Certified Financial Planner Donald Roy teaches adult education classes in his spare time. Inevitably on the first day, he tells his students he’s going to share with them the secret of successfully retiring. As he speaks, everybody edges closer to him in their seats, waiting for the magic.“And the magic is, spend less than you make. And everybody groans,” says Roy, owner and founder of New England Wealth Advisors in Merrimack. “And it’s like ‘ah, come on,’ but the reality is you’ve got to have that mindset that that is what it takes.”
While some bemoan that they may never be able to retire, some younger savers are examining the possibility of fleeing the rat race early and enjoying retirement while they are young enough to do so.
Recent media reports have focused on the FIRE—Financial Independence, Retire Early—movement whereby some millennials are living extremely frugally in order to retire at 30 or 40.
Living at the extremes, though, is not for everyone, but following some specific steps and setting certain goals may make retiring at least somewhat earlier feasible. Robin Young, president of Northstar Financial Planning in Windham, says retirement is really more about financial freedom. “I would ask these younger clients, what is it that they would like to have the financial freedom to do exactly,” says Young. “What’s the lifestyle that they’re looking for? What is it in their life that they’re trying to accomplish? Really, what are their goals and their values? It’s really more a conversation about aligning your money choices with what’s important, which is financial life planning.”
Sacrifice Now, Not Later
Certified Financial Planner Ron Valpey, owner of Valpey Financial Services in Concord, says if someone wants to retire early, they need to start saving early. “It’s a factor of sacrificing more now so you can have more later and retire earlier,” he says.
Valpey says that starts with basics, such as going out to eat less and lowering the bill by skipping desserts, appetizers and alcohol. That also includes making fewer of those coffee runs that quickly add up over time. Also, if you need a car, buy used and keep it for as long as possible.
While education is important, weigh whether a more expensive school will really provide a greater benefit than one that is more cost effective, Roy says. “If you need to assist your parents, would moving in for a time be appropriate?” he say. “The point is that the individual’s priorities need to be set and then their behavior should be in accordance with those priorities.”
Create a Financial Model
The next step is to create a retirement income model. Valpey says if a 30-year-old would like to retire at 60 and their goal is to replace the equivalent of their take-home pay, they need to build a model that calculates how much money that requires, factoring in taxes and inflation. “And every year, you’re really measuring that progress to that model,” he says.
Without that motivation, it could be tempting to spend that savings on the latest tech or a second vacation. But Roy says he finds that when people have a clear goal and a clear strategy, they can better assess what is important to them and prioritize.
Young says that when she works with clients, she advises them to create an emergency fund so that they can have six months to a year of cash on hand for emergencies, as well as a bucket of “safe money” that would fund five to 10 years of living their lifestyle and the remainder could be invested for growth to keep up with inflation.
“For a lot of our clients, we plan for a base spending and we make sure that they are able to fund that plan whatever their base spending is, which includes high inflation and healthcare costs,” she says.
Jennifer L. Climo, a CPA and owner of Milestone Financial Planning in Bedford, says she has clients who retire on $1,000 per month above Social Security to those with $12,000 per month above Social Security. “The rule of thumb I tell people is that in the first year of retirement, you can withdraw 4 to 5 percent of your portfolio balance. That amount, plus any other income such as Social Security, has to cover all your expenses, including income taxes. In future years, that dollar amount can be increased for inflation. The earlier one retires, the less likely this will be successful,” she says.
Climo says William Bengen, who came up with this rule, has stated he only tested it for 30-year retirements, not 40 and 50-year retirements. “The more certain they want to be of not running out of money, the less they should withdraw at the beginning of their retirement,” she says.
With all those plans and goals in place, the next thing to do is to actually start saving. Not only does saving build a bigger nest egg, it also teaches you to live on less, Valpey says. “The huge factor in retirement is, how much income are you replacing?” Valpey asks, noting that $200,000 in annual income is harder to replace than $65,000. “For the average earner, Social Security will replace 40 percent of his or her pre-retirement income. That’s a terrific help but certainly not enough,” he says.
In general, Climo says she likes to see people saving at least 15 percent for retirement using a Roth IRA (if eligible) and an employer-sponsored retirement plan, such as a 401(k) or 403(b). “If a young person gets in that habit right out of college, it tends to not be a problem, because they adjust their lifestyle accordingly. My experience is that frugal people save more, regardless of income level,” she says.
Young advises clients to go back to the strategy of paying themselves first or auto-investing for those who are not good at moving their money around. “[It’s] helping a client understand that every dollar they are able to put away will provide the freedom they will want to have in the future,” she says.
Michael Solari, principal of Solari Financial Planning in Bedford, says to be sure you’re making use of all the basic savings plans available, from 401(k)s to Roths to health savings accounts. Once those are in place, Solari says it’s important to push that savings a bit more.
For example, even if someone is not making enough to put the maximum amount of savings into a 401(k) right now, they should set up their account to automatically go up one percentage point of savings per year to get to that point, Solari says.
Solari also cautions not to forget about health care costs down the road. One of the biggest pitfalls he sees is forgetting that early retirement usually means having to bear the full weight of insurance until Medicare kicks in at 65. He says investing in a health savings account now will go a long way to defraying those expenses.
Really Want to Retire Early?
People need to ask if retiring early is what they want. “I do not know if retiring early should be a major objective for most individuals or if it is necessarily healthy. Work does not have to be drudgery. For many it is fulfilling and provides a helpful social network,” Roy says. Many of his clients have downshifted as they get older by working fewer hours but still allowing them to access the company’s healthcare plan. “Employers are going to be eager to provide flexible work options for older workers due to declining size of workforce and productivity issues,” Roy says.
And people need to have a plan for how they will spend all that free time. “I believe you must retire to something. Entering that next phase of life should be filled with activities or work that you are interested in and truly desire. You must have a reason to get up in the morning. If you don’t, becoming unhappy or depressed is likely to occur,” Roy says.
Valpey says a good strategy might be to take on a part-time job that’s enjoyable to make ends meet until retirement age. “Earning one-fifth of what one was earning before they retired, over five years, can increase the retirement savings by one-third,” Valpey says. “So working part time in retirement can make a huge difference.”
Paraphrasing Ben Franklin, Valpey says, in the end, it comes down to a simple concept. “There are two ways to be wealthy: to have less need than money and more money than need. It’s a lot easier to have less need than money.”