How to prepare for your days of leisure
For those with established family wealth, retiring early shouldn’t be a problem. But for the rest of us, it's got to be planned.
Compared to standard retirement planning, early retirement is all about getting rich quicker: reduce your expenses, save as much as you can, leverage your assets and so on. To work out exactly how much you need, here are a few simple questions you should ask yourself.
What's early?
Early is getting earlier these days, according to Cynthia Lee, managing director and head of the North Asia wealth advisory team for JP Morgan Chase. “People are starting to talk to us in their mid-40s or maybe early 50s.”
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Lee recommends coming up with a personal balance sheet: what are your assets and liabilities? Professional wealth managers generally use tools that will work backwards from your retirement goals and work out what you need to do to get there.
What income will you need?
You might expect to save some money by no longer commuting, for example, but as a rule of thumb, you can expect your expenditure during retirement to be about 80 per cent of what it is now. That’s assuming you don’t suddenly start to fill your time with expensive hobbies and toys, such as boats and cars.
Lee says she’s also seeing an increasing number of people who want to retire so they can concentrate on philanthropic causes, for instance through micro-financing of particular communities—and that can also be expensive.
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How much are your lifetime needs?
You'll need assets that produce enough income so that you don’t have to eat into those assets themselves. If you assume, for example, a 4 percent rate of growth, you’ll need assets 25 times your annual expenditure during retirement, plus enough to offset the effects of inflation.
Separate your core assets from any discretionary portion that you don’t mind losing, says Lee, and then make sure you don’t touch your core assets.
You might, of course, still have some income during retirement. Bear in mind, though, that more people think they’re going to carry on working than actually do so, although that paradigm could easily change in the future as more flexible working practices become the norm.
Finally, anyone planning to retire should also think about whether they need a will (answer: usually, yes) to make sure their family are looked after should the worst transpire. “It’s not just the financial aspects of retiring that you should consider, but also the legal and lifestyle aspects,” says Lee.