Three Steps to See If You're Ready for Early Retirement

A reader writes in to CNN Money with the following situation:

• He's 50 years old
• He "absolutely hates" his job (it's stressful, requires long hours and he has a tough boss.)
• He has about $1.6 million dollars saved.
• The only debt he has is a mortgage on his house that equates to less than half its value
• He also leads a very frugal lifestyle.
• He's wondering if he can retire early.

The columnist is wise in counseling him to be VERY careful before jumping off the career track. After all, your career is your most valuable financial asset, so letting go of it is a very big financial move (and potentially disastrous.) In addition, there are several costs/challenges associated with retiring anytime and retiring early makes these even more difficult. Here's how Money says it:

Before you leave you want to be sure that you're prepared. Otherwise, you could find yourself in the uncomfortable position of having left work without adequate resources to support yourself only to realize that finding another job with comparable pay and benefits may be harder than you think, especially when you're 50 or older.

This isn't a decision you want to make on impulse, no matter how much you may detest your job. Step back and do a clear-eyed and methodical analysis of whether you're prepared to retire.

I couldn't agree more. Retirement at 65 with $3 million in the bank isn't an easy decision. Retiring at 50 with $1.6 million plus some debt is a HUGE move.

Here are the three steps Money suggests he take to determine whether or not he's ready to retire:

1. Do a status report. What really matters is whether the savings you've accumulated can provide what you feel you'll need to maintain an acceptable standard of living. The only way to really know is to crunch the numbers.

2. Make an exit plan. If, after going through the analysis above, you find that leaving your job at age 50 wouldn't give you the comfort level you need, the single most effective thing you can do is continue to work and save. Each year you stay on the job gives your $1.6 mill a chance to grow, and you also get to fatten your retirement accounts with new contributions (up to $22,000 this year in a 401(k) and up to $6,000 to an IRA, if you're 50 or older).

First consider whether you could improve your situation by holding out a bit longer. Maybe you've got stock options that will vest. Or perhaps working an extra year or two could mean a larger pension. Maybe there's the chance your company could downsize, in which case you could collect a nice severance package. The point is that you don't want to leave any easy money behind by making too hasty an exit.

3. Make an entrance plan. Here, I'm talking about a plan for entering retirement. You'll boost your odds of having a fulfilling retirement if you think about how you're actually going to live once you leave the workaday world.

Overall, it's pretty good advice. But I'd offer a few more options including:

• How about looking for another job? I've had jobs I've absolutely hated. Twice I worked in them for two years (each) while I looked for a better opportunity, and each time I found a much better option.
• What about finding another position in the same company? That would get him out of the "bad job" and "bad boss" messes.
• How about finding a part-time (or maybe "easier" full-time) job so that he won't need to draw on his savings much (or at all.) Perhaps he can now do something he's always wanted to do and take a pay cut to do it. It would be better than having no income at all and would give him a chance to get rid of his mortgage debt.
• He needs to think whether or not he's really ready for retirement. At 50 he's still got a lot of life left ahead of him -- is he really going to be satisfied being retired? Maybe, maybe not. But he really needs to think it over.

My sense is that he has a job that he hates and is desperate to get out of it. But if he takes some of the steps I suggest above, it's likely he can find a job he likes and keep working. Then he can build his nest egg, pay off his debt and still retire early (7 to 10 years from now) with a boatload of money in the bank.

What do you think about the situation? What would you advise him to do?

Comments

[LotharBot]

The question of "can I retire early" should be broadened to "what are my early retirement options?"

If he straight-up retires with $1.6m at age 50 and might live to be a hundred, he's looking at being able to safely draw down only about $35-40k per year, maybe less. Is that a realistic option? Depends on how frugal he is and what commitments he has to meet (family, etc.) It also depends on the lifestyle he wants to lead.

He could look to semi-retire, cutting back significantly on hours but staying in the same position, or moving into a lower-paying but lower-stress job that pays the bills (including the mortgage), and leave the $1.6m untouched for another decade or two.

