The idea of early retirement appeals to many people - and why wouldn’t it? When you’ve spent so much time and energy planning for your ideal retirement, it’s completely reasonable to be excited to dive in. However, early retirement doesn’t come without its drawbacks. It’s important to know what you’re walking into before taking the leap.
As many financial considerations as there are when you look at early retirement, the non-financial ramifications can be even more important. Many pre-retirees imagine that retirement will be full of all their favorite hobbies - travel, spending time with family and friends, boating. However, the truth is that those hobbies rarely fill the amount of time your full-time job once did.
Additionally, transitioning from your full-time career to full-time retirement can be an emotional challenge. Your career had clear goals and markers of success. In retirement, your time is much more flexible. Figuring out what’s next can be a challenge. After all, you’re no longer building a career.
You’re going to have to make a plan for your next 40 years that is both relaxing and fulfilling. This might mean pursuing travel early in your retirement, but also determining what you want to retire to in the day-to-day. Maybe you’ll pursue a new hobby, such as painting or running a book club in your local community.
Retiring early requires planning your finances well in advance. There are several financial considerations to take into account.
Do you have enough money to retire early?
Your first step is to determine if you have enough money to retire. If you’re considering early retirement, reverse engineer your savings goals based on different levels of spending.
For example, start by determining how much savings you’d need to live comfortably, but not extravagantly, through age 95. Then, create a stretch goal for what your savings would need to look like if you wanted to live in a way that checks off all of your bucket list goals.
What would it take for you to reach those goals? Is your current savings strategy sufficient, or do you need to increase and adjust?
How will you organize your savings to withdraw at a comfortable and sustainable rate?
Organizing a savings strategy to retire early can be daunting. Sometimes, it’s useful to think of your savings as different buckets. By creating different “buckets” of savings, you’re able to build in low-risk savings that can be used in the near-term, while still allowing your savings to grow with interest for the long-term.
The average life expectancy in the United States is 78 as of 2016, but it’s wise to put a savings plan in place that can sustain you through age 95+. The last thing you want is to retire early, only to run out of money.
What health care arrangements are you going to make?
Medicare benefits traditionally kick in at age 65, unless you qualify for Medicare through disability. So, if you retire early, you need to think of a way to cover medical expenses for you and possibly your family if they’re still on your plan.
Savings through an HSA can help to offset some of these costs, but you might also need to look into COBRA programs or the healthcare marketplace to make medical expenses somewhat more affordable. Your savings should also take premiums for these programs into account.
Whether you’re concerned about the financial or non-financial aspects of retiring early, get in touch! We’re here to answer any questions you may have, and help you put together a plan to reach your ideal retirement goals.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs, and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
"Finance Made Simple" blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.