Early retirement is a trend among the Kansas City workforce.
There are 6 signs you’re financially and emotionally ready to retire.
Ah, retiring early! It sounds wonderful, right? It brings up thoughts of road trips whenever you want, fewer emails to dig through every day, and of course less stress! Then the more practical side strikes you, and you think will I have enough money to retire from my Kansas City job? Look for these 6 signs, and you’ll know you can retire early.
Kansas City early retirement
Retiring is a right of passage, so it’s understandable it brings up a mix of emotions. It’s never easy to say goodbye. However, if you’re thinking about ending your career earlier, there are more looming questions because you’ll need to live off your saved money for longer.
These are 6 financial signs you may ready to retire early:
- You can live off retirement income for 6 months.
- Your debts are paid off.
- You have a healthy emergency fund.
- You have healthcare.
- Your Kansas City company is going through a merger or acquisition.
- You’re offered a buyout.
Create a pre-retirement budget
Your retirement income is like your working income. It fluctuates from year to year depending on your investments. You’re no longer relying on a merit raise or promotion, you’re relying on the market and retirement withdrawal rules.
If you quit your job early, you likely won’t have as much income as you would at normal retirement age. That’s due to age restrictions on when you can withdraw money penalty-free from certain investment accounts and of course Social Security, if eligible.
For example, the longer you wait to collect Social Security the more you’ll receive. The increase is significant. You can withdraw 8 percent more each year, up to age 70, when you wait past age 62.
When you’re creating your budget, set a standard budget that will account for changes in the market that may impact your net worth, fluctuations in expenses for things like healthcare, and added income from mandatory or allowable withdrawals based on age.
So, how much income should this budget include? The 4-percent rule is a general rule of thumb. For instance, you take 4-percent of your assets as income the first year of retirement. In year two, you take the same amount of income plus an extra 2-percent into account for inflation. Each year, you add on inflation.
It’s no longer a hard and fast rule, especially if you’re not waiting until your 60’s to quit working. It’s a starting point. Your Kansas City financial advisor can offer specific guidance based on your portfolio. It’s better to base it off your investments rather than some number that a national financial expert threw out there because even they can’t agree on whether you need a $1 million or $5 million nest egg.
1. Can you live off your retirement budget?
Once you create a budget, try living by it for six months. For example, if you plan to take a vacation every six months when you’re retired, set that money aside as if you were going to travel. Of course, you probably won’t spend that money because you’re still working but don’t touch the money.
Where are you going to live? Will you move to a warmer state with no income tax, like Florida, or are you going to stay in Missouri? Think about your lifestyle before you leave the Kansas City workforce.
Also, think about where you’ll spend the most money. For instance, will you spend more on entertainment and dining now that you’re not tied to a 9-5 schedule? If you’re still working, indulge yourself and start going out more so you’re prepared for your new lifestyle that’s around the corner both emotionally and financially. If you’re the frugal type, again set the entertainment funds away. Don’t touch them while you’re living by your retirement budget yet still working.
At the end of six months, ask yourself how it felt to live with that budget? Did you feel cheated or fulfilled? You may have to use your imagination a little and pretend you took those vacations even though you didn’t because you were still working. If the answer is fulfilled, that’s one sign you’re ready to retire.
2. Do you have zero debt?
Second, look at all your debts when you create your six-month pre-retirement budget.
Is your house paid off? Credit card debt? Student loans, as silly as it sounds but it’s possible with people retiring younger and younger. A second sign you’re ready to retire is if your debts are paid off.
Since income will be limited to what you’ve said, or a side gig you get, you want to make sure your budget isn’t paying down debt.
If you still have a few years before your mortgage is paid off, which is probably your biggest debt, make sure it’s possible to pay down the loan on a tighter budget.
3. Do you have a healthy emergency fund?
Also, set aside an emergency fund in this retirement budget just like you hopefully did while working. If you own a home, one of your expenses will be maintenance to your property.
Secondly, add a cushion for medical expenses. You can probably count on more medical costs the older you get. If you leave the workforce early, medical expenses may not be top of mind in your 40’s and 50’s but they may become more prominent in your 60’s and 70’s.
With such big swings in needs and income as you age, look at your budget in phases. For example, create a budget for each decade and create various scenarios. What can I live on in my 40’s? How about my 50’s? At age 62 you can start collecting Social Security, although you won’t get full benefits until 66, but what about your health at that age? Will you have more medical expenses that will eat up the difference in income?
You can’t predict the future, especially when it comes to your health so that’s where a healthy and robust emergency fund is key. If you didn’t have one while working and survived, that’s one thing. When you’re retired, it’s smart to have more money set aside for unexpected expenses.
