Sat, 20 Aug 2022

Mark Hauser, co-managing partner at Hauser Private Equity, shares insights related to planning, executing, and enjoying an early retirement.

Preparing for early retirement involves a multifaceted approach. An individual first wants to ensure that they have a reliable income source to sustain them through their retirement years.

Maybe a would-be early retiree plans a low-key retirement that's filled with relaxation and personal fulfillment. Alternatively, they may envision several whirlwind decades filled with travel and other life-enriching experiences. Either way, they'll need sufficient income to maintain their preferred lifestyle.

To accomplish this goal, private equity principal Mark Hauser recommends working with a credentialed financial advisor. This highly skilled professional will analyze the individual's life situation, income needs, and income sources.

The financial advisor will also discuss the need to plan for unexpected life events. Based on the analysis' results, the advisor will design a targeted investment strategy for their early retirement client.

Two Distinct Phases of Retirement

The term 'early retirement' generally refers to retirement prior to age 65, the traditional retirement age. This accelerated retirement timeline is frequently based on the Financial Independence, Retire Early (or FIRE) investment strategy.

The FIRE strategy is clearly based on a solid financial foundation. However, financial independence is the philosophy's overarching component. A well-rounded plan enables an early retiree to choose when (and for whom) they work.

Within that model, separating a retirement plan into two distinct phases is useful. With a defined plan for each phase, an individual can be more confident that each retirement component will be addressed.

The Pre-Retirement Phase

Before embarking on the early retirement path, each person should develop their own vision of this next phase of life. Once they have defined that vision, they can better determine the financial resources required to bring it to fruition.

Prioritizing Satisfying Activities

Several Financial Advisors say prospective early retirees should clearly understand how they will fill the hours that they previously devoted to their careers. Most importantly, many people don't realize the social and emotional benefits their careers provided over the years.

To remain engaged with the world, these individuals should consider which part-time jobs or volunteer opportunities they might enjoy. If they intend to travel, they should paint a picture of those travel experiences.

Generating Steady Income

Many early retirees selectively choose part-time or gig economy work to support their new lifestyles. By continuing to generate income, individuals don't need to save as much money before leaving their jobs. Ideally, they will funnel some (or all) of their current job-related income into the retirement fund. In addition, some part-time jobs occasionally offer health insurance benefits.

However, early retirees should be aware that many part-time jobs do not offer schedule flexibility. Employers may not react favorably toward employees who want to take time off to travel, socialize, or conduct personal business.

Creating Passive Income Streams

By generating one or more passive income streams, early retirees can enjoy additional income while retaining more lifestyle freedom. Private equity investor Mark Hauser notes that real estate investments, such as home rentals, often provide a steady source of income. Unused vehicle and equipment rentals can also generate extra cash.

Some resourceful early retirees offer an in-demand service or turn a personal passion into extra income. Others develop an online course that can provide welcome income without any additional effort.

Ramping Up the Savings

Many upcoming early retirees maximize their savings while they still have job-related income. Establishing an automated savings plan is the most effective way to supplement the retirement fund. The employer's human resources or payroll department can handle the savings plan enrollment logistics.

Early retirement planning often includes paying off substantial bills such as car payments and/or credit card balances. After the individual has paid each bill in full, they should immediately funnel those extra funds into their retirement savings vehicle. Individuals who receive a tax refund should transfer the funds into their retirement savings plan.

Making a Social Security Plan

Preparing for early retirement includes deciding on when to collect Social Security payments. Many retirees begin tapping their payments as soon as they become eligible. However, they will receive up to 30% less than if they had waited to draw maximum benefits.

The Social Security website contains planning tools that help retirees to decide when they should begin collecting benefits. Mark Hauser recommends consulting with a financial advisor familiar with Social Security Program logistics. This knowledgeable professional can provide guidance on how to delay payments until the optimal withdrawal date.

Managing the Housing Situation

Homeowners should handle major home expenses while steady income is still rolling in. If their finances allow, they should pay off the mortgage well ahead of time.

