Early retirement conjures up visions of relaxation, hobbies, and time with family, but that picture hides some unpleasant financial realities that many early retirees deal with. That's not to say it's impossible to enjoy a comfortable early retirement, but you'll need a solid financial plan to help you remain financially secure through the decades to come.
There are three problems exclusive to early retirees that you need a plan for if you're thinking about exiting the workforce in your 50s or sooner. We'll talk about each of them below and how you can prepare.
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1. Longer retirements cost more
Yes, I'm stating the obvious here, but it's important not to underestimate this. If you spend roughly $50,000 per year in retirement and you retire at 55 instead of 65, that's an extra half a million dollars in living expenses you'll need to come up with. It's no small feat.
A large nest egg is critical here, but so is a detailed plan that outlines how much you'll need to save and how you'll safely withdraw your cash in retirement to ensure it lasts. Guessing isn't going to cut it. You need a personalized approach based on your goals and timeline.
Set aside some time to come up with a retirement savings plan if you haven't already done so, then check in with yourself at least annually afterward or whenever you experience a major financial shake-up. Make small adjustments as needed over time so you're not scrambling to make bigger changes on the eve of your retirement.
2. Accessing your savings could be more difficult
The government generally charges you a 10% early-withdrawal penalty if you take money out of your retirement accounts before age 59 1/2. There are exceptions for things like first-home purchases or large medical expenses. But if you hope to avoid extra taxes, you'll need to plan your withdrawals for the first phase of your retirement carefully.
There are a few ways you can approach this. Here are some suggestions:
- Use Roth funds if you have them: Roth IRAs enable you to withdraw your contributions tax-free and penalty-free at any age, as long as you've had the account for at least five years. This doesn't apply to earnings.
- Keep some money in a taxable brokerage account: Taxable brokerage accounts don't offer the same tax perks as retirement accounts, but you can withdraw your cash whenever you'd like without penalties.
- Employ the Rule of 55: If you'll be at least 55 in the year you retire, you can make penalty-free withdrawals from your most recent employer's 401(k) under the Rule of 55.
- Make Substantially Equal Periodic Payments (SEPPs): SEPPs enable you to withdraw retirement savings early without penalty, but you have to make scheduled withdrawals of a certain amount every year for at least five years or until you turn 59 1/2, whichever is longer.
You could also employ a combination of these strategies if you prefer.
3. You won't have access to Medicare right away
Medicare is only for seniors 65 and older, so those retiring sooner will have to cover their health insurance costs another way. You can join your spouse's employer-sponsored health insurance if they're still working or purchase your own policy. If you choose the latter, you'll have another cost to budget for in the early years of retirement.
Whatever you do, don't skip health insurance. It's not worth the gamble, even if you're a pretty healthy person. Injuries and illnesses can crop up unexpectedly, and a single emergency room visit could cost tens or even hundreds of thousands of dollars in some cases. That could completely derail your retirement plans. It's better to opt for a predictable payment.
Hopefully, you've already thought about these issues but if not, now is the time to revise your retirement plan. Consider delaying your retirement if you need to give yourself additional time to save the money you'll need. And don't be afraid to get a second opinion if you're not sure your plan is feasible.
