12 Things to Consider Before You Retire Early
Most people feel ready for retirement approximately the moment they enter the job market. It’s a day most of us dream about for decades and one that the vast majority of people only wish would come sooner. For those that have put in enough long years of hard work for the end to finally be in sight, the temptation to rush the process and retire early often becomes strong.
Some people can pull off early retirement without too much trouble, but anybody who’s considering early retirement really needs to take the time to think the decision through.
There are three main categories of questions you need to consider: those relating to your current financial state, those that will help you foresee the financial issues likely on the horizon, and those that address what retirement will mean for your lifestyle.
Immediate Financial Considerations for Early Retirement
Whether or not early retirement is feasible for you has a lot to do with your current financial state. Before you can make a decision as big as this one, you need to do a thorough analysis of how much you have now. It’s probably worthwhile to talk to your accountant or a financial advisor to get a more complete picture of your current finances.
You should start by asking yourself these questions.
1. How much do I spend now in a year?
If you haven’t been in the habit of keeping a budget, then take time now to go back and review all your expenses. Review your credit card records and bank statements in order to add up how much you’re spending in a typical month.
Many people will find they save money after retirement on things like professional clothes and the transportation costs of getting to and from work, so your current expenses will likely go down by a little bit. Most experts suggest that people should expect retirement expenses to come to about 70-80% of their pre-retirement budget.
You have to be careful here though. A general standard like that won’t speak to your specific habits and some households actually spend more after retirement. If most of your current expenses are those you’ll be maintaining during retirement – for example, if you aim to continue dressing in the same way or walked to work each day – then there may not be a meaningful difference in your expenses. This is where your analysis can pay off: don’t just look at the amount you spend in expenses each month, analyze what those expenses are, which are likely to continue at about the same level, and which are likely to decrease.
Create a new number based on that analysis of what your likely retirement budget will be and practice living within that budget for at least six months to see if you find it challenging. This will give you the clearest picture of what to expect your costs to be in the years after you retire.
2. How much do I have saved?
This is the next step in figuring out the math. How much money do you have saved that you’ll be able to spend in those retirement years? This question is much simpler to answer than number one because all you have to do is add up straightforward numbers.
How much do you have in your retirement accounts? Your savings accounts? And what’s the value of your current assets (car, house, real estate investments, etc.)?
Many retirement accounts have a penalty for taking money out before a set age, so check whether yours do and factor any possible penalties into the money you have at your disposal. If you can live off of the money you have in a savings account up until the age when you can withdraw that money penalty free, obviously that’s ideal.
3. What will I be receiving each month in benefits such as social security or a pension?
If you’re retiring from one of the few remaining jobs that provides a set monthly pension after retirement, then you should keep that monthly number in mind in your calculations. The amount you earn in social security will also be a consistent number you can (probably) count on, but it will be lower if you enroll earlier.
The earliest age you can start taking social security payments is 62, but doing so results in receiving 30% less per year than if you wait until 67 – the age that’s deemed “normal retirement age.” Waiting until the age of 70 to start receiving social security benefits will net you the largest amount. If you can hold off on social security for that long by using other funds, it’s recommended.
4. Do I still have debt?
If you do, then that needs to be taken into account in the expenses you calculate for the short term. The good news is that debt is one of those expenses that will go down over time, so if you’re on the path to having your mortgage or any other debt paid off within the next couple of years that’s an expense you only need to budget for in the short term.
Long-Term Financial Considerations for Early Retirement
Your current spending and expenses can tell you a lot about what your expenses will be in the years to come, but not everything. Healthcare issues are difficult to predict and big lifestyle changes, like a move, will make a big difference in your expenses as well.
While nobody can predict the future, asking yourself a few key questions can help you better plan for the unexpected.
5. What healthcare issues do I have now?
If you haven’t been to the doctor for a general physical lately, now is a good time to go. A lot of the health issues that come with age vary from person to person and are hard to see coming, but if you have a clear idea of your health status now, it can help you guess at some of what’s to come.
Talk to your doctor about any healthcare issues you should anticipate for the next few years. That will give you some advance idea of the kind of costs to expect.
6. What healthcare issues are common in my family?
If certain hereditary diseases run in the family then that’s another important factor to keep in mind. Think back to the common diseases and issues your relatives have experienced and what age they tended to kick in. If you can, make up a list to bring in with you when you visit your doctor so they can weigh in on your potential risks.
7. Do I want to stay where I live now or move somewhere new?
There’s a reason Florida has a reputation for attracting retirees; many seniors see retirement as the perfect opportunity to finally move somewhere with nicer weather, more nature around, or in closer proximity to cultural activities they love.
If you know you want to stay in the same house you’re in now for as long as possible, then that somewhat simplifies your calculations. If you’ve been pondering the idea of a move to greener pastures, then do some research now on the cost of living and real estate in the main places you’ve got your eye on. You may find it’s worth sticking with your job a little longer to be able to afford to live where you want.
8. Do I have reliable healthcare coverage?
Medicare kicks in at 65, and you’ll still need health care in the meantime. Make sure you factor the cost of paying for health insurance in your calculations. You may not know exactly what healthcare issues you’ll have, but you can pretty well count on the fact that you’ll need to head to the doctor for something during your early retirement years.
9. Do I have long-term care insurance?
You want everything you have saved now to last you to your final days. Even if you’re still more than a decade away from having to think about something like assisted living or a nursing home, you should consider the financial implications that needing that care will have if and when the day comes. A good long-term care insurance plan can help offset those costs.
Lifestyle Considerations for Early Retirement
The financial side of things is the trickiest part to figure out for most people, but you also need to consider the more personal, emotional aspects to retirement.
10. Am I emotionally ready to stop working?
For most people this question has a kneejerk, obvious answer: of course! But sometimes people think they’re desperate for workless days, only to find them long and monotonous once they have them. Really examine your feelings about work. Is it important to you to feel like you’re being productive? Does your job provide you a sense of satisfaction nothing else in your life does? Does the social component of work add something to your life you’ll miss?
11. What will you do with your time?
At first you may be content to sleep in late and catch up on TV shows, but at some point you’ll want to fill your days with something that feels more fulfilling. Are there hobbies you’ve wanted to try? Classes you want to take? Volunteer work you’d like to pursue? Consider in advance how you’ll want to spend your days once they’re available to do anything you might wish with. You may find you want to try things that cost a lot (which is important to include in your calculations), or you may find that you don’t really know what you want and might miss working more than expected.
12. Would switching to part-time work make more sense?
The answers to many of the above questions may lead you to consider a compromise: working part-time before retiring all the way. You can continue to bring in money if you’re not quite at the point financially you need to be, won’t have full days to fill, and can retain some of the satisfaction you get from work now (if applicable).
It’s not an option for everyone and won’t be available to every potential retiree, but it may be one worth looking into if you’re tired of the 9-to-5, but not sure you’re ready to take the full plunge into retirement.
Once you get through the full list of questions, you should have a pretty good idea of whether early retirement is for you. If you can manage it, enjoy your newfound free time. If you’re not quite there yet, don’t despair. Retirement will come and you can rest assured you’ll have an easier time enjoying it with the extra money you make in the interim years.