He could tough it out in the same position for 5, 10, or even 15 more years, keep adding to the $1.6m, and be able to draw down a larger amount.

There's really a broad spectrum of possibilities here. It's up to him to run the numbers and decide what's important.

[DIY Investor]

I think he needs to be aware of the market. If the market moves against him he will need to go back to work or cut back his living standards significantly as those who retired in 2000 and 2008 realized. Get this: I had one client who retired in 2000 and had to go back to work and then reretired on 1/1/2008! People look at their portfolio and think it represents spendable assets. It doesn't unless it's in CDs, money markets etc. But it can't be in CDs etc. because it needs to grow because of inflation. It needs to be in risky assets.

[basicmoneytips]

This is a tough call here. Actually 1.6 million is a lot more than most people have at 50, that is sure. However, going to work to a job you dislike is painful too. Plus it may could cause health issues down the road that are not worth it.

We really do not konw enough to properly decide what this fellow should do. How is his health? As the story mentions, does he have stock options or other company perks that may be vesting down the road (golden handcuffs)? I tend to think he could change jobs and be okay. At 50 he still has 10-15 years in front of him. Even if he takes a cut in pay, if he makes it to 65 with the same 1.6 million in the bank and debt free, he will probably be okay.

[Strick]

I'd think the main reason to have $1.6 million is so you don't have to work a job you absolutely hate. Unless he needs six figures a year, quit today, and even call it "retirement" if it would make him feel better.

[Everyday Tips]

I would definitely suggest he get out of his current job and find something he can tolerate. He obviously saved diligently for a good part of his life, and he should reap some reward. However, I think he should find something that might be less stressful and also has some good life insurance.

I am a big proponent of saving big so you can retire when you still have your health. But you have to make sure you have saved enough and your health costs can be covered. If he doesn't choose another job, he might have a whole new stress- financial.

[billyjobob]

He could easily retire now on 1.6 million. As long as he lives a reasonably frugal life, I don't see how he would run into any problems. If he lives to be 85, he could take out 49000 per year. Thats counting on a 3.5 % inflation rate, and him earning just 4% on his money. This doesn't even include what he will one day get from SS.

[BillV]

I could ramble on for a while here giving my thoughts, but, as FMF has already written the same advice I would give, there is no need to repeat it. All three points need to be read and re=read by the person asking the qx.

As an add on to point three: Do not oiverlook one aspect of working that is often forgotten. Work occupies about 10 to 11 hours a person's day. Getting ready, commute, time on the job, over time --paid or not, commute home. That's then becomes a block of time that the person needs to deal with and that often means spending money. He may find it harder to live as frugally with all his new found 'free' time.

[Nate]

I would go for it... Retire... Then realize what your true passion is over the next couple of years. Then make that passion make money. Life a full life my friend!

[Don Current]

I totally agree with the advice to look for a different line of work. I used to have the goal of early retirement. I no longer have that desire. The company I was working for went bankrupt and I had to seek other employment. I was in a position to be able to work toward something I enjoy instead of just seeking a certain salary. I am no longer worried about early retirement. When you enjoy what you do, it opens up a world of other possibilities. It really sounds like this person has the discipline and the resources to make a change. My number one encouragement would be for them to do that.

[Ross]

3 million at age 65 isn't an easy decision? Wow, what am I missing?

[Doug Warshauer]

I agree with the suggestions that he "run the numbers." But unless you are a financial person, it isn't obvious exactly how to run the numbers. Here is a simple methodology I'd suggest to him:

1. Assume he will pay off what's left of his mortgage out of his $1.6 million in savings.

2. Determine how much he needs to spend each year in while retirement(today's dollars)

3. Multiply that number by 15. This amount will cover his spending until age 65, when he will start taking Social Security. Subtract this amount from what's left of his $1.6 million in savings, to see roughly how much will be left at age 65.

4. Estimate the Social Security benefit he will receive (again, today's dollars) and subtract that amount from the annual spending requirement. Multiply that amount by 20. That is roughly the amount he needs to still have in savings in order to retire.