Downsizing to a smaller home is a strategy that pays multiple dividends. Monthly mortgage costs would certainly decrease. Property taxes and home maintenance expenses would also go down. Finally, downsizing to a smaller home would likely mean that early retirees could add the home sale gains to their retirement funds.

While preparing for early retirement, homeowners may want to complete major renovations and/or repairs. Financial advisors say homeowners should avoid major home projects during early retirement. These often-escalating expenses can seriously impact homeowners' long-term financial resources.

Obtaining Health Insurance

Establishing cohesive health insurance is one of the most challenging aspects of an early retirement plan. When individuals retire from their jobs, they are no longer eligible for their employer's health insurance coverage. In addition, they cannot receive Medicare health insurance until they turn 65. Therefore, they must find a plan that bridges the gap between these two milestones.

COBRA Coverage

Many employees are aware of the Consolidated Omnibus Budget Reconciliation Act (or COBRA) health insurance continuation option, according to Mark Hauser. Thousands of United States workers have utilized this federal government-provided program over the past several decades. The COBRA plan enables qualifying employees (and their families) to continue the last employer's group health benefits for 18 to 36 months.

Although COBRA coverage serves a useful purpose, it is extremely expensive. The insured (the ex-employee) must pay 100% of the employer's premium cost plus 2% administrative fees. Depending on the insured's age, a COBRA plan may not provide a complete bridge to Medicare coverage.

Other Health Insurance Options

Younger early retirees may need to choose additional health insurance after their COBRA coverage ends. Other individuals do not want COBRA coverage at all.

In both cases, a specific state's health insurance marketplace has plans available. Although often less than COBRA coverage, the state-sourced plans will contain high premiums, plan deductibles, and out-of-pocket maximum costs.

Individuals should compare COBRA and marketplace plans' cost and overall value. A health insurance broker may be able to provide additional coverage options at more affordable prices.

The Early Retirement Phase

Finally, individuals begin their early retirement phase. Now, they'll likely bring a different set of guidelines to the forefront. Managing their income and spending will require discipline and ingenuity. Here are X recommendations that typically apply to early retirees.

Adhering to Spending Guidelines

Every early retiree should know how much cash they'll need to maintain their planned early retirement lifestyle. Many people can stay within preset spending guidelines while occasionally straying off the beaten path to splurge on memorable experiences.

In general terms, retirees typically spend about 80% of the amount they spent while working. Aspiring FIRE retirees often strive to live on 50% (or less) of their income.

However, there are exceptions to this rule. Younger retirees may spend more, as they're generally more active and want to treat themselves to new adventures and special purchases. Regardless of their ages, newer retirees tend to initially spend more on retirement-related lifestyle changes. Examples include home renovations, relocation to another property, or travel.

Strategies for Reducing Expenses

FIRE advocates are strongly committed to decreasing their expenses to the bare minimum. Their priority is retiring their debt, even 'good' debt such as a mortgage loan. In addition, these determined cost cutters find creative ways to save money on housing costs, utility bills, grocery store trips, and transportation expenses.

Adjusting Rate of Return Expectations

Some retirees may be counting on a high rate of return on their investments. Private equity principal Mark Hauser, and many financial advisors, say that is not a realistic expectation.

For perspective, the S&P 500 has achieved a 9.8% average return during the last 90 years. Individual investors are not likely to achieve that rate. In the advisors' estimation, a 5% or 6% rate of return may be more achievable. In the long term, steady income may be more important.

Enjoying a Fulfilling Early Retirement

Many upcoming early retirees expertly laid the groundwork for the next phase of their lives. They established reliable income streams and addressed other financial and logistics issues. Collectively, they did everything necessary to prepare themselves for a satisfying early retirement.

Once these individuals entered the early retirement phase, though, they were sometimes reluctant to part with their money. Mark Hauser recommends that early retirees work with their financial advisor to establish a retirement spending plan. This detailed template helps to preserve their resources while enabling them to enjoy a well-deserved retirement.

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