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If you have 5 years before retirement

by retirebyforty on November 16, 2012 · 15 comments

in early retirement, goals and milestones

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if you have 5 years before retirement

The November issue of Money magazine contains a bunch of retirement articles. It must be their retirement issue.  I am planning to evaluate each article one at a time to see if I agree with their position. Last week, we went over where you should be if you have 10 years before retirement. This week we’ll take a look at 5 years out. This scenario also applies if you want to change careers or to become a freelancer in 5 years. You need to be prepared for a big reduction in income and this checklist will help you measure your progress.

Saving

Money Magazine:  With 5 years left before retirement, the saving target is 9.4x household income. Their target retirement saving is 12x household income when you’re 65.

As I said in the 10 years out article, I think it’s better to use your expense column as a measuring stick. The target at 65 should be 25x expenses. With 5 years out, you should probably be around 20x expenses.

See if you need a course correction

Money Magazine: If you haven’t managed to accrue 9.4x household income, then you need to examine your saving and spending rate. You may be able to retire on less or get to your goal by working longer.  A one-time review with a financial planner who charges by the hour can be worth the $1,000 or so investment to help you figure out where you stand.

5 years will fly by very quickly. Again, I think it’s better to use your expense as a yard stick and shoot for 25 x expenses. If you use 25x as the target, then you can draw down your retirement saving at the 4% safe withdrawal rate. Making an appointment with a financial planning is worth it. They can go over your total portfolio and give recommendations. Retirement is a big change and your investment will have to change too. Even if you’re nowhere near retirement age, it’s worth talking to a financial advisor. Read about my financial planning session with Personal Capital. That’s even better because it didn’t cost me anything. Working longer is also a valid option. If you’re tired of the same job, then perhaps see if you can consult or freelance instead.

Examine Healthcare Cost

Money Magazine: This is the time to estimate the cost of health insurance and any out of pocket expenses. If you plan to retire before Medicare kicks in at 65, then you could have a big expense ahead. Be aware that Medicare isn’t free and costs about $4,600 on average.

Healthcare is a huge problem in the US. It’s very expensive and everyone needs to make sure they allocate some funds for health insurance.  I think healthcare will go through a lot of big changes over the next 20 years so I’m not going to worry too much about it now. Once we are 60, we’ll take a closer look at it. One alternative is to think about moving to a country with a more retiree friendly healthcare system like Canadaor Thailand.

If you are quitting your job to go it alone, you really need to figure out the healthcare cost before you quit. It can take a big bite out of your freelance income. Unfortunately,  many entrepreneurs can’t afford healthcare and are going without a big safety net right now. Here are some Healthcare Options for early retirees and self employed.

Plan for Long Term Care

Money Magazine:  A year in a nursing home can top $78,000. Long term care can drain your savings very quickly. Insurance can help, but the premium can cost as much as $4,000 per year for a couple in their early 60s. Buy only if your assets total $250,000 to $1,500,000. If you have less, you’ll probably run out of money and can qualify for Medicaid. If you have more, you can pay your own way. If you’re going to buy, do it now because the older you are, the higher the cost.

This is another big problem in the US. While our families don’t have a history of needing long term care, who knows what can happen? Again, a way to alleviate the cost is to move to another country with more affordable healthcare cost. Long term care south of the border is much more affordable than in the US and many retirees are considering this option. I have also been reading good things about Ecuador and the Philippines.

Move out

Money Magazine:  Think about downsizing or moving to a cheaper area. Once the kids are out of the house, you won’t care much about being near the right school, so moving to a cheaper neighborhood with low-scoring schools will cut your costs dramatically. It’s time to research potential retirement locations.

I think moving after retirement is a great way to reduce monthly expenses. If you are not tied down to a location, take some trips and see if you can find a good retirement spot. Personally, I like Central/South America and Southeast Asia. The cost of living is much cheaper than the US and I like the warmer climates. Once Baby RB40 is out of the house, I’ll try to convince Mrs. RB40 to move overseas (at least for a few years.) By that time, she’ll probably be ready for retirement.

Practice your retirement job

Money Magazine:  Begin laying the foundation for any work you’ll do in retirement. Ease the transition by getting credentials or using relevant volunteer work to reorient your resume. If you want to consult, start your business before you retire and lose all your contacts.

I started blogging 2 years before I left my job and the time spent really eased the transition. If I didn’t have an online business, I probably would have felt compelled to grind it out a few more years.

Keeping active in retirement is the way to go and a part time job/business will help ease the financial transition as well. If you have 5 years before retirement, it’s time to figure out what you would like to do in retirement. The same applies for a career change or going freelancing. It’s better to try it out for a few years while you still have a full time job. Once you get some traction, it’s much easier to quit and live on the reduced income. Starting your business while you’re working full time also let you project income and expenses more accurately. I kept track of our income and expenses over the final 18 months and I found that I could retire early without drawing down our retirement saving. This gave me the confidence to quit my engineering career.

Are you preparing for a big transition over the next 5 years? It really isn’t a lot of time. Next week, we’ll see if Money Magazine has any advice with only 1 year left before retirement.