5. Compare the amount from #3 to #4. If #3 isn't larger than #4, retirement at his current age is pretty risky.

If his $1.6 million doesn't provide sufficient savings, he could consider whether he can reduce his annual spending to a lower number, or whether he has options for earning some income during retirement.

[Mike B.]

Don't you have to be 59.5 before you can withdraw from retirement savings (either 401K or IRA) without penalty? He'd almost have to work a different lower stress/lower paying job until then just to pay the bills unless a large part of his 'savings' are not in retirement accounts. Or am I missing something?

[BillV]

Mike B. you are right of course. Another reason for him to find work in a less stressful place. Many of us (okay at least me) know some one who lost/ gave up a 6 figure job for a lesser paying one and who actually like their lives better.

As I was thinking about this scenario, a couple other things occurred to me:

1. Health care and other insurance. How is he going to get those? does he have any idea how much that will cost?
2. He lives a frugal life style. What if that changes? Someone comes into his life for example. What about the unexpected events that life throws at you that might affect his stash. We all know about Murphy's Law. (and by the way, Murphy was an optimist).

3. 1.6 million saved. And what kind of return is he getting? Even low inflation will cut into his earnings and standard of living. 40k now vs 40 in 10 years.

4. I re-read the above and went to the article. It says he has a tough boss; he doesn't say bad boss. It wouldn't hurt this person to do serious self examination. May be he can adapt, what makes his boss "tough"?
5. Only change is certain. Myabe his boss will move on or out. bosses come and go. (Ok, if the boss owns the place thats different)

Finally if he set on leaving: tough it out for another year or two and go into hyper saving mode; identify that passion or something else he intends to do. I suppose this gets back to the adice that says do some serious planning
before just quitting. And even then, leave with class, style and grace. The "Take this job and shove" approach is only momentarily satisfying and can come back to haunt him.

[James]

Keep working until you have made at least 2MM. that is unless you are going to get a retirement income from your last job and you know you have extra cash coming in. or if you own a company and are getting dividends, or own a rental property and you know you have a steady stream of income, then why not enjoy yourself.

[Budgeting in the Fun Stuff]

I'd look into other income options and leave as soon as I can. Life is too short to work in jobs you absolutely despise, but having another job lined up first is just logical. My husband and I are looking to retire at age 52 with one full pension and $2 million or more in retirement accounts. I'd want another income source if I "only" had $1.6 million...that's great but not enough for the $40k a year lifestyle I've grown accustomed to without some stress about the future.

[Jeffinwesternwa]

Not w/o a pension and ZERO bebts, including NOmortgage, even then, it'll be "lean" until SS $$ at 62, perhaps if he still had cash at 70, he could then buyback the SS@62 and collect the age 70 rate but, the age 50-62 WILL be tough. Cheap lifestyle, cheap cost of living, cheap utilities, low taxes, walk, bus and a used car? but, any fun??? then "maybe" but living another 40~ yearsmakes it improbable...

[Money and Risk]

The other considerations are how much is he going to spend in retirement, how is he going to invest in retirement, and how will he structure his salary to himself. These 3 questions will also affect his retirement.

I recently wrote about a couple who retired at 50 with $1Million. They will run out of money by the time they're 75. Try getting a job at 75 years old. It's not pretty.

Current statistics expect that a couple who are 60 today will have one of them living until 95. Retiring at 50 means making sure that you can pay yourself for at least 45 more years from your own earnings. We're currently planning til 120 for people. I have friends who retired before I was even born.

[Old Limey]

It looks pretty dicey to me.
I retired in 1992 at age 58 and with no debt, our home paid for, and a whole lot less than $1.6M.
The big difference though was that my wife and I each had pensions that were plenty enough to live on quite well, even though we were several years away from receiving Social Security payments.

