18 Important Things Everyone Should Know About Early Retirement

Early retirement can sound appealing for a multitude of reasons, but there is a lot to consider before you cut the cord with the working world. Making sure to think out and plan for these 18 things can help you sail off into your golden years with ease.

Early Withdrawal Penalties

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Withdrawing from retirement accounts before age 59 1/2 typically incurs a 10% penalty, reducing the amount available for your retirement. “There are some options for getting IRA money before 59 1/2, but it’s tricky and can cause major penalties if done incorrectly,” says Matt Stephens, founder of AdvicePoint. Make sure to check what penalties you would have to pay before removing money from any account.

Inflation Impact

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We’ve all endured a rising inflation impact on our grocery bills and other everyday necessities, which can be hard even when you’re still working. Inflation can erode the purchasing power of your savings, requiring a larger nest egg to maintain your standard of living.

Increased Expenses

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You may think your expenses will decrease when you retire because you no longer need to commute to work or any of the other expenses that go with working. However, many find the complete opposite. Some expenses, like your home and utility payments, will remain the same. Other expenses, like recreation and home remodeling, can increase as you look for things to do every day.

Reduced Social Security Benefits

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Claiming Social Security benefits early at 62 results in reduced monthly benefits by up to 30% compared to waiting until full retirement age (67 for those born in 1960 or later). According to the SSA website, “In the case of early retirement, a benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month.”

Longer Retirement Duration

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We are living longer than previous generations, which also explains why most people are retiring later than the generations before. But that means if you choose to retire early, you have to account for the extra years you need to have saved for.

Health Insurance Coverage

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Before Medicare eligibility at 65, you’ll need to secure health insurance, which can be a significant expense when you are no longer covered by your employer. “Private health insurance before Medicare kicks in costs an arm and a leg,” according to Brian Schmehil, director of wealth management for the Mather Group.

Part-Time Work Challenges

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Just because you are technically retired doesn’t mean you won’t want some form of work to bring in extra money and occupy your time. Part-time work may not be as flexible as expected and can interfere with other retirement goals, like travel or family time, though freelance gig work can be flexible enough to work with your goals.

Investment Strategy Shift

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You may need to adjust your investment strategy to balance growth with the preservation of capital. CBS News reports that “many families looking to retire early prefer to invest non-traditional assets, such as small business ventures, crowdfunding opportunities, and rental properties to increase their income and accelerate their savings rates.”

Lifestyle Changes

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Retirement can lead to significant lifestyle changes, and you’ll need to plan how to fill your time meaningfully. The last thing you want for retirement is for your brain to dull as you sit and watch reruns of Golden Girls. Planning for the changes in your lifestyle when you have nothing but free time can make sure you stay sane and healthy.

Tax Implications

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Strategic tax planning is crucial to minimize the tax burden on withdrawals from retirement accounts. Investopedia advises that “deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.”

Estate Planning

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If you have heirs to whom you plan on leaving money, consider how early retirement affects your ability to pass on assets. Thinking about it, the more you end up spending from your savings, the less you will have to pass on.

Market Volatility

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Though we won’t always know when a recession or economic crash is coming, when you are planning for retirement, there are clues you should watch for and plan accordingly. Early retirees must be prepared for market downturns, which can have a more significant impact when you’re not actively earning.

Compounding Interest Sacrifice

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Time is your friend when you’re saving for retirement, but not once you start spending. “Retirees should look at tapping into about 4% of their savings annually,” says Merrill. But even still, that’s just an estimate. “‘The younger you are when you retire, the lower the percentage you’ll be able to spend each year if you want your savings to last throughout your lifetime,’” says Ben Storey, director of Retirement Research & Insights for Bank of America.

Long-Term Care Costs

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As we age, our bodies lose the ability to bounce back the way they did when we were young. Healthcare and your ability to maintain independence will become increasingly important in your later years. Planning for potential long-term care expenses, which can be substantial and are not typically covered by Medicare, is vital to a long retirement plan.

Debt Management

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Walking into retirement with no debt can make it easier to live the life you want. If your home, car, and credit cards are paid off before you retire, you won’t have those monthly expenses draining your retirement savings. Once you retire, be sure to only use credit cards for what you know you can afford to pay with your budget each month.

Emergency Fund

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Maintain an emergency fund to cover unexpected expenses without tapping into retirement savings. This fund should be completely separate from the money you plan to use for your retirement. This way, if you have to use it for an emergency, it doesn’t affect your retirement.

Psychological Adjustment

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Retirement can be a significant psychological adjustment. We start having a 9–5 to be at from elementary school through adulthood. When we retire and every day becomes like a Saturday, it can be emotionally jarring. Some revel in the freedom, while others need to find a new routine to keep from becoming bored.

Spousal Alignment

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Ensure your retirement plans are in sync with your spouse or partner to avoid conflicts and manage expectations. If you plan to retire early and travel but your spouse is still planning to work for another ten years, it can cause a rift in the marriage or relationship.

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