For some people, early retirement is a major goal. And it's easy to see why. After all, wouldn't it be nice to leave the stress of a job behind at a younger age and enjoy different activities and pursuits while your health is still in good shape?
But early retirement could also have financial consequences, so it's important to go in prepared. With that in mind, here are a few key moves you have to make if you're planning to wrap up your career at a younger age.
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1. Secure an income source that isn't your IRA or 401(k)
Saving for retirement in an IRA or 401(k) plan makes sense. That way, you get some sort of tax break -- either on your contributions or on your investment gains and withdrawals.
The downside of saving in an IRA or 401(k), however, is not being able to access your money without penalty until age 59 1/2. If you tap your savings early, you'll risk a 10% penalty on any money you remove. And when you're retiring early, the last thing you want to do is lose a chunk of your savings to an avoidable penalty.
That's why you must line up another income source if early retirement is on your radar. Not only will your IRA or 401(k) be off the table if you retire before age 59 1/2, but so will Social Security, since the earliest age you can claim benefits is 62.
That income source could be investments in a taxable brokerage account. It could be a heaping pile of cash in a savings account. Or it could be an income property. But it needs to be something.
2. Figure out what you'll do for health insurance -- and read up on your costs
One major challenge you might face as an early retiree is paying for health insurance. Buying your own coverage could get very expensive. But it's an expense worth paying for, because while your premiums might put a strain on your budget, out-of-pocket emergency room bills have the potential to do a lot more financial harm.
Read up on the cost of health insurance before you make the decision to retire early. Once you see what numbers you're looking at, you might have a change of heart -- or at least delay your early retirement another year or two so you can build up more savings.
3. Make sure you won't get bored
When you leave a job behind, there's no guarantee you'll be able to get it back if you change your mind. That could prove problematic if you retire early only to realize you're bored in the absence of going to work.
That's why it's so important to have a game plan for early retirement. You can spend your days volunteering, painting, golfing, or taking classes -- but know what you intend to do with your time. And also, make sure your income is robust enough to support your plans.
Early retirement should be a positive experience for you -- not a stressful one. If you make these moves ahead of time, you're more likely to wind up happy with your decision.
