Retiring early can sound like a dream, but there's a lot more to think about than just how to fill all your free time. It can be done, but there are some special challenges. Here are three things you need to prepare for if you plan to make an early departure from the workforce.
1. Your savings has to last a lot longer
The biggest difficulty with retirement planning at any age is that you don't know exactly how long your savings has to last. Maybe you'll only live until 70, or perhaps you're one of the lucky few who make it to 100 or beyond. You can estimate your life expectancy based on your personal and family health history, but you can never be certain.
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Those who underestimate the length of their retirement could find themselves in serious financial trouble down the road, and this is especially true for those who retire early. If you retire at 50 and live until 100, that's 50 years of retirement. It's not easy to estimate how much money you'll need during that time, especially since you don't know what health concerns or emergency costs may come up.
The best way to reduce the risk of running out of savings is to plan for a long retirement. Expect to live until at least 90, unless you have good reason to believe you won't live that long.
You may also want to develop a backup plan if you notice yourself burning through your savings more quickly than anticipated. Maybe that means cutting back on travel or discretionary purchases. Or maybe it means finding a part-time job to help you cover some of your costs. Figure out what will work for you.
2. You may have trouble accessing your retirement savings early
Even if you have a substantial nest egg, you may have trouble accessing it if you retire before age 59 1/2. The government typically imposes a 10% early-withdrawal penalty if you take money out of your retirement accounts before this age, though there are ways around this.
If you have Roth retirement accounts, you can can access your personal contributions tax-free at any age, though you could still owe taxes and penalties if you withdraw any earnings before 59 1/2 without a qualifying reason.
If you're turning 55 or older this year, you may be able to take advantage of the Rule of 55. This says if a worker quits their job in the year they turn 55 or older, they get penalty-free access to the 401(k) associated with their employer. It doesn't give you penalty-free access to your other retirement accounts, though.
There's also substantially equal periodic payments (SEPPs). If you choose this route, you can access your retirement savings early, but you must agree to withdraw a certain amount of money each year for five years or until you turn 59 1/2, whichever is longer. If you fail to make all your required withdrawals, the government will charge you the 10% early-withdrawal penalty retroactively.
3. You may have to pay for your own health insurance
Retirement usually means saying goodbye to your employer-sponsored health insurance. That's not a problem for adults 65 and older who can apply for Medicare, but if you retire earlier than this, you'll need to find your own health insurance.
You don't want to skip health insurance, even if you believe you're a pretty healthy person. A single emergency could cost you tens of thousands of dollars, and that could easily derail your plans for early retirement.
There are a few ways you can get coverage. First, see if you're able to stay on your former employer's health insurance for a while longer. This is known as COBRA coverage. However, you'll have to pay the entire plan premium on your own, and this can make it considerably more expensive than what you paid while you were an employee.
If you're married and your spouse is still working, you may be able to get on their insurance plan. Or you could look into purchasing an individual health insurance plan, either privately or through marketplaces established under the provisions of the Affordable Care Act.
Whichever method you choose, make sure you budget for the cost of this insurance in your retirement plan. If you've forgotten to do this, you may want to put off retirement for a few months or years until you've saved enough to cover the cost of your health insurance.
Retiring early is great if you can manage it, but it takes careful planning to get there. You don't want to rush into retirement only to return to the workforce a few years later because you weren't financially ready. If you haven't already done so, take some time to consider the three issues above and make sure you have a plan to handle them before you hand in your letter of resignation.
