Great question, and if you’re asking it, you are indeed one of the lucky ones. 

Many Americans retire early not by choice, but because of disability, illness or employer downsizing.  Others simply do not have the resources to retire and assume (bad idea…) that they will work until they die.

But let’s say you think you have a choice: retire early and finally be free of staff meetings and timecards, OR stay on the job and sock away more money just in case…

“Just in case” – Ah, therein lies the dilemma.  What happens if you don’t die when the tables say you should but end up living another decade…or two?  What happens if shortly after you retire the stock market decides to start over at its 2008 levels?  What happens if you get hit by a bus the day after you retire, and you require round-the-clock nursing for the foreseeable future?

Pretty daunting what-ifs, but they shouldn’t necessarily send you out to buy another business suit or commuter card just yet.  Here are some things you can do to calamity-proof your plan for early retirement:

Stress test your assumptions:  This involves building uncertainty into your retirement projections, as well as some “worst case” assumptions.  For example, if longevity runs in your family, add 5 years onto the life span of your oldest relative, for purposes of determining your own life expectancy.  Be sure to consider the effect of inflation on your projected expenses; for this you might use an estimate based on projected inflation of medical costs and energy costs, which is higher than the normal price index and better reflects your major expenses in retirement. Finally, in determining how long your invested resources will last, use retirement planning software that employs Monte Carlo simulation of investment returns, which factors in the variability of returns over time and is far preferable to straight-line return projections. Alternatively, consult a CFP® professional who does this type of analysis. 

Plan for your expenses to vary over time as well.  Research shows that retirees’ expenses follow a U-shaped pattern.  Early in retirement, expenses are often greater than what was being spent while working. This reflects the fact that young retirees are generally still healthy and eager for travel and staying active.  In the retirement mid-years, expenditures often decline, as travel and activity slows and living arrangements are down-sized.  In late retirement, expenses again rise to reflect the greater medical and long-term care needs experienced by those in their 9th or 10th decade of life.  Relying on the rule-of-thumb that says you’ll spend 80 percent of your pre-retirement income throughout retirement may leave you unprepared for those higher expense periods.

Insure the direst “just-in-cases”:  Definitely consider purchasing a long-term care policy to cover the expenses of needing assistance with personal care.  It’s money well spent to get an inflation indexed policy, and advisable to get coverage for as long a period as you can afford. There are now hybrid policies which convert unused benefits into life insurance coverage, so you do not necessarily lose money if you do not need long-term care. A good long-term care insurance broker can help you shop smart in this area.  Consider, too, purchasing longevity insurance, which is essentially a deferred annuity policy that starts to pay out when you are 80 or 85, thereby protecting you from living too long to be able to retire early.

Assess the wiggle room in your budget: As part of your decision-making, you will need to draw up a budget of your expenses. (See bullet 2).  Once you have that in hand, go over each expense and determine if it could be cut or pared down in the case of an emergency.  In other words, how much discretionary wiggle-room do you have in your expenses?  The greater the proportion of your bills that are fixed – regular obligations, such as car payments or mortgage payments, and real estate taxes and insurance – the less capacity you will have to respond to emergencies.  And if you have less capacity, early retirement is less advisable.

Make sure other family members are doing their financial planning as carefully and responsibly as you are.  Your plans for early retirement can be completely sabotaged if you find you must take financial responsibility for the care of other family members.  For example, make sure your children – especially those who have their own kids – have life insurance should anything happen to them and you find yourself being full-time “parents” once again.

Have a workforce re-entry plan: Be prepared to return to work, if you begin to see that you will run out of resources before you run out of life.  Keep your skills honed, and your contacts up to date. Stay current with developments in fields that you would consider returning to. 

Retiring early, while you still have health, energy, and a full bucket list, is not necessarily an impossible dream for all but the most fabulously wealthy. Careful and early planning is key, as is the willingness and flexibility to change those plans if necessary.  Talk to a CFP® professional who can help you strategize how to turn this dream into a reality.