Is retiring early too risky?

Still, you should consider several obvious stumbling blocks.

Can a bad economy destroy the value of a retirement nest egg? Gnuse cautions against being lulled into a false sense of security by projections of average returns. An average doesn't take into account the possibility that there will be several years of below-average returns that could force any retiree to dip into his investment principal. Returns can "revert to the mean later on," Gnuse says, "but by then there may not be enough assets to revert."

Will inflation cut down your purchasing power? Watch out for the ravages of inflation. A portfolio can earn handsome returns, but if the cost of living increases at a faster clip, retirement can be jeopardized. So you will need assets that will grow over time and provide a hedge against inflation.

How reliable is your income? Weigh this carefully. The future viability of Social Security is an open question. And company pensions and retirement savings plans are not always the bedrock upon which a retirement can be built. So not only do you need assets that will grow, you also need assets that won't shrink -- bonds, bond funds and similar income-generating investments.

To capture "the vagaries of what the real world throws at us," the Schaumburg, Ill., firm of Balasa Dinverno Foltz & Hoffman runs what Mark Balasa calls a sophisticated "Monte Carlo" analysis for clients.

Using a Monte Carlo simulation and other modeling tools, Balasa is able to tell prospective retirees the probability -- given their assets, savings rates, and ability to generate income -- that they'll achieve the retirement they seek.

He says in cases where the probability is low -- 60%, for example -- "We say, gosh, either you need to work a few more years, go for a riskier portfolio with a higher rate of return, or you need to die sooner."

Balasa also recommends considering a number of other factors in any early retirement scenario:

• The age for taking full Social Security benefits is increasing. Those born before 1938 reach full retirement age at 65; those born later have to wait longer.

• Medicare benefits begin at age 65, so anyone retiring before that age may be on the hook for the cost of basic health insurance.

• Avoiding a 10% penalty for early withdrawal of IRAs and pensions requires knowledgeable planning -- and the use of such things as the 72t election, which permits a fixed amount to be withdrawn at regular intervals before the age of 59 1/2.

• Be aware of a portfolio's "tax efficiency." The lower an asset's cost basis, the worse the tax consequence when it is sold.

A final factor that must be taken into account is the possibility of failure. What if you retire and then, for whatever reason, can't make ends meet? How do you un-retire?

One strategy is to maintain contact with the work world by lining up part-time employment during retirement. A majority of boomers -- nearly eight in 10, according to the AARP survey -- already plan to do that, whether out of perceived economic necessity or simply for fun.

A variety of resources exist -- private and not-for-profit -- to help retirees find work. A good place to start is AARP's Work Options home page.

Even if all of this rumination and calculation yields an unfavorable result -- a finding that early retirement simply is out of reach -- it will not necessarily have been in vain.

A substantive benefit of such exercises, McNair says, "is finding out what you need to do to get in the ballpark."

Philipp Harper writes about business, the economy and politics for national and regional publications.

Updated Aug. 14, 2008

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