you protection against inflation.
Covering inflation should be a major priority, and national inflation and your personal inflation are not always the same thing.
The Federal Reserve sets a benchmark inflation rate of around 2%, generally accepting any number between 2% and 3%. This rate alone will double your cost of living approximately every 30 years. Your personal spending power may erode even faster, said Vijay Marolia, managing partner of Royal Point Capitaldue to costs associated with how and where you live.
It is personal inflation, the idea that the costs you pay for your life and lifestyle may be increasing faster than national averages. For example, let's say you rent an apartment in a popular city. Historically, your housing costs will increase much faster than 2%. If you like to travel, your entertainment costs have increased over the past couple of years. Meat eaters have seen their grocery bills rise faster than vegetarians, and pedestrians are not as individually worried about the price of gas.
All of this can mean your household costs might not match the national CPI.
For example, Marolia said, let's say you get a 5% return on an income-generating portfolio. After taxes, this will leave you with $6,250 per month, meeting your current needs.
“Don't get too excited, because what looks like a surplus of $250 a month might not stay that way; it's only a 4% margin. If one experiences a personal inflation rate of only 5%… then that eats up all the excess and some. For what? Because with an inflation rate of 5%, the monthly expenses are $6,300 per month, which is $50 less than you need,” Marolia said.
This is not a problem, you still have enough money set aside to manage this risk. Just make sure you manage it.
A financial advisor can help you establish budget projections for your retirement.
Personal inflation is a particularly significant problem for pre-retirees.
The reason to retire at 55 is to be able to enjoy your lifestyle. It would go against all of this if you moved away from your standard of living. So make sure you're investing for the kind of growth you'll need to stay comfortable, not just getting there on a fixed budget.
Beyond that, it's important to remember that early retirement adds a host of new challenges to your retirement planning. Two of the most important are health care and Social security.
Firstly, you will need to arrange for health insurance. Health insurance will not appear until age 65, and until then, most people rely on their employer for insurance coverage. When retiring early, you will need to purchase your own coverage. Unless you are currently paying for insurance, this will likely add about $500 to your planned monthly budget.
Even once Medicare takes effect, you will still need to budget for gap And long-term care insuranceso don't count on a reduction in these additional expenses.
Second, make a plan for Social Security. One of the benefits of having a well-funded retirement account is that you can delay taking up Social Security, which will make those benefits more generous in the long run. Indeed, based on your numbers, collecting Social Security at age 70 can be an important part of your inflation hedge. Just make sure to include it in your overall plan, because this money won't be paid out for 15 years.
At age 55 and with $2 million in the bank, you're well-positioned to retire early. Just be sure to anticipate the complex issues surrounding early retirement, including long-term inflation hedges and health insurance.
A financial advisor can help you develop a comprehensive retirement plan. Finding a financial advisor doesn't have to be difficult. The free SmartAsset tool connects you with up to three licensed financial advisors who serve your area, and you can have a free introductory call with your advisor to decide which one seems best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.
Keep an emergency fund on hand in case you face unexpected expenses. An emergency fund should be liquid – in an account that doesn't have the risk of large fluctuations like the stock market. The tradeoff is that the value of cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare the savings accounts of these banks.
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