I happened to run into the best stockmarket period in a very long time and increased the value of my portfolio by a factor of over 10 in the next 7.5 years - that was totally unexpected and with the state the economy and budget is in right now I would expect a poor stockmarket for the next several years.
If you put your $1.6M into fixed income investments you probably wouldn't generate enough income to pay your mortgage, property taxes and other living expenses, plus if your $1.6M is in an IRA you will be paying taxes on every penny you withdraw.

My advice is to suck it in and keep working.

[Mike Hunt]

Gulp. Guess that dashes my retirement dreams for now. Suck it up is the advice of the day!

-Mike

[Jan]

If you die with two million in the bank- you are still dead.
All I could think while reading the advice is that the ADVISOR must be living a huge lifestyle OR working for the company that hires this guy.
You can retire with a whole lot less than 1.6 million.
Work is over rated in the US. We work and give up vacation. We work instead of spending time with our families. We work to be important.
Unless the person's ambition is to travel exclusively or live at the spa- he could retire on less and find something better to do with his life than work at a job he hates.
There is a time to cut bait and run!
Pay off the house, generate enough income to pay the taxes, insurance and then find something worthwhile to pay for the rest! You only have one life!

[Jan]

BTW- noticed that most of those in the work forever camp make their money off of you putting your money in their hands....

[Old Limey]

If you have been successful enough that by the age of 50 you have accumulated $1.6M and bought a home that is half paid for, it would seem that you are not the kind of person that would want to spend the remainder of your life scrimping and saving just to avoid working.
My wife and I have been retired for 18 years and believe me, retiring especially at the age of 50 should be the time in your life that you realize a lot of your dreams. Looking back at my life, at age 50 I was in my prime physically, enjoying work, and certainly not ready to retire. That was when I was full of energy and made the two single most exciting and personally fulfilling journeys of my life, the first was a 5 week trek in Nepal that took me to Everest base camp, culminating with a climb of Mt. Mera (21,246ft.). The next year was another 5 week trek that was a circuit around the Annapurna range, a crossing of the Thorong La pass (17.769ft.) and visits to many remote and fascinating villages in the Himalayas.
Both trips were quite expensive and required months of training (running, backpacking & Hiking) in order to get into the necessary physical condition but they are wonderful memories that I will have forever, along with many other exciting trips with my wife to countries all over the world. You have to ask yourself the key question, "What do I want to do with the remainder of my life?"

My point is that retirement at age 50 is not the time to quit your stressful job, sit by yourself at home, watch TV, and live frugally - I don't even do that at 76. It is the time to start making your dreams and aspirations, whatever they may be, come true. I was in a job that I loved but by age 58, and with the help of a company retirement incentive of 32 weeks pay I was ready to pack it in and to start seeing much, much, more of the world.
If you were to invest $1.6M at this time in risk-free 10 year CDs you would earn $48,800/annum and if you went for riskier investment grade corporate bonds you would earn $84,800/annum. If your $1.6M is in a retirement account you would pay a 10% penalty plus state and federal taxes on the money withdrawn prior to the age of 59 1/2.
This would certainly allow you to retire, but fast foward 10 years and calculate the estimated value of your nest egg at age 60. There is no way you can take the risk of trying to grow your capital by investing in stocks the way the economy is heading, when you are no longer working, when social security has yet to kick in, and health issues could become a concern.

As others have pointed out, life (and love) are very precious and not to be wasted. For one thing you need a good companion as you travel down the road of life, everything is better when shared with another person. The two most precious things in the world are "To love someone" and "To be loved by someone". Quit a good job now at age 50 and you may have great difficulty finding another. For now you should definitely stay put but try to map out a future much more definitively that will allow you to realize your dreams.

[Rob]

If he hates his job so much I would definitely advise him to look for another. Even if it is just part time, he would not be giving up an income completely and would not have to rely solely on his retirement savings. Not only that, but as other commenters pointed out, we don't know all of the details. Is he in good health? How long does he think he would live? I haven't run any numbers but I don't think I would want to retire with only 1.6 million at age 50 if I thought I might live for another 60 years.