Planning Early Retirement? 2 Powerful Ways to Test Out if You're Ready for Early Retirement

Can you retire early? Of course you can! Planning early retirement isn't hard.

Go through all the pros and cons of early retirement and an evaluation on whether you can afford to retire early......

Well, I think you've no trouble about the pros...The upside of calling it quit early is your dream, any way....

What are the cons?

Oh, yeah, to unshackle yourself from the 9-to-5 cycle....You gonna need some time to get used to it.

Then, you got to deal with your emotional issues. You aren't just retiring per se, you're also giving up a high-paying job, title, status and power that come with the job.

You may feel you're "worthless" now without a job because you've been building up your identity and "image" around it; it's sort of like you suddenly feel so empty, so without purpose and meaning in your life.

Be careful on this front because easily, without warning, you could slip into a depression.

Maybe you're banking on spending your free time pursuing your hobbies like traveling, painting, singing, gardening....but after a while, you find that your heart's not in it.....

And the financial issue may keep bugging you too - whether your retirement income is enough to support you for 20, 30 or even 40 or more years. It's daunting to know that you don't have regular paychecks coming in anymore.

It's even more daunting that you've to turn your savings into a reliable income that'll support you for a long retirement and that you'll be withdrawing from your savings for a long period.

So, weigh the pros and cons carefully, before you decide you're up to it - to retire early.

Now, we go to the second part - how do you evaluate whether you're financially ready to afford an early retirement.

Well, what better way than for you to go over the numbers?

What numbers?

Such as until what age you expect to live. I suggest in this case, it's better for you to estimate until at least 90 or 95. You may not live until that age but it's better to overestimate rather you live until 90 but run out of money at 85...

Say, if you retire at 55, you've to plan a good 40 years or so of your life in retirement.

And then such as how "big" your nest egg gonna be to support you over that length of retirement.

Let's work out an example.

Say you need a retirement income in today's dollars of $45,000 per year. And let's assume you can count on $15,000 from Social Security. And you won't be getting monthly checks from a company pension. This means you've to throw off $30,000 ($45,000 minus Social Security $15,000) a year in real dollars from your retirement money.

(Note: Your income would have to increase by the inflation rate each year so you maintain steady purchasing power)

As a rule of thumb, you need a portfolio roughly 25 times the amount you withdraw that first year of retirement, to fund inflation-adjusted withdrawals over a period of 30 to 40 years.

This means if you need $35,000 of inflation-adjusted income from your investments, you would need a portfolio of about $875,000.

Actually, you may need more since the earliest you could collect Social Security benefits would be at age 62. (Note: For Social Security, it's advisable to hold off collecting its benefits early, for a larger benefit later on).

You might be able to get by with a smaller nest egg, but that would increase the odds that your money might run dry while you're still alive.

This is just a rule of thumb. You can get a better sense of how long your money might last at different levels of withdrawals by working it out with a qualified financial planner.

Don't just "guesstimate" the retirement money you'll need. The more specific you can be, the better sense you'll have of whether you're truly prepared.

Think about your lifestyle and budget

Again, how much you need to spend per month in retirement depends on the type of lifestyle you gonna adopt.

It's best to do a retirement budget based on the lifestyle you want.

And then of course how you gonna fill up all those free time you've.

This approach of planning early retirement let you know, at least, if you're emotionally and financially ready to plunge into your dreamed retirement.

Due to her strong yearning to retire early in life, Cecelia Yap has been researching on the subject of retirement. She has found the most "viral" way to grow her retirement nest egg and you too can do what she does, at My Passion.