For many, retiring early is the ultimate life dream, but it is one that may be more challenging than anticipated. Retiring early means you will need to adjust your savings plan and accommodate for the extra years of supporting yourself. However, successfully retiring early is still a very possible endeavor with proper planning.
Social Security benefits
The first thing to learn about when planning to retire early is social security. “Social Security benefits are calculated based on your highest thirty-five years of work history, with the highest 35 determined after each year of work has been indexed for inflation,” says retirement expert Dana Anspach in an October 2017 article for TheBalance.com.
If you retire before you have a full 35 five years of work history, you may lose out on Social Security benefits. Alternatively, even if you worked at least 35 years, your benefits are likely to be smaller than if you continued to work, because most people earn more near the end of their career. If you elect to retire early, you can claim retirement benefits as early as age 62, though you will get a higher benefit if you wait until age 70 to file. This can create some complications, as you may be tempted to work part-time to cover the costs of living while retired without Social Security — which in turn can lower your benefits.
“If you plan on working part-time during early retirement your Social Security benefits may be reduced,” Anspach warns. “The reduction is based on something called the Social Security earnings limit and it only applies if you have not yet reached full retirement age. If your income is higher than the limit, your benefits will be reduced. This reduction only applies until you reach your full retirement age, which is age 66-67 for most people.”
Planning and lifestyle adjustments
Retiring early in the future means having to adjust your lifestyle in the present. “To maintain an acceptable lifestyle throughout a retirement that could last upward of 40 years, you’re going to need a sizable savings stash to support you,” writes Walter Updegrave, a retirement planning and investing expert, in a May 2017 article for CNNMoney.com.
Start by estimating your retirement expenses and creating a detailed budget. If you want to maintain the same standard of living, you will likely need to significantly ramp up your savings rate. If you cannot do that, then you may want to consider getting by with a smaller nest egg instead. In either case, it’s important to gauge what kind of life you wish to have after retirement, to include what kind of new hobbies you might want to pick up, places you want to visit and friends you want to reconnect with.
“Lifestyle planning can also help with the financial side of preparing for your early retirement, as the way you live in retirement can directly affect how much you’ll spend and thus how large a nest egg you’ll require,” says Updegrave. “You’ll want to think about such issues as whether you plan to travel a lot or stick close to home and whether you intend to remain in your current house or downsize to smaller, less expensive digs in an effort to free up home equity and lower housing costs.”
You won’t be eligible for Medicare until age 65, so if you plan to retire early you will need to find insurance elsewhere. Few employers offer health insurance for retirees, which was once a major obstacle in the way of early retirement. Furthermore, it used to be tricky for even healthy 50- and 60-year-olds to find affordable insurance on the private market before they qualified for Medicare. Fortunately, the Affordable Care Act ensures that you cannot be turned down or charged more for a pre-existing condition like diabetes or heart disease.
“Regardless of your health, you can buy a comprehensive insurance policy through the state online exchanges,” writes Donna Rosato, senior writer for Money Magazine. “Your age will still push up your premium, but a 60-year-old can’t be charged more than three times what a 20-year-old pays, as was once the case.”
If you plan to retire early, get in touch with your financial institution so they can help you assess what it will take to help you meet your goals.