Chances are, dreams of early retirement have crossed your mind at least once or twice. It sounds sweet to have no work and be in charge of your daily routine. Many fantasize about days of golf followed by entertaining friends or heading out of town indefinitely. But early retirement is not for everyone. Even if you think you’ve got the funds to retire, the mental shift can take a toll on health. Experts say you should “practice” retirement before you actually choose it. Whether you’re 40 or 55, here’s what you should consider if you’re thinking of retiring early.
1.Taking from your retirement accounts early can cost you.
If you do retire prior to age 59.5, there are penalties for withdrawals from most tax-deferred accounts. Plus, you will owe income tax on the amount withdrawn. When you start withdrawing, you’ll lose out on some compounding interest. If you work five more years, you’ll earn on your principal and you’ll earn interest on the interest that has compounded. This makes it imperative to have a solid plan before retiring early.
2.Planning for life expectancy and health issues.
There is really no way to determine whether you will have to stretch your savings until 75 or 85. So if you choose to retire at 55, you could need to plan for 20 years or 30 years, which is a huge difference. Healthcare can be very expensive to pay on your own, especially before Medicare begins, plus there could be health issues that arise that require a chunk out of your nest egg. To determine potential health issues, take into consideration:
It is important to consider long-term care insurance as part of your planning. Life expectancy is increasing, but the unknown makes planning challenging and very important. Meeting with a financial advisor is a great way to access how prepared you are for the unexpected in life.
3.You will probably spend more than you think.
If you’re thinking that you won’t be spending money on a commute, lunches out, retirement contributions or payroll taxes when you retire, that may be true. But it is possible that your expenses will not be reduced when you retire, unlike the 80 percent rule indicates. With every day resembling a weekend, the temptation to fill the day with fun things is there – all the time. Retirees tend to spend on travel, lifestyle changes, home renovations and even a second home. It’s a good idea to plan for more than you expect to spend.
4.You may decide you need additional income.
If you get partway into retirement and realize you need to or want to take on a part-time job, it may not be easy to find one at that point. The job market may not be accommodating as you hope. Plus, committing to a schedule can also be challenging with so many retirement interests on the horizon. There could also be unknown health challenges to face. This is why it is important to know your expenses going into retirement and have a solid plan. Another way to help is having a side hustle – if you are open to continuing it through retirement.
5.There’s one thing you will have a lot of – time.
The truth is that the reality of retirement can be shocking. If you retire early, your friends may still be working. Have you thought about filling that 40- or 50-hour workweek? Suddenly, your sleep schedule, diet and daily activities will shift. Eventually, the excitement of having few obligations wears off. If you’re one who loves a mental challenge, enjoys a packed schedule and is fulfilled by a career or accomplishing difficult tasks, you’ll want to make sure that you have enough activities to keep your mind, body and spirit healthy.
6.Have a backup plan.
You must have a backup plan for emergencies or hardships before taking early retirement and giving up a well-paying day job. As yourself questions such as:
If you’ve thought through everything and feel comfortable retiring early, good for you! If you’ve come to the conclusion that early retirement just might be too risky, that’s ok too. Making an informed and educated decision is the key to success in your future. If you’re considering early retirement and would like to have a plan created or reviewed to make sure you’re making the right decision, Bayntree can provide expertise and guidance.
Bayntree Wealth Advisors provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.