A lot of things come around sooner than we like, be it Tax Day or a birthday.
But early retirement? That can be fantastic, as long as you’ve done the critical analysis to make certain that you truly are ready before retiring.
Maybe you’ve already assessed your financial and emotionally readiness to retire, and your portfolio is stronger than you thought. Is it possible that you’re in the right place, right now – maybe even years before you hit the standard age of 65?
How Young Is Too Young?
If you’ve not already factored a retirement age into your calculations, it’s vital to know that this is one of the most important variables.
Getting out of the workforce early means you’ll stop contributing to 401(k) plans and IRAs, and there’s more at play, including:
- A smaller Social Security check down the road, as it’s based on your earnings for the last 35 years.
- An unfunded gap between your retirement date and the point you can draw retirement pay, Social Security benefits, and qualify for Medicare.
- The need for a bigger nest egg to cover regular cost-of-living expenses for those extra years you’re not drawing a salary.
None of these will definitively quash your early retirement dream, but they must be considered as part of your overall planning.
Can I Afford Early Retirement?
The money you will need to ensure a comfortable retirement will vary by person. In short, what will your lifestyle cost? That’s something you can determine through budgeting. Use your current expenses and spending as a guide, and don’t forget you’ll need big-ticket things like appliances or a new car from time to time. A simple retirement calculator can help.
It’s easy to get overwhelmed, but don’t worry about mapping it out to the penny. There are a lot of unknowns, including one big one: how long to plan for. You can use averages – the U.S. Census Bureau tells us that a 65-year-old person will live an average of about 19 more years, for instance – but it’s better to plan for a longer time and higher expenses than to face a shortfall later.
There are other factors to consider as well:
- Are you ready to say goodbye? You may very well be earning more now than you ever have in your life. And as difficult as you may find it to shake hands and say farewell to coworkers, bosses, and friends, it may be just as hard to let go of a few years of your top salary.
- The end of contributions. Similarly, if your company offers you a pension, you’ll be opting out of contributions when you’re earning the most. This effectively trims the amount of your pension. Contributions to your 401(k) and IRA will stop, too, and if you need to draw from those funds before age 59½, you’ll pay a 10-percent penalty.
- What about health care? Medicare will not help to cover health care until you’re 65. Unless your retirement plan includes health care or your spouse remains in the workforce, you’ll need to plan for insurance coverage. Right now, you can take advantage of the Affordable Care Act for coverage, but of all the uncertainties you’re dealing with, this may be one of the least certain long-term.
- What age will you draw Social Security? Maybe you’re counting on drawing Social Security at age 62. You certainly can, but you should first know that you’ll be getting a smaller check than if you waited, and the reduced amount is a significant 25-30% per month, depending on your birth year. Waiting 4 or 5 more years will give you the biggest payment. There’s no right or wrong decision without knowing exactly how long you’ll live, and there are pros and cons to taking payments both sooner and later.
These issues can compound, so you can think of it this way: Retiring early means, on average, needing to have enough money for a longer period of time. Drawing Social Security early means you’ll be receiving less money to live on each month. And, depending on your lifestyle, that may mean you you’ll draw down money from savings more quickly – potentially losing an additional 10% if you take it from your 401(k) or IRA.
The net effect is that your assets will diminish faster when you actually need them to last longer. And if inflation outpaces plan earnings, that money has effectively shrunk even more.
Don’t Go It Alone
You can see why retiring early is a difficult decision. But don’t lose heart.
Even if the numbers seem out of reach, you may still be able to start retirement ahead of schedule by adjusting your retirement budget expectations or setting the date just a little further down the road. The easiest way to pull those numbers within reach is to work another year or two. You’ll not only put more in the bank, but also into your IRA and 401(k), pension, and Social Security – and reduce the number of those unfunded gap years.
Financial reporter Kristin McKenna recently wrote for Forbes: “At any age, you’ll want to make sure you’ve fully thought through your retirement plan before retiring. Retiring early requires even more planning.”
And the more planning you need to do, the more you may find it’s beneficial to have guidance from financial experts. Schedule a consultation with us today, and we can start moving you to retirement, possibly early, but definitely with a solid plan for your financial future.
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