One of the first steps in creating a retirement plan is deciding when you'd like to retire. It's an essential piece of the puzzle because it dictates how many years of savings you'll need. The average near-retiree -- someone planning to retire in the next 10 to 20 years -- is waiting for age 65 to tender their resignation for the final time, according to an Empower Institute survey. Some people plan to retire even later than this if they got a late start on retirement savings.

Working longer is a solid plan if you can make it happen. The trouble is, you can't be sure you'll be able to. Even those planning to retire at 65 might be in for a surprise. The same survey found that among current retirees, the average planned retirement age was 63, but the average actual retirement age was 59. Some of these early retirements were probably by choice, but others were likely forced out of the job by an illness or injury, a job loss, or a family emergency.

A worried older couple looking at documents in front of a laptop

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It's difficult to be prepared for an unplanned early retirement, but you should at least try to come up with a backup plan in case you're forced to exit the workforce sooner than you expected. 

The cost of an unplanned early retirement

Consider the following scenario: You plan to retire at 65, and you think you'll live until 85. You anticipate spending approximately $50,000 per year with a 3% annual adjustment for inflation. That gives us a total retirement cost of about $1.34 million. You won't have to pay for all of this on your own because you'll get some money from Social Security. If you claimed the average Social Security benefit of $1,456 per month for 20 years, that would knock about $350,000 off your retirement total, leaving you to save roughly $1 million on your own. 

Now let's imagine you were forced to retire about four years earlier than planned, like the retirees in the Empower Institute survey. Now, instead of your retirement savings lasting you 20 years, the money has to last you 24 years. If you already had $1 million in savings, you'd now only be able to spend about $41,667 per year, plus whatever you got from Social Security, instead of $50,000 per year plus Social Security. However, you also might not have $1 million yet because you thought you'd have another four years to save up for it. That means you may have to get by on even less than $41,667 per year.

You'll probably have to give up some of the things you wanted to do in retirement, such as travel. If you end up living longer than you expected, which is always a concern with any retirement plan, your budget might get even tighter. Plus, if the reason you're forced to retire early is because of an injury or illness, you could drain your retirement savings even faster as you pay for your medical bills.

Planning for an early retirement

Planning for retirement is tricky in general because of all the variables, but planning for an early retirement is even more complicated because you don't know if it'll happen, when it'll happen, or why it'll happen. There isn't even a good way to estimate it. So, the best thing you can do is to plan for the worst-case scenario.

When crafting your retirement plan, assume you're going to live a long life -- at least 90 years -- unless you have good reason to think you won't live that long, like a terminal illness. You should also prepare as if you were going to have a long retirement -- think 30 years or more. Estimate what you'd need to cover your basic living expenses for that amount of time, and when in doubt, build in a cushion. You can never be too careful, and if you don't end up using all of that money, you can always pass the extra along to your heirs. If you reach your chosen retirement age and don't feel ready to retire yet, you can keep working, but at least you'll be financially prepared if you do have to leave your job.

Saving as much as you can while you're young will make hitting your savings target a lot easier because your early contributions will have more time to grow before you have to begin drawing upon them. Try to trim back your budget if you can so you can put more money toward retirement savings. You're allowed to contribute up to $19,500 to a 401(k) in 2020, or $26,000 if you're 50 or older. You can also put up to $6,000 in an IRA, or $7,000 if you're 50 or older.

You'll also need a backup plan in case you are forced into early retirement before you're financially ready. If it's because of a job loss, you might just be able to find another job and continue working. If it's because you need to take care of a sick family member, see if you can work part time or find a remote job that lets you earn income and be there for your loved one.

The worst-case scenario is a costly illness or injury that requires frequent doctor visits or in-home care. Working in any capacity probably won't be an option then, and you'll also have medical expenses draining your savings even faster. You'll have to limit your spending to the essentials, and even then, you might struggle financially. 

Having good health insurance in place can help, and so can saving in a health savings account (HSA) if you're eligible for one. Money you put in an HSA reduces your taxable income this year, and it's tax-free if you use it for medical or dental expenses. If you don't end up needing it for medical purposes, you can withdraw the money for non-medical purposes after 65, though you'll pay taxes on it. You can technically make non-medical withdrawals before 65 too, but you'll pay a 20% penalty, so it's not worth it.

Individuals with a health insurance policy that has a deductible of $1,400 or more may contribute up to $3,550 to an HSA in 2020, and families with policies having a deductible of $2,800 or more may contribute up to $7,100. Adults 55 and older are allowed an extra $1,000 in catch-up contributions. Once you enroll in Medicare, you're no longer eligible to contribute to an HSA, but you can still use your existing funds.

One of the hard truths about retirement planning is that you'll never know if you're doing it right. You don't know what life is going to throw your way. But trying to plan for an early retirement is better than just praying it won't happen. Build an extra cushion into your retirement plan so you can at least feel confident that you gave it your best shot.