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Are You Financially Prepared to Leave Your Job?

Joe Udo

Some people have a target date in mind for retirement. This doesn't necessarily mean the day you'll stop working completely. It could be the day you quit your job to go it alone or change careers. It's good to have a target date in mind so you can prepare for the financial and lifestyle impacts that change brings.

Even if you love your career, there will be a day when it won't be the right fit anymore. There are many reasons employees are pushed in new directions, including their health, the economy, or outdated skills. On the other hand, there are many of us who are ready to try our hand at something else. Here's how to tell if you are financially prepared to leave your day job:

Savings target. The first step is to keep track of your monthly expenses and tally them up for a few years. This will give you an idea of how much you need to save. Hopefully you have been diligently building your retirement savings and also investing while you worked. If you plan to be an early retiree, your savings target should be at least 25 times your annual expenses. This is a good starting point, because it will enable you to withdraw from your portfolio at the 4 percent safe withdrawal rate. Studies have shown that your portfolio should last 30 years when withdrawing at this rate. This is just an estimate and you will need to adjust the withdrawal rate for your situation, but it's a good starting point.

Reduce expenses. It would be great if everyone reached the target of saving 25 times their annual expenses, but the reality is that many of us can't get there because we spend too much money. One thing that can help you get there faster is to reduce expenses. Many employees spend most of their paychecks and live month to month. People with early retirement ambitions need to spend less and allocate the rest to savings and investments. Reducing expenses will also decrease the amount you need to save for retirement as well as give your investments a boost. But it's not easy to do, and many of us still have room to improve.

Mortgage costs. Housing is usually the biggest monthly expense we have. If you can time your mortgage payoff date to your retirement date, then your monthly expenses will drop quite a bit after retirement. Now that mortgage rates are low, it may be a good time to refinance into a shorter-term mortgage to match your retirement date. If you have 10 years left until retirement, see if you can refinance into a 10-year fixed-rate mortgage. You may have to pay more now, but once the mortgage is paid off, your monthly expenses will be much lower. Another alternative is to downsize after retirement. There are many affordable locations around the world where your monthly costs will be lower than in the U.S.

Replacement income. Another way to reach the 25 times your expenses savings target is to work longer and generate some replacement income. The longer you put off retirement withdrawals, the more time your retirement investments will have to grow. Let's say your retirement savings is around 20 times your annual expenses. Instead of retiring and starting withdrawals right away, consider working part time, freelancing, or consulting to generate some income. This income can go toward your current cost of living and help you to put off retirement withdrawals. If your investments do well, then in five to 10 years your retirement fund could still reach the 25 times your annual expenses target.

These are just a few strategies to help you save enough for a 30-year retirement. Focusing on earning more money and reducing expenses while you are still working will get you there quicker. Once you reach your savings target, then you will have more freedom to choose what you want to do with your time. You can continue to work if you enjoy it, reduce your hours to part time, or even quit to pursue other interests.

Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.

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