Three Things You Need to Know If You're Considering Early Retirement
Early retirement sounds great: We make plans to enjoy the rest of our lives without having to work—unless we want to do so—and to spend time with family and friends, explore new hobbies, and maybe even travel the world. An early retirement also sounds like a sign of true financial security, which many of us would appreciate.
"Retirement timing is often different for everyone as it should be based on your personal goals and unique financial situation. That said, early retirement can mean many different things," explains Kelli Keough, head of digital and client solutions for U.S. wealth management at JPMorgan Chase. "More Americans 65 and older are staying in the workforce, while members of the F.I.R.E. movement (financial independence, retire early) aim to retire in their 30s or 40s. Some people define retirement age as the age when you become eligible for Social Security. There is no one-size-fits-all timeline for retirement."
Retire Early, Reduce Some Benefits
Retiring early can reduce some of the your benefits. "If you retire before the age of 67, your monthly Social Security benefits are 30% less than they would be if you withdrew at 67," says Keough. "And for each year you postpone retirement between the ages 67 and 70, you receive an additional 8% in your monthly Social Security benefit." So, if Social Security figures into your after-retirement budget, you may want to wait until you get a higher benefit before leaving the workforce.
You also may have to penalties for withdrawing from other accounts before full retirement age. Accounts like 401(k)s have a 10% penalty for early withdrawals before age 59 and a half. Depending on how much you have in your accounts, this can be a large amount of money. You may also be required to pay taxes on it if the amount was taken out of your paychecks before taxes. Be aware of the costs of early retirement and plan accordingly.
Most of us get our health insurance through employment. Medicare eligibility starts at age 65, so Keough suggests determining how you will cover healthcare costs if you retire early. For some, this means getting a private insurance plan or saving money just for healthcare. Have a plan in place before you leave the workforce because everyone needs healthcare at some point in their lives.
As we age, we tend to need more healthcare regardless of how healthy we have been in our lives. There are also unexpected healthcare costs, like illness, car accidents, or other accidents, that you should account for in the terms of a financial cushion. While it is possible to negotiate a cash-pay price at some clinics and hospitals, you should still plan how you will cover your healthcare needs if you retire early.
Retiring from the workforce means that you will likely not have a steady source of income unless you plan ahead. How will you plan to survive without money from work? "When planning to retire at any age, it's important to figure out what your income sources and expenses will be," Keough says. Maximize your retirement accounts while you have them through work, or set up individual accounts that are independent of an employer.
You should also put savings aside for early retirement. If you are savvy with stock market and real estate investments, you could have passive income that continues long after you leave the workforce. "You can work with a financial advisor to help determine the exact contribution amount and the proper asset allocation you should have to reach your goals," she says. "It's crucial that you start investing as soon as you can as compounding can grow your investments over time. Setting up automatic investments from your paycheck can be a helpful way to 'pay yourself first' and ensure you're staying on track."