Sue from Illinois wrote into SeedtoInvest.com with the question, “Can I retire?” Her message was as follows, “I’m 53, with $1.4 million in assets. I make $65,000 a year and live alone with my cats. I’m tired of working. Can I retire in the next few years?” It’s nearly impossible for Sue, or anyone else, to determine if she can or cannot retire based on the information provided. Deciding to retire early ideally follows a holistic approach with considerations of net worth, annual spending, asset liquidity and diversification, and insurance.
This is my opinion; it may or may not apply to your personal situation. Here are ten considerations for anyone pursuing FIRE. They are based on my personal experience providing money coaching through Seed to Invest and retiring at age 45, nearly a decade ago.
FIRE Retirement 10-point Checklist:
- Calculate Annual Spending: It is essential for someone considering retirement, to know how much they spend on an annual basis. What is your annual spending rate? The easiest way to determine this rate is using a budgeting app for three, six, or even better, twelve months. Seed to Invest’s Budgeting Tracker allows you to determine annual spending rate as well as track progress towards savings and/or investment goals.
- General Goal: Once your annual spending rate is determined, multiplying that number by 25 (Target = Annual Spending × 25) provides a rough estimate of the investment portfolio needed to support a 4% initial withdrawal rate. This is assuming the investor is using a conservative withdrawal rate, similar to the 4% rule created and outlined by William Bengen in 1994.
- Determine Net Worth: Having firsthand knowledge of your net worth is critical, but even more important for retirement, the specific allocation of taxable or retirement accounts along with overall diversification. I have coached several individuals who have retired early, only to find themselves with little to no assets in taxable accounts instead of retirement funds. If you retire early, accessing money in retirement accounts before age 59½ can create additional tax consequences. Seed to Invest has a Net Worth Calculator that allows you to add all assets and assists in determining investment tax location, pension allocations, diversification, and so much more.
- Protect your “Booty” Insurance: Consider getting an Umbrella Policy to protect your assets. According to Charles Schwab, “A general rule of thumb is to have total liability coverage worth one to two times your net worth across your umbrella and regular policies.” I personally follow the 1:1 ratio.
- Plan for Spending: Building a 3- to 5-year bond or CD ladder to cover the majority of spending for each year may eliminate significant stress. When investors have established a fixed-income ladder, there is little worry about selling stocks during market downturns or attempting to time the market. I have found that brokered CDs at low-fee brokerages offer significantly higher rates compared to banks.
- Health Insurance Costs: Most are aware that health care costs, especially in the U.S., have been on the rise and need to be thoroughly researched before retiring. Everyone has to make their own determination on what type and level of care they are seeking, but alternatives include high-deductible plans, catastrophic insurance, and religious-based healthcare sharing co-ops.
- Brokerage Fees: If your allocations are not already in a low-fee brokerage, consider transferring assets to Fidelity, Schwab, or Vanguard. High fees can significantly reduce the long-term returns of mutual funds and ETFs. If you are truly uncomfortable individually managing your own investments, consider using an advisor at the affiliated brokerage where your account is located or a fee-only financial planner who is a fiduciary. The Garrett Financial Network assists individuals to find qualified financial planners who are fiduciaries.
- Eliminate the Mortgage: Why not give yourself 20-30% more spending allowance in retirement? Additional thought needs to go into paying the loan early if an individual has a low fixed-rate (e.g., 2.5%–3.5%).
- Diversification of Equities: Many recommend investing solely in the S&P 500 (VOO), but is an investment in only U.S. assets wise? There are two items to consider with this point; national debt and high U.S. valuations. Read more in My Favorite All-Purpose ETF.
- Stock to Bond Ratio: In his research, Bengen found that portfolios consisting of 0 to 25% stocks, consistently underperform other portfolios. He suggested that allocating too few resources to stocks “shortens the minimum portfolio life.” Bengen encouraged retirement portfolios to be between 50 and 75% stock with the remainder allocated to bonds, based on the individual’s comfort level. The article Updated 4% Rule Chart and FIRE Movement explains more.
Check out the SeedtoInvest.com Retirement Spending Calculator to visualize what may be needed for retirement funds and account longevity. I personally followed the above checklist when I retired; it helped me eliminate the emotional side of retiring early so I could turn my attention to life pursuits.
References: Bengen, W. P. (1994). “Determining withdrawal rates using historical data.” Journal of Financial Planning, 7(4), 171–180.
https://www.schwab.com/learn/story/when-do-you-need-umbrella-insurance
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