For many of us, the dream of early retirement is alluring. Quitting your job and enjoying the rest of your life on your own terms seems like a perfect plan. It's a chance to relax, enjoy your hobbies, and spend time with your family. But before you retire, there are a few things you need to know in order to make sure you have a comfortable retirement. Here are three key points to consider and plan for before making that leap:
1. You'll need to have a plan for your finances.
If you're accustomed to living paycheck-to-paycheck, or if you've been saving but don't have a clear plan for how you'll use that money in retirement, it's time to get serious about your future finances.
If you’re like most Americans, your retirement savings will come from a combination of sources, like a 401(k) or 403(b), a pension, and Social Security. To get an estimate of how much income those sources will provide in retirement, you can use the Retirement Estimator tool on the Social Security Administration’s website, or talk with your trusted fee-only financial advisor. Remember, early retirement is only possible if you have a solid plan for how you'll support yourself financially. This means knowing how much money you'll need to cover your basic expenses, and then having a strategy to generate that income.
Keep in mind that you can’t receive any Social Security benefits before age 62. And it is best to wait until reaching Full Retirement Age, or FRA (somewhere between 66 and 67, depending on when you were born), to begin receiving benefits, as taking them before then will result in a permanently reduced benefit for you and your spouse. So, if you plan to retire before FRA, you’ll want to make sure your other sources of income are sufficient to cover living expenses until you're eligible for Social Security (or have a plan in place to accept the 30% reduction).
Most experts agree your retirement expenses will be roughly 80% of your pre-retirement expenses - and maybe more if you want to continue to live a comfortable lifestyle and travel. Start by getting a clear picture of your current financial situation. Make a budget and track your spending for a few months, so you have a baseline to work from.
Once you have a good estimate of how much income you’ll need in retirement, you can start planning for how to generate that income. For example, you may need to put more into your 401k, 403b and 457, or start a backdoor Roth IRA. Whatever route you decide to take, don’t retire without first assessing how much income you’ll need to cover your costs of living, as well as any other expenses you might have.
Retirees often have lower expenses than pre-retirees. For example, you may have paid off student loans, and no longer need to save for retirement, pay off a mortgage, or cover family-related costs. And, if you plan to downsize your home, you may be able to reduce your housing costs and related insurance. But don't underestimate your retirement expenses either. Make sure your portfolio accounts for inflation. Inflation makes it more difficult to afford the necessities as the buying power of your savings diminishes over time. And consider other financial factors that you may face in the future, like rising healthcare costs or staying in assisted-living facilities.
But don't underestimate your retirement expenses either. Make sure your portfolio accounts for inflation. Inflation makes it more difficult to afford the necessities as the buying power of your savings diminishes over time. And consider other financial factors that you may face in the future, like rising healthcare costs or staying in assisted-living facilities.
2. You'll need to have a plan for your health.
Retiring early usually means giving up employer-sponsored health insurance, which can be a major financial consideration. Have a plan in place to cover your health care costs. This may include purchasing your own health insurance, signing up for Medicare, or some combination of the two. Few people have retiree healthcare offered by their employer, but that can also be an option as well.
According to the latest estimates in 2022, a 65-year-old American man can expect to spend $150,000 on healthcare in retirement, whereas a 65-year-old woman can expect to spend $165,000 (partly due to women's longer life expectancy). Healthcare costs are only predicted to rise in the coming years. This estimate also assumes enrollment in Medicare Parts A, B, and D (which you can read all about here).
Of course, these are just averages and your actual healthcare costs in retirement will depend on a number of factors, like whether you have Medicare coverage, if you remain active, and your overall health. But it’s important to factor healthcare costs into your retirement planning.
Maintaining your health is important at any age, but it becomes even more critical as you get older. Consider how you'll stay healthy and active. This is especially true if you retire early, as thanks to modern medicine you may live to be a centenarian! You'll need to make sure your retirement savings will last a lifetime. And speaking of longevity:
3. You'll need to have a plan for your time.
Retirement is a major life transition, and it can be easy to find yourself with too much time on your hands. Make sure you have a plan for how you'll fill your days in retirement. This may include pursuing hobbies, volunteering, traveling, or working part-time. Whatever it is you want to do, make sure you have the financial resources to do it. Better yet, why not add to your income streams by pursuing a hobby that pays?
Early retirement is possible if you're willing to put in the work to make it happen. By having a plan for your finances, health, and time, you can set yourself up for a successful retirement. Think about how you want to spend your days and what will make you happy in retirement. After all, that's the whole point of retiring - to enjoy your golden years!