Retiring Early

When it comes to retiring early people should remember the old adage, "It's not how much you've got, but how you use what you have." Sure, it's fantastic if you've managed to sock away a tidy little next egg, but when it comes to actually feeling rich, it's often more about your lifestyle and how you manage your expenses and assets that will determine just how wealthy you will feel in retirement.

Expenses, expenses, expenses, it's all about expenses. As a director of finance in the hotel industry, I have watched revenue levels rise and fall, but one thing remains constant, expenses. They are always there and will always be there, and with the exception of the occasional unexpected event or emergency, they remain relatively consistent. Most individuals choose to focus on income and their investments as they plan for retirement, and while those are definitely important factors, I have always been a firm believer that expenses will make or break a successful early retirement. How many examples have there been of retirements ruined by over expenditure? Sammy Davis Junior and Ed McMahon are two perfect examples of people that should have been financially secure in retirement. They made untold millions during the course of their careers and should have had more than enough money to cover their expenses as they entered their twilight years. But instead, what happened? Because their expenses outweighed their income, Sammy Davis Junior died with hardly any assets to his name and Ed McMahon now needs Donald Trump's help just to save his house.

All of us have necessary expenses, and those expenses often increase as we age, but there are ways of measuring and controlling our needs as they correlate with our available resources. Using a retirement calculator can be a helpful way of estimating how your assets will grow over the years and what income you will have at your disposal to apply to your expenses when the time comes. Beware though, these calculators can be highly deceptive if you are not realistic when entering the amounts or percentage returns on your investments. If you use one of these investment tools in your planning efforts it is better to ere on the side of caution when entering your values and be pleasantly surprised later on when your returns are better than expected.

The most effective way to retire with more money than you expect is to find things that make you feel wealthier and richer than you are. Now I'm not going to blow happy smoke at you here and tell you that being surrounded by friends and family is what you need to do this, although they can be helpful in decreasing your expenses during retirement. What I mean by finding things that make you feel rich, are the values found in the activities you enjoy. If you like going out to eat, find a restaurant where you feel you get a great meal for the price. If you like to have a drink or two, go to a bar that offers one-dollar beers for happy hour. When you buy your friends a round of drinks for ten bucks, or go out to eat with your entire family for fifty you'll feel like you're rich without spending an excessive amount of money.

Finally, understand your assets. I don't mean knowing how much money you have in the bank. Truly understand your assets. People say to me, "I own my own home." And I say, "Do you own it, or are you just paying the bank to live there?" How much equity do you actually have in your home? Is your estimation of its worth accurate? Is it backed up by appraisals? If you sold your home it in today's market, would you actually get that amount? Others say, "I have this much in my retirement account, I'll be fine to retire early." And I say, "Exactly how much of that will be yours after taxes or withdrawal fees if you decide to take it early?" And they answer, "Taxes? Uh, I don't know. How early do early withdrawal fees occur?"

So when I say understand your assets, don't just know the numbers, understand the numbers. Know where you're money is, what it's doing, and exactly how much of it there actually is. Watch it carefully and make sure that it's well diversified in investments that will provide a secure, yet reasonable rate of return. Be reasonable in your estimates, calculate carefully, be honest with yourself, and truly be realistic about your wants as well as your needs for retirement. Then, and only then will you be ready to retire early.