MANY PEOPLE DREAM OF retiring early and kicking that 9-to-5 job to the curb. For some people, that might mean retiring while in their mid-50s or early 60s. Early retirement gives you more time for golf, traveling or friends and family. But there might be a few unexpected surprises you did not anticipate.
“You have to make sure you have enough money to retire early,” says Mitchell Katz, a financial planner at Capital Associates Wealth Management in Bethesda, Maryland. “You don’t want to outlive your money, and you don’t want to be forced back into the workforce when your skill set and health are eroded.”
If you are planning an early retirement, here are seven big things you need to remember. Otherwise, you could be in store for some unanticipated surprises that could have a huge impact on your pocketbook.
Buy health insurance. People who retire before age 65 will need a plan to buy health insurance. It could be expensive to replace the insurance you qualified for at work until you qualify for Medicare. “That could be an extra $1,200 to $1,500 a month,” says Mark Byelich, principal at Wealth & Advisory Associates in Newtown, Pennsylvania. “They are surprised at how much it costs.”
Qualifying for employer health insurance is a major reason many people don’t retire early. “Family insurance is $20,000 a year,” Katz says. “If your employer is covering 70 percent of that, and you don’t have a plan to cover $15,000 a year for five or six years, you have committed financial suicide.”
Project your expenses. Make sure your retirement income sources will be enough to cover your costs. You need a plan to pay your monthly and annual bills. “Make sure your expenses are nailed down,” Byelich says. “People under-project expenses the first time they come to us, sometimes pretty significantly, sometimes to the tune of $30,000 to $50,000 a year, which is a lot. That has to be revisited every year.”
Prepare for taxes. Many people, early retirees included, underestimate their tax bracket. “Most people are not in a lower tax bracket when they retire, and if they are they won’t be there a long time,” Byelich says. You will need to pay taxes on each withdrawal from your traditional retirement accounts, and part of your Social Security payments could also be taxed.
Don’t take early retirement account withdrawals. Some early retirees have to take money from their retirement accounts for their living or other expenses. There’s generally a 10 percent early withdrawal penalty if you want to withdraw money from your retirement accounts before age 59 1/2. “If the bulk of your money has been saved in that [401(k)], you need other income,” Katz says. “You have to have the right mix of assets until you get to withdraw from retirement accounts without penalty and early withdrawal.”
It’s prudent to use money outside of your retirement accounts for living expenses until you qualify for penalty-free withdrawals. Kelli Click, president of the STRATA Trust Company in Waco, Texas, says you should make sure your assets are liquid going into retirement. You don’t want to trigger taxes and penalties each time you need to draw from your savings.
Know how you will spend your time. When you retire early, a lot of people the same age are still busy with work and family life. “In your corporate life, you have purpose and drive. When you retire early, you don’t have that any more. Friends may still be working,” Katz says. “Make sure you have friends. If you retire you will have a lot of free time. You need relationships.” Decide what hobbies you plan to pursue in retirement and who you will spend time with. “Have a hobby,” Katz says. “Have something you are passionate about.”
Among Katz’s clients is a couple who retired in their early 50s. They were both avid golfers and their goal was to be in a golf community, near the beach and in a walkable community. The only problem: In the communities they tried to live in, they were by far the youngest residents. “They didn’t want to hang out with people in their 70s,” Katz says. “They are still looking for that perfect retirement community.”
Eliminate mortgage and other debt. It’s easier to retire early if you pay off all your debts before you retire and keep your bills as low as possible. “You have to make sure you have addressed all the costs,” Katz says. “Mortgage or debt is a big one. So if you don’t have a blueprint of what it looks like that is complete, comprehensive and through, you should not be retiring early.”
Prepare for the unexpected. In addition to making a budget to pay for your ongoing monthly expenses, you also need a plan to cover sudden bills and emergencies. “Thirty years in retirement is an awful long time,” Byelich says. “There are bumps, medical premiums, out-of-pocket [costs] and then the risk of a long-term care event.”
Early retirement isn’t easy to pull off. “[Retirement is] hard at 65 and extremely hard for people to do it early,” Byelich says. “You have to be very wealthy or super frugal.”