Last week, almost 150 million American adults left their houses to go to work. According to a Gallup poll, over 68% of these people -- or over 100 million -- were either "not engaged" in their work, or "actively disengaged." That's terrible, especially when you consider that over half of your waking hours are devoted to your job during a typical work-week.
That may help explain why the idea of retiring early appeals to so many people. Who doesn't love the thought of one day skipping the morning commute, sleeping in, and spending an afternoon exercising, talking with friends, and watching your favorite TV show?
But the life of an early retiree can have its own pitfalls and anxiety-producing states. Before you decide that the life of an early retiree is for you, there three big questions you need to answer. If you're not sure how you'd respond, you're probably better off waiting on early retirement.
1. Can you live on your retirement income?
Use the 4% Rule to figure out how much you can withdraw from your nest egg. The rule essentially says that you can withdraw 4% of your money in year one of your retirement, and increase that amount to match inflation every year thereafter.
For example, if you have $625,000 in retirement savings, you could withdraw $25,000 for living expenses in your first year.
However, since you are retiring early, you might have to pay early withdrawal penalties, and you may have to pay taxes if you are pulling from a 401(k) or Traditional IRA.
Answering this question is best tackled over a two- or three-year timeframe. Before retiring, spend a year or two trying to live on the budget you'll have in retirement. If that works, consider getting a part-time job while adjusting to retirement. Check and make sure the extra free time doesn't result in extra spending.
2. Have you considered increased medical expenses?
You might think you'll live forever, but if you don't account for healthcare costs, you could be in trouble. Remember, most can't benefit from Medicare until age 65.
And even then, Fidelity estimates the average retired couple will spend $220,000 on medical expenses between age 65 and their death.
The Centers for Medicare and Medicaid Services offers this visualization to jolt early retirees into reality, and all are in constant dollars.
Not only does medical spending increase dramatically later in life, but costs for those 85 and older grew by over 4% per year, outpacing inflation.
Other than simply making sure you have enough money to cover these expenses, there are three other strategies that can help early retirees pay for healthcare:
- As simple as it sounds, live healthy. Eat a balanced diet, exercise, and get enough sleep.
- Consider using a Health Savings Account (HSA) as a way to save and invest for future healthcare-related expenses. Money put in, growth, and withdrawals are all tax-free as long as it's used on qualified expenses -- a rarity within our tax code.
- Find out how to live on less. If your income from retirement funds is low enough, you could qualify for assistance through the Affordable Care Act.
3. Do you have at least three core pursuits?
While most pre-retirees say that their greatest concern entering retirement is a lack of regular income, those that have already crossed over to the other side say it's something different that keeps them up at night: a loss of social connections that were usually nurtured at work.
Moss found that those who have at least three core pursuits identified before entering retirement were far more likely to enjoy themselves after leaving the mandatory workforce. So, the question becomes: Do you have three such pursuits? If not, "retirement" will likely be so boring you'll want to gouge your eyes out -- and nobody wants that.