Are you nearing retirement and want to better understand whether you are financially ready? 

It’s a crucial question, especially if you want to retire earlier than the “standard” full retirement age of between 62-70. Understanding where you stand financially is the first step toward crafting a retirement that aligns with your dreams, regardless of when you take the leap.

Let’s delve into a step-by-step process to ensure you’re on the right track. 

1. Assess Your Net Worth: Taking Stock of Your Assets

Start by creating a comprehensive Net Worth sheet. Look beyond the obvious retirement accounts like 401ks and IRAs. Consider everything from savings and investments outside these accounts to assets like your Employee Stock Purchase Plan. The goal is to take stock of all your resources that will contribute to replacing your income during retirement.

2. Evaluate Your Spending Habits: A Reality Check

No sugarcoating here! Take an honest look at your lifestyle and the costs associated with maintaining it over the past two years. Avoid the temptation to artificially trim your budget to make it look more retirement-friendly. Realism is key. 

You’re retiring to a lifestyle you love, and understanding the true cost of daily living is crucial to making the transition as smooth as possible. Rushing to cut corners now might lead to a retirement that doesn’t match your dreams.

This doesn’t necessarily mean you must go over the top with budgeting or completely rework your lifestyle. Instead, look at your spending and evaluate whether or not it aligns with the retirement lifestyle you envision for yourself. 

For example, if you live in a comfortable home but are out over your skis with maintenance costs (financial and otherwise!), it may be wise to make adjustments. You might consider relocating to a smaller, more manageable living space or making proactive improvements to your home to make it easier and less costly to maintain in the future. 

Another example might be if you look at your spending statements and find that the majority of your monthly cash flow goes to eating out – evaluate whether that supports an early retirement lifestyle that prioritizes travel or time with your loved ones. If you can pull both off, great! If not, you may need to reassess your spending.

3. Building a Cash Cushion: A Safety Net for Early Retirement

Ensure you have a substantial amount of cash on hand. Financial experts often recommend having a minimum of 2 years’ worth of living expenses in reserve, especially if you’re considering an early retirement. Early retirement brings unique challenges, and a healthy cash reserve provides a buffer against unforeseen risks associated with extended periods of savings withdrawals.

4. Optimize for Tax Efficiency: Planning for the Long Haul

Consider the tax implications of your retirement savings strategy. It’s not just about minimizing taxes in the present; it’s about optimizing for tax efficiency over the long term. Diversify across tax statuses—Roth, Tax-deferred, and taxable accounts—to ensure flexibility and avoid getting stuck in a rigid distribution plan.

5. Avoid Cornering Yourself: Embrace Options in Lifestyle and Finance

Diversification isn’t just for investments; it’s also crucial in lifestyle and career choices during retirement. Don’t lock yourself into a single account type or a specific spending pattern. Keep your options open, whether it’s pursuing a traditional retirement or exploring a second career, consulting, or volunteering. Flexibility is the key to a fulfilling and sustainable retirement – especially if you plan to transition to retirement or an encore career earlier than you had initially planned.

Match Finances to Lifestyle, Not the Other Way Around

As you approach retirement, enter this phase of life with both eyes wide open. Align your finances with your envisioned lifestyle, and don’t force-fit one into the other. The journey to retirement is not just about reaching a financial milestone; it’s about creating a life that reflects your passions, dreams, and the fulfillment you deserve.

Remember, it’s not just about retiring early; it’s about retiring well. So, take the time to plan, assess, and craft a retirement that genuinely resonates with the life you’ve always wanted. Your financial future awaits—make sure it’s a future you’re excited to embrace!