“My investment portfolio consists mostly of stocks, bonds and mutual funds.” (Photo subject is a model.) – Getty Images/iStockphoto
I’ve been a longtime follower and reader of your column.
I am 39 years old and reside in Virginia. I have worked as a government employee for over 10 years. Based on a combination of real-estate investment and investments in the stock market, I quickly went from roughly $500,000 in 2018 to $1.3 million in net worth.
The “Trump bump” added an additional $75,000 in the last week. My portfolio consists mostly of stocks, bonds and mutual funds, and I do have a financial adviser who actively manages my accounts. I also have two thrift savings plans (TSP) through the federal government.
Taking all of the above into account, I have my eyes set on moving to either Italy or Spain next year, where the cost of living is roughly half of what it would be in the U.S. I can also take a year sabbatical and then return to the workforce if I get bored of traveling.
What are your thoughts on early retirement — and what would you do if you were in my position?
I suggest a “work” move or partial retirement. – MarketWatch illustration
Take your sabbatical and enjoy your European adventure.
You’re still young and, no doubt, you have a lot more fuel left in your tank. But if you have the opportunity to take a year-long break from your job, enjoy a taste of retirement to see if you like it, and decide what you want to do next with your life, go for it.
Retirement, as I’m sure many people reading this column will tell you, is not just about sitting back and smelling the roses — although that’s part of it for millions of (older) people — it’s also about having the financial freedom to decide what you want to do next.
We have a relatively short time on this planet, so you should live where you will be happiest. You may decide to move and, depending on your visa, also work in Europe, even part time (if you have a parent or grandparent or great-grandparent who was born in Spain or Italy).
The reason I suggest a “work” move or partial retirement: At 39, you’re building wealth and you’ve done well thus far. Employing the 4% rule — yes, that old chestnut — you could take $52,000 a year to live on, or just over $4,300 a month, which would be a good income in Spain.
If you start withdrawing money from your $1.3 million pot of stocks and bonds, you would be depriving yourself of future interest on those investments — also known as the magic of compounding, meaning you’re making money on the principle and the interest.
You would also have to take into account income tax, whether you have a property you could sell in order to buy somewhere in Spain. The property taxes are significantly lower in Europe and you would probably pay roughly $200 a month for health insurance.
But even assuming you only live until 80 and, let’s hope you live longer than that, you would have to stretch that $52,000 a year over the next four decades, which would require you to have roughly $2.1 million. You will pay a 10% penalty for an early withdrawal from your TSP.
That does not, of course, include your Social Security benefits. However, you are — statistically speaking — about to enter your peak earning years so you would receive a significantly smaller Social Security check if you retire early and move to Spain.
“If you stop work before you start receiving benefits and you have less than 35 years of earnings, your benefit amount is affected,” says the Social Security Administration. “We use a zero for each year without earnings when we calculate the amount of retirement benefits.”
“Years with no earnings reduce your retirement benefit amount,” it adds. “Even if you have 35 years of earnings when you stop working, some of those years may be low-earning years. When you file for retirement benefits, those years are averaged into your calculation.”
Put your happiness first, but financial security is a big part of that happiness.
