I love my job. I like the crew members I work with on Vanguard’s Arizona campus, and I enjoy building personal relationships with my clients. But the best part of my role as a financial advisor has to be telling a client they can retire early.

The average retirement age in the United States is 63 for women and 65 for men.* But since the COVID-19 outbreak, many people are being faced with early retirement and wondering if it’s the best option for them.

If you find yourself in this situation, your first step should be determining whether early retirement is a realistic option. Here are some things to consider.

Determine your goal

A financial advisor can analyze your portfolio and use cash flow modeling tools to help you determine if early retirement is possible. But if you don’t have an advisor, our retirement income calculator can help you get a ballpark idea of where you stand.

Retirement income calculator

Use these initial calculations to compare what you have now with what you may need to retire by a specific age. Then start thinking about how you’ll make up the difference—in other words, figure out a way to save more for retirement. Can you give up cable? Reduce the number of times you order takeout each month?

Think about these “sacrifices” in terms of net benefit: Weigh the financial gain against the social or emotional cost. If you’re not willing to compromise a particular lifestyle choice, accept that you’ll have to cut back somewhere else.

I’ve seen clients commit to saving most of their 6-figure salaries and living on $4,000 a month. I’ve also seen clients decide to come up with an alternate (and less aggressive) retirement goal. Be flexible and consider your options. And remember: The easiest goals to meet are those that are realistic and achievable.

Stay in control of your finances

Whether or not you can retire early often comes down to dollars and cents: how much you have now, what you’ll have if you stay on course, and how much you’ll need to get you through (what could be) several decades of retirement.

Budget (now)

You can’t project your future expenses without knowing your current expenses. Even if you’ve made it this far without budgeting, early retirement is an ambitious goal.

Our retirement expenses worksheet can help you visualize where your money goes. Fill it out now as a pre-retiree, and then estimate what your financial situation may look like once you’re retired. Plan to replace 85% to 100% of your pre-retirement income in retirement. (It’s better to overestimate—not underestimate—your spending needs, especially during the first few years of retirement.)

Once you’ve estimated your monthly expenses in retirement, use our retirement income worksheet to see if your retirement income (less taxes and expenses) will be enough to sustain your lifestyle. Start with a monthly calculation and go from there.

Factor in debt

Being entirely debt-free when you retire may not be realistic for everyone, especially those who retire early. That said, I strongly encourage you to pay off debt with high interest rates and few potential tax benefits―such as personal loans, credit cards, and auto loans—before retiring early.

Other debt, like your mortgage, can be factored into your monthly, quarterly, or yearly expenses. Just keep in mind, the more nondiscretionary expenses you have, the more income you need.

Have a cash cushion

My wife and I are pre-retirees, and we aim to have enough cash savings to cover daily living expenses for 3 to 6 months. I encourage my clients to do the same. It provides protection from an income shock, such as an unexpected job loss.

Many clients are surprised to learn that income shock can still be a concern for retirees. You need to cover your daily expenses if you earn below-average investment returns or encounter an unexpected rise in monthly expenses. For example, some retirees end up caring for a relative, a parent, or an adult child. Although it may be difficult, confront the possibility of facing these unanticipated financial obligations realistically and honestly.

It’s important to have enough cash on hand (both now and in retirement) to cover other financial shocks, such as a large medical expense or a home or car repair. A reserve of about $2,000 is a good place to start. (See Vanguard’s research about emergency savings for more information.)

Plan for future health insurance costs

The cost of health care is often one of the biggest impediments to early retirement. Before you reach age 65 (when Medicare becomes available), you have limited options.

If you have an advisor, they can generate a personalized annual health care estimate. If you’d like to come up with your own estimate, our research shows these 6 factors can help you determine whether your future costs will be higher or lower than average.

Consider the big picture

Early retirement isn’t all about finances. It’s important to think about your emotional well-being too.

If you retire early, what will you do with your time? There’s no right or wrong answer to this question, but it’s an important one to think about. Shifting from working to not working can be a challenge. If you don’t have a plan for how to spend your free time, the feelings of satisfaction and happiness that come with retirement can decline quickly.

Figure out the logistics

If you’re ready to commit to an early retirement date, start thinking about how you’ll transition out of working full time. Is a sabbatical an option? What about reduced hours or consulting? This could give you an opportunity to “test” early retirement before making it official. Explore your options with your employer and see what’s available.

The prospect of early retirement can be exciting, daunting, or even scary. But with some forethought and planning, it can be a realistic possibility―and we can help you get there with confidence.

*Source: The Balance, July 2020. Average Retirement Age in the United States: Is Retiring at the Average Age a Smart Move?

Note:

All investing is subject to risk, including the possible loss of the money you invest.