How to figure out if you'll be able to retire early

  • The No. 1 consideration for most people in the second half of their working careers is whether they can retire early.
  • The first step in figuring out your retirement date is determining your income sources after you stop working.
  • The second step is to figure out how much income you'll actually need to replace, based on projected spending.
  • For fine-tuning and an actual game plan, consult a financial advisor.

When you're in the early or middle parts of your working career, retirement can seem like nothing more than an impossible dream. But at some point, usually during your mid-40s, the idea of no longer working starts to become more of a reality. This is when you begin to ask yourself: "Can I actually do it? Can I retire early?" Does this scenario sound familiar?

This is by no means an easy question to answer. If it were, it wouldn't be the No. 1 question I hear as people enter the second half of their careers. While I believe almost everyone should get the advice of a professional certified financial planner when making this decision, there are some ways to start figuring out how close you are to realizing your retirement dreams.

The truth is, you may or may not need to replace all of your current income to retire early.
ImageegamI | Getty Images
The truth is, you may or may not need to replace all of your current income to retire early.

Here are some fundamental questions you'll need to answer to decide if you can retire early.

Can you replace your current income?

Although everyone's circumstances are unique, the main question you have to answer is if you'll have enough money to retire early. The first step is to understand where your income will come from in retirement to replace your paycheck.

  • How much Social Security will I be receiving?
  • How much in retirement savings will I have accrued by then? Remember, your 401(k) plan or traditional individual retirement account is tax-deferred money — meaning, for every dollar you take out, you will owe taxes (federal and state).
  • How much will my cash savings be by then if current patterns continue?
  • What about my non-retirement investments? What is the total income I can reasonably expect from my portfolio at this time?
  • Will I have any income from rental properties? How much will this income be?
  • How much will my annuities generate for me?
  • How much income will I receive from my pension (if applicable)?
  • What about any part-time work I might do during retirement? How much income will I receive from it?

Answer these questions to arrive at a reasonable starting figure. Once you've done this, you can begin to refine your speculations by using the methods discussed in the following sections.

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How much income will you need to replace?

Clearly, the controlling idea here is to replace all or most of your current income by using the above sources. And while this is a great place to start, there are many other considerations, as well, most of which depend on your particular needs, goals and life circumstances.

The truth is, you may or may not need to replace all of your current income to retire early. Here are some things you'll need to consider regarding your retirement income needs.

  • How much will your lifestyle change once you retire?
  • In what ways will your lifestyle change? Can you get by comfortably with a little less income?
  • Will you want to maintain emergency funds that are over and above your health, homeowners and life insurance?
  • What are your specific goals and dreams for your retirement? Will you have enough to achieve them and still maintain a reasonably comfortable lifestyle?

After you've come up with the answers to these questions, use them to calculate what your expected retirement income needs will be. From here, you'll have a decent idea of how close you are to reaching your early retirement goals and any changes you need to make going forward to satisfy your future income needs.

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Financial advisors are able to help you figure out how to reach your financial goals and achieve financial independence as soon as possible. So while it can be a complex topic to tackle, carefully considering your lifestyle, assets and debts will allow you to calculate a rough estimate of how long your money will last beyond your income-generating years.

No one knows what the future holds, especially when projecting out 20 to 30 years. That's why it's so important that financial planning is a process, not a one-time event, that flexes and adjusts with you and the financial environment over the years.

Can you retire early? Chances are that you can with the right preparation and financial planning that puts you on the path to achieve this financial goal.

(Editor's note: This column originally appeared on Investopedia.)

— By Paul Sydlansky, founder of Lake Road Advisors

Contact FA Playbook


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