5 Considerations to Make If You Want to Retire Early
Who wouldn’t want to retire early? That’s the dream – to get out of the rat race as soon as possible and live a life doing what you want, on your own terms.
Sadly, that won’t be the reality for many in the US. According to Jeff Rose, writing for Forbes, “Over 1/3 of Americans don’t believe they’ll have enough money to live off of in retirement. Ouch.”
It doesn’t have to be that way, though.
You can retire early, but only if you make these five considerations and ensure that you’re in the best position to step back from the workaday world.
Health Coverage and Medicare Protection Are Essential to Retire Early
If you were to look at the expenses of the average retired person who hasn’t yet reached the age of 65 in the US, you’d find that health care is one of the largest costs. This is because there is no Medicare coverage at that age, and because they’ve retired early, they no longer qualify for an employer’s insurance.
That leaves individual health insurance, which can be incredibly expensive.
In fact, it’s not unusual for health care costs to double or even triple after retiring, and without Medicare or an employer’s help, those costs fall squarely on your shoulders.
Make sure you have your health care covered before you decide it’s time to retire early.
Check Your Savings and IRAs before Deciding to Retire Early
In order to ensure that you enjoy a reliable, uninterrupted stream of income during your retirement, you need to make certain that you have the right amount of savings, and that your portfolio will bear the strain of withdrawals.
In general, the rule here is that you can withdraw about 4% per year (a portfolio worth $1 million should be able to supply you with about $40,000 per year).
Of course, many people simply cannot make ends meet on $40,000 per year, so you need to supplement that with other sources of income, savings, pension payments, and Social Security.
If you’re going to retire early, that can be hard to do.
Couple that with the fact that many experts point out that the market is about to experience significant, ongoing devaluation. With that in mind, they recommend pulling 3.5% or even just 3% from your retirement savings per year, rather than 4%. Even in a best-case scenario, that cuts your income by $10,000.
This is complicated by the fact that you most likely cannot withdraw from your IRA without taking a penalty. That penalty goes away at age 59.5, but withdrawing anything before that comes with a 10% penalty.
Those distributions will also be considered taxable income, and you’ll need to pay the IRS (and worry about your new tax bracket) unless you have a Roth IRA.
And, as Donna Rosato mentions in her article for Money magazine, finding other sources of income during retirement has become a challenge.
Ensuring a Stable Source of Income Makes It Possible to Retire Early
Perhaps the single largest obstacle to getting out of the rat race is the fact that if you don’t work, you don’t get paid.
You might be too young to qualify for pension disbursements. The minimum age for most pension plans is 65. You’ll definitely be too young to draw on Social Security without taking any penalties.
You are only eligible for full benefits at the age of retirement, and taking them even just a few years early could result in penalties of up to 30%.
You’ll want to work with an expert in Social Security planning to ensure that you’re able to both retire early and enjoy all the benefits you’ve built up in Social Security.
You Need a Budget to Retire Early
If you’re planning to retire before Social Security kicks in and before you can withdraw from your IRA without a penalty, and you have no other source of income, then you’re going to need to rely on the return from your investments.
The issue here is that with interest rates so low, the ability to retire before 65 might be limited at best. In addition to savvy investments, make sure that you’ve created a budget.
Your budget should allow you to meet your day-to-day living expenses without straining your financial situation, and should be based strictly on your actual income, not projected income.
It’s also vital that you curb your spending – too much strain will destroy your financial situation.
Remember that the return on your investments can fluctuate greatly, and you need to ensure that you have a reserve of cash to help get you through lean times.
Smart Asset Allocation Can Help You Retire Early
Another important consideration here is where you’ve put your money – asset allocation.
If you’re heavily invested in the stock market, now might be the time to start moving your assets somewhere safer.
We’re past the point of peak valuation, which means that the stock market is starting its long, slow slide downward. If your wealth is caught in that slide, you can bet that you’ll not only lose money, but that your plans for early retirement might be dashed.
There’s also the problem that the bond market also looks like its bubble is about to burst.
If you pulled your money from stocks and sunk it all into Treasuries, you might not be any better off.
Where does that leave you?
Actually, high-quality corporate bonds (investment grade) offer a stable income and a predictable return on your investment, allowing you to create a budget, enjoy a consistent stream of income, and retire early.
While retiring early will require savvy planning, smart investments with your wealth, and dedication, it can be done.
There’s no reason to remain part of the rat race when you don’t have to.