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{ 15 comments… read them below or add one }

Money Beagle November 16, 2012 at 5:57 am

Paying your mortgage as soon as possible is a key goal of mine, and it ties back to focusing on the expense portion as you mentioned. If you reduce that payment, that’s that much less you’ll need every month. If you pay your mortgage off before you finish working, not only do you drop the payment, but you can apply the payment toward additional retirement funding, so it’s a double bonus.

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retirebyforty November 16, 2012 at 8:18 am

We still have a mortgage, but aim to have it paid off by the time we are 60. Many retirees still have a mortgage though. Sometime it’s not possible to payoff early especially if someone moved recently.

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FI Fighter November 16, 2012 at 6:28 am

I sure hope “5 years will fly by very quickly”, as I am greatly looking forward to reaching early FI! Healthcare costs are something I do worry about, especially long-term costs for someone who wants to retire so young.

I like the idea of practicing a post-retirement gig while you are still employed. For me, I’m planning on getting more involved with rental properties, so it’s probably a good idea I test out being a property manager for a few years first. Who knows, I may end up hating it, which would force me to come up with a backup plan.

Take care!

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retirebyforty November 16, 2012 at 8:20 am

Thanks for your input. I don’t really like managing properties, but I put up with it. Eventually, I’ll move all my properties to my management company. It will give me less headache and we can also move if we choose.

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Thomas S. Moore November 16, 2012 at 7:25 am

I think the big ones for people are the home, health care, and lifestyle changes. I was looking at home recently with my wife and we realized that the community is too expensive. Even after the home is paid off it would cost us about $1500 per month the live there. For some that might be worth it but an extra 1500 per month in retirement is a lot of money. Plan smart and plan ahead!

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Kurt @ Money Counselor November 16, 2012 at 7:42 am

It’s refreshing to read that you’d consider relocating to another country to ease retirement’s financial challenges. There are many beautiful, appealing places to live on the planet, and many offer economic advantages vis-a-vis the US for retirees.

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retirebyforty November 16, 2012 at 8:23 am

I’m not tied down to our location at all. There are many places where the dollars go further. I would love to move around and see the world while we still can. Perhaps keep a small condo in the US as a base.

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Christa November 16, 2012 at 8:12 am

Great advice, as always. I particularly like the advice to try out your business as a side endeavor before making it a primary source of income.

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Sin Camisa November 16, 2012 at 10:24 am

We paid off our mortgage; unfortunately in the wrong state (FL). We are now back in the Pacific NW (Seattle) and the housing costs are monumental. We are using the rent income from FL to pay for the rent in our tiny apartment here. But the HOA in FL makes it very hard to be a landlord (it’s a police state). We might have to sell next summer; no choice. With the $120K we’ll net, we won’t be able to afford anything here.

I can’t imagine retiring anywhere but in WA/OR; the quality of life is unmatched. We even love the weather (specially after our 10 year mistake in FL).

I have been “retired” under special circumstances for 3 years now but itching badly to go back to school and make myself feel useful. Society and our parents plant seeds in our brains since the time we are kids, that have ways of making us feel inadequate when we stay home. I have not been able to enjoy my kids (both in school); because I feel immense guilt.

I really envy your commitment to this project.

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retirebyforty November 17, 2012 at 2:29 pm

Seattle is quite expensive. Maybe you can live in one of the more affordable suburb. I don’t know the area that well.
I’m feeling pretty good right now, but perhaps I will have a change of heart in the future. I’m busy with our kid and the blog sucks up the rest of my time. Once he goes off to school, I’ll have more free time to think about things. If you want to go back to school and rejoin the workforce, you should do it. Good luck!

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Mike November 17, 2012 at 6:50 am

Good overview! I’ll have to review this a lot more as I am getting ready to become independent.

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DPF November 18, 2012 at 7:12 am

For me it will be a while until retirement, but regardless – for most people this is a shorter time frame than they realize. The reality is that we do need to think about how we have cash flow needs in retirement, and for them to be met – we will need a significant amount of savings. Slashing down to 40% of current spending or something along those lines won’t make too many people happy! For a pleasant retirement, it’s important to think in these terms.

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Elizabeth @ Broke Professionals November 18, 2012 at 3:17 pm

Healthcare is a major concern, especially for my generation (I’m 30), because there’s so much time between now and then – ie, so much time for Medicare to go bankrupt or for the government to privatize the system, which I (personally) believe would make it more expensive to get the same level of care. I’m happy my parents are already at that age with the system more or less in tact, so we can plan more concretely for their needs.

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retirebyforty November 18, 2012 at 11:30 pm

I agree. It’s going to keep getting more and more difficult for us. Even countries with public healthcare are going to run into trouble. Healthcare just cost too much. My mom will qualify for Medicare soon and I’ll have to figure out how the whole system works.

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Dominique Brown November 20, 2012 at 5:42 am

I would like to stress that if you’re retiring in 5 years you should be focused on preserving capital. Don’t get caught out there over exposed to equities.

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