The “FIRE” movement, which stands for Financial Independence, Retire Early, has gained steam as stock market returns have provided many with a financial cushion. In addition, the pandemic of 2020 has reshaped how people think about work and retirement. While the idea of retiring early is appealing, it requires significant planning.
The two biggest questions are often the most important: How will expenses be covered in retirement? And what will fill each day once work is no longer part of the routine?
Retirement is about more than finances. Some people pursue passion projects, volunteer work, hobbies or charitable endeavors. Others spend more time traveling or with family. The key is understanding what will occupy your time, stimulate your mind and provide a sense of purpose. Just as importantly, consider whether these activities generate income or add expenses to your budget.
Running the Numbers
To calculate the amount needed, start with the anticipated yearly spend and work backwards. We’ve all seen the commercial with people walking around with their retirement “number” but where does that number come from? The answer depends largely on lifestyle. One person might be able to live modestly, while another needs a mansion and caviar. Your retirement target should be based on expected annual expenses, including housing, food, healthcare, travel, leisure and any other recurring costs.
Where to Live and Lifestyle
A major factor in the retirement decision is determining where you want to live. For some, that may even mean relocating outside of the United States, which comes with its own expense profile. For those staying in the country, this website helps inform the tax ramifications of living in each of the 50 states. Once you have your location, think about how you’ll spend your time. Whether your interests include golf, travel, boating or any other hobby with an expense, that budget item needs to be accounted for. Lifestyle plays a huge role in expense and overall retirement satisfaction.
Healthcare Considerations
Healthcare is often one of the largest unknowns for retirees. Before becoming eligible for Medicare at the age of 65, the cost of health insurance coverage will vary depending on the source. COBRA coverage from your previous employer might make sense. Or you may be able to obtain coverage through state or federal health insurance exchanges, with several plans to choose from.
Structuring Income
Once there’s an understanding of spending needs, living arrangements and lifestyle goals, it’s time to structure yearly income. This involves coordinating pensions, brokerage account withdrawals, Social Security benefits and withdrawals from retirement plans like 401(k)s, Roth IRAs and IRAs. When and how you draw from each source will determine income taxes and the overall sustainability of your investment portfolio. If you retire before age 59½, account-access rules and potential early-distribution taxes also require careful coordination.
Retiring early will involve many moving parts. Financial independence is about creating a sustainable plan for both finances and lifestyle. By starting with the end goal and working backwards, those considering FIRE can build a retirement blueprint that covers practical and personal considerations. And as always, working with a CFP® professional can help ensure that your plan is sound before you give your employer notice that you're ready for the next chapter.
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