Positioning for a Potential Early Retirement
In an earlier post, Many Paths Lead to Financial Freedom, I noted that my current path leads to retirement at age 60. Why 60? There are multiple reasons, some of which were highlighted:
- Financial ignorance in my 20s
- Early marriage and children
- Credit card debt in my 20s to mid-30s
- Divorced at 35
- Retired from active duty (Army) at 38
- Focused on education and earned graduate degree (MBA) later (age 40) in working career
However, the most significant factor is that I currently work for an employer whose defined benefit plan requires that I work until age 60. That specific age doesn’t apply to all employees. The eligible age for retirement is based on a few factors, chief among them are the employee’s age and the number of years of employment. It just so happens that based on my age when I started and the number of years required, my eligible retirement age lands squarely on 60.
Actually, there are a couple of situations in which I could retire a little bit earlier. In the first situation, I could retire a couple of years earlier having met the ‘minimum years of employment’ requirement. However, because I would have less than 30 years and being younger than 60, there is a penalty – that would impact the annual payment permanently – associated with doing so.
In the second situation, my employer would offer early retirement for employees that fall within a particular window. This is a fairly common occurrence for many employers when they are looking to trim the workforce for a variety of reasons. Of course, you never know when the early retirement will be offered or how long the window will remain open. While the formula is reduced slightly in the second situation – and a one time lump sum (typically $25,000) is offered as part of the deal – the impact isn’t as severe as the first situation.
With that as the backdrop, the question becomes, “What would I have to do now to be prepared should an opportunity to retire a little earlier than planned present itself?”
The short answer is save a lot of cash. How much cash? My rough calculation is $72,000 for each year that I would retire before age 60. How did I arrive at that number? Well, that’s the long answer.
The first part to the long answer is why cash, or a cash equivalent such as certificates of deposit? Accessibility. For the 1 – 3 years (age 57, 58 or 59) that I retire before age 60, I won’t have access – without penalty – to monies in my retirement accounts. Therefore, the money I would need to tide me over until I can reach into any retirement accounts needs to be easily accessible.
The $72,000 I referenced earlier was not simply pulled out of midair. As part of my retirement plan, I have calculated how much money I desire as an annual income and the minimum amount I would need.
My desired income is $150,000 in today’s dollars. However, once we account for inflation – I plugged in 1% – you can see in FIGURE 1 that $150,000 in 10 years would be equivalent to $165,693.32 [Required Amount]. The Reduced Amount [$135,793.04] represents how much the value of $150,000 would decrease in 10 years at a 1% rate of inflation.
Just to carry me over for the 1 – 3 years, I could live with less, the minimum needed. How did I arrive at $72,000? Two years ago the wife and I tracked every expense for the entire year. Everything! Our spending came to just under $90,000.
Considering that our $2,000/month mortgage will be paid off before we head into retirement, I backed that $24,000 out, leaving me with $66,000, which I just rounded down to $65,000. Using the magical Inflation Calculator again, you can see in FIGURE 2 that $65,000 becomes $71,800.44, which I simply rounded up.
So there you have it, my friends. While my retirement plan is constructed to provide $150,000 (today’s dollars) of annual income after age 60, I have determined that at a minimum I need to save $72,000 for each year I might retire before age 60 if such an opportunity arises.