4. Your healthcare is covered
Healthcare is expensive. Premiums aren’t cheap and most plans are catastrophic, so if your sick often you’ll likely face a high deductible. While an emergency fund will cover some unexpected expenses, you still need to think about healthcare before retiring.
AARP suggests you don’t underestimate how long you will live. They point out that at age 55, men live 28 more years on average and women 31 years. Practically speaking, your expenses especially medical will exponentially increase as you age. Predicting expenses for three decades is difficult when you’re working, never mind retiring.
Medicare kicks in at age 65, so you have to account for medical expenses in your budget until you reach that age.
If your employer covers your healthcare when you retire, it’s probably an easy decision to leave work. It’s yet another sign you’re ready to retire, even if it’s early.
If you have to buy medical insurance privately, speak with an experienced agent, especially if you’re buying through Healthcare.gov or on the exchange. You’ll pay the same price whether you buy the coverage yourself through the exchange or through a trained insurance professional.
Speak to your financial advisor about setting up a Health Savings Account or HSA. You can set aside money each year, even years before you think about retiring, and withdraw the money tax-free to cover medical expenses.
You may even have one already setup through your employer that you can continue using after you stop working. You may not be able to continue contributing, though. They all have different rules and fees so check with the specific HSA plan.
5. Mergers & Acquisitions
Let’s face it, the business world is changing and sometimes early retirement finds you through a merger, acquisition, or financial buyout. In fact, 2018 was a record year for mergers and acquisitions for Kansas City area companies. There were 195 last year according to the Kansas City Business Journal, breaking a record from 2007.
Baby boomers were a driving force behind so many transactions, according to experts, as they retire while business values are still high. Technology and telecom were the leading industries with mergers and acquisitions in KC, and it’s thought to be because of the rise of the tech sector downtown.
There’s an entrepreneurial spirit with the Kansas City Startup Village growing strong in KC. The Kansas City tech market increased 26-percent in the past five years with a pool of more than 52-thousand workers, according to the Business Journal. As tech expands and changes there’s a natural creation and selling cycle that takes place with a startup. That’s why KC saw a record year for mergers and acquisitions, according to experts.
Where do many of these startup entrepreneurs come from? Employees who leave the big companies in town like DST Systems, Cerner, and Sprint. Some employees leave to build their own startup, perhaps as a retirement gamble with the expectation it will pave the way to a quicker retirement through a possible sale a few years down the road. Others see the writing on the wall and leave a well-known KC company expecting a sale or merger.
Take, for instance, Sprint employees. With layoffs on and off for years at company headquarters in Overland Park, and with the merger of Sprint to T-Mobile, it’s decision time for employees. Do you stay and ride out the changes both culturally and potentially financially or do you leave and find a new job or just call it quits for good? There’s really no guarantee you’ll even have a job after a merger, even if the corporations assure you that you will. You may have a job, but will it be the same one?
With so many unknowns when there’s a merger, it’s understandable that retirement becomes a discussion point. Sometimes, retirement finds you.
6. Changing industries: Buyouts
It’s not just mergers, but buyouts too as industries change. It’s no secret the newspaper industry is struggling, and recently several well-known KC reporters took early retirement packages.
The parent company of The Kansas City Star offered 450 employees voluntary early retirements deals recently. If you have 25-30 years at a corporation, are you really going to start over? Perhaps you’ll retire early with the buyout and get a side gig bringing in just a little money to supplement your early retirement.
Two dozen seasoned reporters took the recent buyouts according to reports by KCUR. They were offered to employees who were at least 55 years old and worked at The Star for 10 or more years. Fifty-five is a good age to retire, but it’s still considered “early.”
No company is immune to separation packages. It’s not just struggling industries. By most accounts, Cerner is growing at a fevered pace, often adding jobs. Yet, the company recently offered buyouts to some employees. It’s not the first time, with a similar voluntary deal in 2016.
In today’s global marketplace, no company is immune to buyouts, separation packages, or a merger and acquisition. It’s a reality for today’s employee. The question is – what will you do when faced with a decision about your company’s future when you’re in your 40’s or early 50’s? For some, it’s yet another sign to retire early.
Should you retire early?
These are just 6 signs it’s time to retire early, but it comes down to a personal choice. That’s why it’s important to have a trusted financial advisor by your side.
Find an advisor long before you consider retirement. They can help guide you in the right direction, not only when you start thinking about retirement but years earlier when you can still make investment decisions that will make a difference in your income post-employment.
There are different types of advisors and different fee structures associated with each. A Kansas City fee-only financial advisor puts your financial interests first because he bases his decisions based on your financial interests rather than earning a commission for selling a product.
Retirement is an individual decision. The open road awaits you if all the signs point to saying goodbye to the 9-5 job.
What’s your biggest financial concern about retiring early?