Early retirement can threaten your financial security.
You are retiring early.
Perhaps this is voluntary.
You are tired of the daily grind and want to travel and spend time with your loved ones.
Maybe you have been offered early retirement from your employer as a result of the economic downturn.
Many businesses are struggling to make ends meet in the midst of the pandemic, making early retirement appealing for employers.
According to a recent Investopedia article titled “Early Retirement: Strategies to Make Your Wealth Last,” you can retire early without compromising your financial future if you plan appropriately.
What can you do?
Set a budget.
Your expenses in your retirement will look different than those during your working years.
You should outline what your needs will be in retirement.
This should include medical bills, food, travel, home maintenance, hobbies, and other miscellaneous expenses.
Next, you should review your life expectancy.
Do you have enough money saved to cover your annual expenses for the rest of your life?
If no, you may want to reconsider early retirement.
Remember the four percent rule.
The so-called four percent rule provides the baseline for determining your withdrawal rate.
What does the rule mean?
If you withdrawal four percent of your savings in the first year you retire and continue to withdrawal the same amount going forward while adjusting for inflation, your savings should last 30 years.
If you need your savings to last an additional 10 years, the four percent rule may be insufficient.
Instead, you may want to reduce your withdrawal rate to 3.5 percent or three percent.
If these percentages are insufficient to cover your expenses while factoring in early retirement, you should reconsider when you retire or find a way to lower your cost of living.
Plan for medical expenses.
Seniors cannot enroll in Medicare until three months before they reach age 65.
If you take early retirement before this, you will need to find your own health insurance until you are eligible for Medicare.
If you are still employed, you can save money in a Health Savings Account (HSA) to help you prepare for future medical expenses.
Early withdrawals are tax-free when used for healthcare expenses.
After age 65, you can remove money from an HSA for any reason without incurring a penalty, but you will still owe taxes on the distributions.
Purchasing long-term care insurance can also help you prepare for medical expenses in retirement.
This will allow you to pay for assisted living or nursing home care without having to use all of your assets until you qualify for Medicaid.
Delay taking Social Security benefits.
If you were born in 1943 or later, your full retirement age is 66.
If you were born in 1960 or later, your full retirement age is 67.
Although you can begin taking Social Security at age 62, you will receive a smaller monthly benefit for the rest of your life.
If you wait, you will increase your benefit amount.
If you can afford to delay taking Social Security during early retirement, you should because you will receive a larger check.
Before committing to early retirement, you should thoroughly review your savings and your future expenses.
Reference: Investopedia (Oct. 30, 2019) “Early Retirement: Strategies to Make Your Wealth Last”