Can You Afford to Retire Early?

Can You Afford to Retire Early?
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Most if not all people dream of retiring early. As some people pull off an early retirement at age 45 to 55, many also wonder if they can do the same thing.

You may have enough savings in the bank and a substantial portion of it invested in highly profitable stocks and mutual funds. You may also have an annual expense that is less than 3% of your investable asset which is the recommended percentage. But just because you have savings and your expenses are within the recommended range doesn’t mean you are eligible to retire early. At the end of the day, you still need to ask yourself again, can I really afford to retire early.

In order to provide a solid answer to the question on whether you can or cannot afford to retire early, you need to take a closer look at your savings and annual expenses.

To illustrate, let’s say you have £2.7 million saved and you want to retire at age 50. If you are going to keep your withdrawals at roughly 3% of your investable asset, that would equate to around £81,000 per year. This amount, however, should be adjusted with increasing inflation through the years to maintain the same purchasing power.

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With $2.7 million reserved for your retirement years, you can expect to enjoy a comfortable financial support for around 40 years or longer. Granted that you have Social Security benefits to look forward to when the right age comes, you have an additional source of income to help with your retirement eventually.

Considering your savings, expenses and Social Security benefits, it does seem like you can indeed afford to retire early. Just remember though that retiring at an earlier age than usual may also pose a challenge.

The challenge lies in the fact that the market is unpredictable and volatile. You may have enough savings to last you the next 40 to 50 years but there is also always that possibility that the market may hit another 2008-like decline a few years after you decide to retire. If this happens, your losses in addition to your yearly withdrawals may soon empty your retirement fund probably leaving you literally empty handed.

While you can answer yes to the question of whether you can or cannot afford to retire early, there are things to consider before finalizing your decisions. If you have dependents, for example, you need to take into account the additional expenses. You also have to think about inflation. Inflation is bound to only go up over the years and you need to have enough money to offset the inflation in order to enjoy the same lifestyle that want. Furthermore, you need to think about the market. The bottom line, therefore, is to do a lifestyle and financial planning before taking the plunge.

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