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3 Simple Steps to Retiring Early

By Katie Brockman – Dec 2, 2019 at 10:00AM

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It's not easy to retire early, but by following these steps, you'll be well on your way to retiring as soon as possible.

Today's employees are working longer than ever, with a good portion of Americans working into their 70s or beyond. In fact, 92% of workers currently in their 40s say they expect to continue working part-time in retirement, according to a survey from TD Ameritrade, and 52% of those in their 70s are still working in at least some capacity.

While that retirement strategy works for some people, others are counting down the days until they can leave their jobs for good and start relaxing. If you're itching to retire as soon as you can, early retirement might be a major life goal to strive for.

Exactly what defines "early" retirement will differ for everyone. For some workers, it means retiring before age 65 while for others, retiring early means in their 40s or 50s. Regardless of the age at which you want to retire, there are a few steps you can take to set yourself on the right path.

Couple looking out on the horizon

Image source: Getty Images.

1. Know how much you'll be spending each year

Knowing how much you'll be spending in retirement is the foundation of building a strong retirement strategy. When you know what you're spending each year, you can better estimate how much money you'll need to save to last the rest of your life. Then, with that number in mind, you can determine the amount you should be saving now to reach that goal by your desired retirement age.

Rather than taking a wild guess at how much you'll spend each year during retirement, really think about your future costs. You don't need to predict your expenses down to the penny, of course, but consider how they'll change compared to what you're spending now.

Do you plan to travel a lot in retirement? Do you have a long list of home renovation projects you want to tackle? Or do you plan to spend most of your time catching up on your reading and enjoying time with family? Your costs in retirement could be similar to what you're spending now or vastly different. But you won't know until you create a rough budget to estimate your future spending.

Once you have this number in mind, subtract the amount you expect to receive from other sources of income (Social Security benefits, a pension, etc.) to figure out how much of your retirement income will need to come from your savings. Keep in mind, though, that you can't claim Social Security until you're at least age 62, so if you retire before that, you won't be able to depend on that income quite yet. Next, run your information through a retirement calculator to see how much you should aim to save by retirement age. From there, your results will give you an estimate of your overall retirement savings goal, as well as what you'll need to save each month to achieve it. Also, remember that if your employer offers matching 401(k) contributions, those should factor into your monthly saving goal too -- meaning you may not have to save as much on your own as you think.

The earlier you get started saving, the better off you'll be. When you start saving early, compound interest is on your side. In other words, you can save less each month and still build a strong and healthy retirement fund.

2. Have a plan in place for covering healthcare costs

Nobody particularly likes thinking about healthcare costs, but if you don't have a plan for how you'll cover them, they could quickly drain your retirement fund. You won't be eligible to enroll in Medicare until you turn 65, so if you retire before that, you'll need another form of health insurance.

One option is to enroll in COBRA coverage, which will allow you to stay on your former employer's insurance plan even after you leave your job. However, COBRA insurance can be incredibly expensive and it doesn't last forever.

When you're enrolled in insurance as an employee, your employer covers the bulk of the annual costs. The average annual premium for family health insurance coverage in 2019 is roughly $20,000, according to a recent report from the Kaiser Family Foundation. Of that amount, employees only paid around $6,000 per year in premiums -- the rest was covered by the employer.

With COBRA insurance, though, your employer won't chip in to help pay for coverage. In other words, if you enroll in COBRA insurance, you're responsible for the full $20,000 per year. You're also only able to stay on COBRA insurance for up to 18 months, so if you retire before age 63 1/2, you'll need to find another form of insurance before you can enroll in Medicare.

Another option is to buy insurance through the Affordable Care Act marketplace, although plans may be expensive. You can find plans with lower premiums, but you'll typically face higher deductibles and out-of-pocket maximums. If you have health issues and visit the doctor regularly, those costs can quickly add up.

Before you choose to retire early, make sure you've budgeted for health insurance. One way to do that is to invest in a health savings account (HSA). You have to be enrolled in a high-deductible healthcare plan to be eligible (meaning your deductible is at least $1,350 for individuals or $2,700 for families), but you can invest tax-deductible dollars, let your money grow over time, and then withdraw the money tax-free as long as it goes toward eligible medical expenses. 

3. Create a Social Security strategy

You can't begin claiming Social Security benefits until at least age 62, so if you plan to retire earlier than that, you'll need to get by on other sources of income. But it's also important to think about whether you want to claim Social Security at age 62 or wait longer to earn extra money each month.

Although you can start claiming benefits at 62, your checks will be reduced by up to 30% by doing so. If you want to receive the full amount you're entitled to each month, you'll need to wait to claim until your full retirement age (FRA) -- which is either age 66, 67, or somewhere in between. If you wait a little longer (up to age 70), you can receive extra money each month on top of your full amount -- up to 32% more if you have an FRA of age 66 and you wait until age 70 to claim.

There's no right answer for which age you should start claiming because it's a personal decision that depends on your unique situation. If you need the money sooner rather than later, claiming at age 62 might be best. If you expect to live a very long life and are worried you'll run out of savings, waiting to claim until age 70 could be beneficial to take advantage of those bigger checks for the rest of your life.

It's also important to know what benefits you're eligible for and to create a Social Security strategy with your spouse. You may be entitled to receive other types of benefits besides the standard retirement monthly checks -- such as spousal benefits, survivors benefits, and divorce benefits -- and it's up to you to know what you're eligible for since the SSA typically won't notify you.

You may also want to strategize with your spouse to decide who should claim their benefits when. For instance, the lower-earning spouse may choose to claim earlier to start earning extra income right away in retirement, while the higher-earning spouse might delay benefits to earn those bigger checks. No matter when you choose to claim, make sure you've thought about your decision to ensure you're making the most of your benefits.

Retiring early isn't easy, but it can be one of the best decisions of your life. Before you leave your job, though, make sure you've thought about major factors like how much you should save, how you'll cover healthcare costs, and when you'll claim Social Security benefits. If you've done your homework and prepared the best you can, early retirement can be a dream come true.

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