Is Early Retirement an Option?

We'd all like to retire early — tomorrow, for example. To find out whether early retirement is just a dream or a real financial option, you need to do a bit of figuring, which will show you two things: first, whether your current financial situation and savings habits will get you to Maui a few years early. Second (if they won't), what you need to change, and by how much, in order to pull off the trick.

First things first, all the numbers in this type of calculation are educated guesses. It's impossible to know things like the future return on your investments, or your future income or medical expenses. Sound planning requires you to make some assumptions, and these assumptions won't be perfect. In fact, if you're a careful planner you'll make some reasonably optimistic assumptions and some pessimistic ones too, just to see what difference they make.

Second, you can refine some of your figures now, or make quick guesses and refine them later. For example: one of the cornerstones of a solid retirement plan is a decent calculation of your monthly retirement expenses. Don't want to do all that now? Fine, just make up a plausible "first guess" figure for retirement expenses which will do for now, and you can come back to the question later.

Ah, you say, but what's a good first guess? Most people in fact have lower expenses, at least early on. At this stage it's okay if you over-estimate your costs a little. It just makes for a more conservative view of how close you are to your retirement goals, and that's not a bad thing.

So. You've got yourself a good figure for monthly retirement expenses. Now you're going to be asked for some numbers that you already know, like your age, current income and Federal Tax bracket, and current balances in 401(k), IRA and other savings. So much for the easy part.

Now you need to start assuming — but keep the assumptions ordinary, for now. For "age at retirement," you may be tempted to put "39," but stick with 65 at this point — it's easy to change individual elements once the big picture is filled out. Ditto for "age at which you might die." It's great fun to use the calculator to play the "retire at 30 and live to 120" game — but do it later, please!

One important set of assumptions comes under the heading "Your Future One-Time Investments." This is a good place to enter a potential future inheritance. People often feel a bit funny about this. After all, it involves guessing when your relatives will die, and how much money they will leave you — not something nice people like to dwell on. There are two things you can do here: make a guess, or enter nothing. The latter option is fine.

Notice that the retirement calculator develops a detailed snapshot of where you are financially. This may seem a bit tedious, but it's essential to get all these details in order to make a meaningful calculation. The minutes you spend to get all of our retirement plans in order will be appreciated if the payoff is the ability to make better decisions now about your budgeting and your future.

See you on Maui!