BY ELIZABETH O’BRIEN, MARKETWATCH – 03/14/2015
The retirement plans of Google Chief Financial Officer Patrick Pichette, 52, who announced Tuesday that he wanted more time to travel with his wife, have no doubt stirred the fantasies of others who would love to exit the workforce early.
You don’t need Google-level money to retire by 55, but you do need a plan — and ideally, decades of smart saving and investing under your belt. Here are some pro tips for those who want to follow in Pichette’s footsteps:
Live below your means:
One rule of thumb holds that you need to save 25 times your annual budget by retirement, says Sheyna Steiner, senior investing analyst at Bankrate. For those of us who don’t occupy the C-suite, generating a nest egg of that size involves years of frugality. That was a key tenet of the best-selling book “The Millionaire Next Door,” whose co-author, Thomas J. Stanley, recently died. People who live out their lives in their starter home and don’t buy a new car every three years can sock away a lot more than those who upgrade regularly.
Stay appropriately aggressive
It’s a misconception that retirees should adopt a conservative asset allocation, experts say. All but the very wealthy will need a healthy allocation to stocks for growth. Joe Heider, president of Cirrus Wealth Management in Cleveland, recommends as a general rule of thumb that folks within a few years of retirement scale back their portfolios to around 60% stocks, and then to hold steady at that allocation into their retirement years. “I don’t mean wild and crazy, like going after hot stocks,” Heider says — just enough of an equity boost to propel the nest egg for a decades-long retirement.
Those retiring at 55 will need money saved outside their 401(k) or IRA, since you can’t tap those accounts before age 59 1/2 without penalty, said Meghan Murphy, director, Fidelity Investments.
Budget for health care
People without retirement health care benefits will need to plan for how they’ll secure health insurance before they become eligible for Medicare at age 65. Options include getting coverage under a spouse’s plan or COBRA coverage, which is a continuation of your prior employer’s health plan, usually for a maximum of 36 months and for the full cost of coverage plus a small administrative fee.
Another option is going to your state Obamacare marketplace to buy an individual or family plan. According to a Fidelity study last year, couples retiring at age 62 can anticipate estimated health care costs of $17,000 a year until Medicare eligibility, including the monthly premium plus out-of-pocket costs. That’s the estimate for an unsubsidized health plan. Those with moderate incomes — defined as a family of two earning up to $62,920 in 2014 — qualify for premium subsidies under Obamacare.
Yet costs can add up even with assistance, and when it comes to health care, “You can’t dial these expenses up and down much — they are what they are,” said Sunit Patel, senior vice president of benefits consulting at Fidelity Investments.
Have some hobbies
In his retirement letter, Pichette announced plans to “grab our backpacks and hit the road” with his wife of nearly 25 years, mentioning destinations such as the Himalayas, Mount Everest and the Great Barrier Reef. That should keep them occupied for a while.
It’s important to think about how you’ll find meaning and social structure in retirement, experts say. Heider had a client who had planned to sell his small business and retire at 55, but when the time came he thought to himself, “What the hell am I going to do all day long?” and pushed his decision out at least five years.