So You Want to Retire Early? What You Can Do Now to Prepare
You’ve done your time. You’ve had a long (and hopefully rewarding) career and are ready to ease into retirement. There’s one problem. You’re not quite officially retirement age yet. You have a few years (maybe more) until you reach age 62 and can start receiving Social Security. And a few more years still until you hit age 65 and can enroll in Medicare.
You’re more than ready to retire early, but can you really afford to? The good news is that it is possible with some careful planning and preparation.
Envision your retirement – and how you will pay for it
You likely have dreams of what retirement will look like: extended vacations, leisurely dinners, spoiling the grandkids. However, if you want that retirement to start early, those dreams need to be supported with some very thoughtful budgeting. Carefully account for all of the monthly expenses you expect to incur in retirement, both the fun and mundane. Next, identify where the money will come from to fund those expenses, knowing that the regular paycheck you’ve depended on for years won’t be there.
Will it come from savings, investment income, perhaps a spouse or partner who is still working? Understand all of your sources of funds. Just as importantly, do the math to make sure you will have enough to last throughout your retirement years, which could last decades.
While you may have a sizeable nest egg in retirement accounts like 401(k) plans and individual retirement accounts (IRAs), that money can’t be accessed until you reach age 59.5, or you will be penalized 10 percent on withdrawals. However, there is a little-known exception. IRS Rule 72(t) states that if you declare yourself as “permanently retired,” meaning you commit to never re-entering the workforce, you can begin taking distributions from qualified retirement plans beginning at age 55.
Lean on your non-retirement savings and investments
Hopefully, you’ve been diligent about saving and investing throughout your career, not only in dedicated retirement vehicles like IRAs and 401(k) plans, but non-retirement accounts as well.
If not, it’s never too late to get started.
Start maximizing your savings and investments now so that you can tap them to fund your lifestyle if you do choose to retire early. Work with an experienced investment professional to help ensure that your investments are appropriately aligned with your risk tolerance and time horizon for retirement.
Consider health care expenses carefully
If you retire before age 65, Medicare won’t yet be an option to help pay for your health care needs. Perhaps you have a spouse or partner with health insurance who can cover you until you reach age 65. If not, you’re on the hook for some potentially significant private health insurance costs. For example, the average monthly premium for a benchmark plan offered through the federal health insurance marketplace is $1,520 for a family of four. That’s $18,240 a year. [SOURCE: AARP]
If you do choose to retire early and know you will be funding your own health care expenses, contribute as much money as possible into a health savings account (HSA) if you are eligible. Even after you retire, that money remains yours to spend on qualified health care expenses. For 2020, a single person can contribute $3,550 annually to an HSA, and a family can contribute $7,100. Those age 55 and older can contribute an additional $1,000 in “catch-up” contributions. [SOURCE: IRS]
The dream of early retirement is possible for many of us, but it requires careful planning and diligent saving years in advance. To get there, work with a financial advisor to develop a plan that is specific to your situation.