If early retirement is a goal, you’re no doubt in good company. Many people dream of exiting the workforce in their late 50s or early 60s and enjoying that newfound freedom while their health is still relatively strong.
But if you’re serious about retiring early, you’ll need to make sure you’re in a solid position to do so. And that means coming up with an answer to these important questions.
1. Can I afford a hit to my Social Security benefits?
Retiring early doesn’t always mean claiming Social Security early. But if that’s part of your plan, then you’ll need to make sure you can handle that financially without causing yourself too much long-term stress.
You’re entitled to your full Social Security benefit based on your earnings record once you reach full retirement age (FRA), which is 66, 67, or somewhere in between, depending on when you were born.
You can sign up for Social Security as early as age 62. But for each month you claim benefits ahead of FRA, they get reduced on a permanent basis. And filing at 62 with an FRA of 67 will mean slashing that income stream by 30%.
If that’s a hit you can afford for the rest of your retirement, then go for it. Otherwise, you may need to either rethink your early-retirement plans, or otherwise come up with a way to cover your near-term costs without having to file for Social Security right away.
2. Have I figured out how much annual income my savings will give me?
You might be looking at a $2 million nest egg and thinking, “Sure, this is enough for an early retirement.” But when you crunch the numbers further, you might realize that on an annual basis, you’re looking at less income than expected.
If you’re going to be retiring early, you may need to plan on having your savings last a minimum of 30 years. And so you may need to stick to a conservative withdrawal rate of 3% in your retirement plan, depending on how it’s invested. That, in turn, leaves you with an annual income of $60,000.
If that income works for you, then by all means retire ahead of your peers. But if you were hoping to get more out of your nest egg each year, then you might need to work a bit longer so you’re not tapping your IRA or 401(k) just yet.
3. Do I know how I’ll get health coverage?
Your early-retirement plans might include things like traveling, mountain climbing, and other activities that could put a strain on your body. And so it’s important to have good health coverage in place as you enter this exciting stage of life.
If you retire too early, though, you won’t be able to get that coverage through Medicare, since eligibility doesn’t begin until age 65. It may be that you have a spouse who’s still working — one whose health plan you can join for a couple of years. That could end up being a cost-effective solution. But if you don’t have the option to jump onto a spouse’s plan, then you’ll need to make sure you can swing the cost of buying your own insurance.
It’s never a good idea to not have health insurance. But it’s an especially dangerous idea as you age, since health issues do have a tendency to crop up later in life.
Early retirement might be a dream of yours, and there’s absolutely nothing wrong with pursuing it. But you do want to make sure you’re in a good place to exit the workforce on your preferred timeline. Running through these questions will help you make that call — and help you approach early retirement with a lot more confidence.
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