For many workers, the idea of retiring early is a dream they've pursued throughout their careers. Being able to have more time to do the things you want is a goal that nearly everyone has.
However, in order to make early retirement work, it's important to understand the potential difficulties involved and to address them while there's still time. In particular, if you want to retire early without ending up in a difficult situation, you'll want to make sure that you have three key issues dealt with before making a decision you might regret later.
1. Figure out where your money will come from
Obviously, retiring early doesn't make sense if you don't have the financial resources to make ends meet for the rest of your life. However, even those who do have ample savings set aside for retirement still face the challenge of ensuring that they'll be able to use their financial resources when they want. That's not always the case, as you can see below:
- Pensions are relatively rare, and even those who qualify often can't tap them until they reach minimum ages that are well above where you might want to retire early.
- Most retirement accounts, such as IRAs, impose penalties on withdrawals made before age 59 1/2 unless they meet certain limited exceptions. The same is true with 401(k) accounts, although a younger 55-year-old age limit applies to your final employer's 401(k) plan if you decided to leave work no earlier than the year in which you turned 55. Moreover, withdrawals from these accounts often carry tax liability with them as well.
- Social Security benefits aren't available to most recipients until they turn 62.
Before you retire, it's important to have a convenient set of funding sources that you can draw from at will. That includes maintaining regular brokerage accounts in addition to IRAs and 401(k) accounts, looking into the possibility of taking lump-sum pension payments, and using the substantially equal periodic payment exception for retirement account withdrawals to avoid penalties. That way, you'll be able to get the money you need when you need it.
2. Decide how you'll bridge the healthcare gap
The main challenge for early retirees is protecting their health. Health insurance is one of the most important perks that most employers offer, and most Americans rely on employer-provided insurance for their healthcare coverage. However, only a small number get to keep such benefits as retirees. Meanwhile, Medicare doesn't kick in until age 65 for the vast majority of its participants. That requires you to find ways to deal with the time in between.
Several options are out there, but they won't work for everyone:
- If you don't retire too early, continuation coverage under COBRA can cover a relatively short period of 18 to 30 months between retirement and when other coverage kicks in.
- Those who have a spouse who's working can often qualify for family coverage.
- Individual healthcare policies are generally available, but they can be expensive, especially for those in their 50s and 60s.
If you're married and have a spouse in the workplace, then getting family coverage through your spouse's employer is often the simplest move. Continuation coverage under COBRA is available to early retirees, but eligibility is only for a relatively short period of time, typically 18 to 30 months. Individual coverage under the Affordable Care Act is also an option to consider, but it can be costly, and eligibility for potential subsidies will depend on family size and total family income. Medicare doesn't kick in for most people until age 65, and for many, that's the main motivation for waiting until then to retire.
3. Come up with a strategy for staying active socially
Many people look forward to quitting their jobs only to discover that they miss their work when they retire. For many, the reason is that they've spent so much of their lives with the people they work with that falling out of that ready-made social circle is a big challenge. If you're not careful, it's easy to fall out of touch with old coworkers, leaving yourself feeling lonely and potentially leading to more serious mental-health challenges.
The solution typically involves a mix of old and new friends. You can't expect old coworkers to have the flexibility that an early retirement schedule offers, so making new friends in similar situations is useful. However, keeping connected with your old friends is also crucial as a support mechanism, as they often know more about you than anyone else. Before you retire, look at the available options in your area, and work to figure out exactly what you want from your social life in early retirement.
Early retirement is worth it
It's not easy to overcome these challenges, but it's also not impossible. By searching for solutions to these potential downsides of early retirement before it's too late, you'll have a much greater chance of having the early retirement that you've always dreamed about having.