People of all age groups think about retiring early – not only those at the end of their careers or in their older years. Generally speaking, early retirement is a dream for many, to have the freedom to pursue passions, travel, and spend more time with family. But, getting to that point means careful planning and consideration of several key things. If you’re thinking about retiring early, here’s a guide to help you think through your options and make informed decisions. No matter who you are; rich, poor, old, young, etc., these are really crucial things to weigh.
1. Financial Readiness
Early retirement means stretching your savings over a longer period, which can be risky without proper planning. The longer your retirement period is, the more financing you’ll need.
Think About These:
Savings and Investments: How much will you need for your retirement years, factoring in inflation and market fluctuations?
Withdrawal Strategy: How will you decide how much you may need during your retirement each week/month/year?
Diversified Income Streams: What options can you use to get income from varied sources after you retire? With inflation always an unpredictable concern, you may need ways to supplement your retirement savings.
Tips: Talk to a financial planner specializing in retirement who can tailor a plan to your needs, talk to friends and relatives who are retired and ask what their strategies are, including what they’ve done or wish they had done. Consult with retirement and senior-focused organizations like AARP. They can give you great advice about how to prepare financially – often for free! Set a sustainable monthly withdrawal rate from your retirement accounts (the 4% rule is a common guideline but may not work for everyone). It should be something you can live with and stick to. Consider rental properties, side businesses, or dividend investments for extra income.
2. Health Care Costs
Retiring before qualifying for Medicare at age 65 can be expensive – very expensive! One never plans to get sick, injured, or disabled, but – SURPRISE! No matter what your demographic is, it happens to the best of us. Will you be prepared?
Think About These:
Health Insurance Coverage: What kinds of health insurance will you be able to rely on?
Health Savings Accounts (HSAs): Will you have enough to supplement healthcare that your basic insurance policies don’t cover?
Tip: Budget for rising healthcare costs, including potential long-term care expenses. Research private health insurance or investigate health-sharing groups and organizations for what you may need. If you’re eligible, maximize how much you contribute to HSAs while you’re still working. It will be far more difficult to do that when your regular income stops. Additionally, find out what other healthcare plans may be available for you to start investing in now that may make future costs easier to handle.
3. Lifestyle Planning
Retirement is more than just a financial landmark. It’s a lifestyle change.
Think About These:
Daily Routine: How will you spend your time once you no longer have a 9-to-5 job? Sure, you may “have fun” some of the extra time, but what about all the other added “free time”? Many people don’t/can’t always have fun. Is that OK?
Personal Fulfillment: Will what you do with your new-found “freedom” be enough to keep you satisfied without having a regular routine?
Travel Plans: Remember; you won’t be receiving that regular paid 2-week vacation anymore. It will be ALL on you.
Tip: Try taking a “mini retirement” or extended vacation to test what retirement might feel like. Plan simple, daily activities to fill your time. Explore hobbies, volunteer opportunities, and social activities to keep a sense of purpose. Factor in travel expenses in your retirement budget if you plan to explore new places when you’re retired.
4. Social Security and Pension Timing
Retiring early often means delaying Social Security or pension payouts.
Think About These:
Reduced Benefits: Understand how early retirement can reduce your Social Security payments. How much might you lose compared to retiring later? Also, although it is unlikely, what options might there be if Social Security benefits cease as some have suggested could happen?
Pension Rules: Check your company’s pension plan for early withdrawal penalties. How much might this cost you?
Tip: Run scenarios using Social Security calculators to see how delaying benefits impacts your income and planned budgeting. Consider other options to relying on Social Security benefits like personal savings and investments, continue working, freelancing, entrepreneurship, employer and/or private pensions, family and community support, using real estate assets, other government and private assistance programs, lifestyle adjustments – reduced spending or moving somewhere less expensive, and insurance-based solutions like cashing life insurance policies or converting policies into annuities.
5. Debt Management
Carrying debt into retirement can get in the way of your financial stability.
Think About These:
Mortgage and Consumer Debt: Will you be able to pay off high-interest debts like credit cards and loans when you retire? Debts don’t go away or get reduced just because you’re retired.
Debt-Free Lifestyle: Adjust spending habits now and avoid building up new debts.
Tip: Create a debt repayment plan as part of your retirement strategy and start now. You may need to consider delaying retirement to bring down high debt balances while you have a regular income.
6. Inflation and Economic Risks
Living on a fixed income makes inflation a significant risk.
Think About These:
Investment Strategy: Do you have enough income generating investments when you stop getting a regular paycheck to handle potentially increasing inflation?
Emergency Fund: Will you be prepared for handling emergencies, including the BIG ones? Of course, emergencies by definition are often sudden and unexpected, so will you be ready for them?
Tip: Keep a part of your investments in growth-oriented assets to fight inflation. Regularly review and rebalance your portfolio to align with changing market conditions. Keep a liquid emergency fund to cover unexpected expenses.
7. Estate and Legacy Planning
Ensure that your financial affairs are in order for your heirs. Of course, what happens with your finances after you “pass away” is not the most easy or pleasant issue to address and discuss with others. Avoiding or putting off planning for that, which most people do, can make it very difficult when the inevitable happens. However, being prepared will make all the difference for others when that time comes and rest assured, like taxes, it will!
Think About These:
Wills and Trusts: Do you have a will or trust prepared? This is a question to consider whether you’re retiring or not at any time in your life.
Beneficiary Designations: Do your accounts and insurance policies include legal protections like naming beneficiaries or specifying what you want to do after your passing?
Charitable Giving: Do you want to be able to support charities or causes after retirement?
Tip: Work with an estate attorney to be sure your documents are legally solid. Create an estate plan. Many major financial institutions, for example, Fidelity Investments recommend updating your estate plan and review and revise it every 3 – 5 years, especially as you have significant life event changes. Check retirement accounts and insurance policies to make sure they reflect your wishes. Having a will and trust will tremendously help to avoid great legal problems like court probate, which can be very difficult to get through. Also, plan and include in your budget how you want to support causes important to you.
Final Thoughts
You don’t have to be a particular age or stage or your life to consider early retirement – but there’s lots to consider. Early retirement can be incredibly rewarding but requires thoughtful preparation and planning. By addressing these key factors, you’ll be better prepared to enjoy a secure, fulfilling, and stress-free retirement. Whether you’re thinking about early retirement or not, the considerations are largely the same. The main difference is that the importance of addressing them is greater when you purposely shorten the time you have to prepare while you’re still earning a regular income.
Have you thought about early retirement? What other challenges or questions are on your mind about retiring early? Please share your thoughts in the comments and subscribe (we guarantee, spam-free)!
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