5 Things to Consider Before Planning an Early Retirement

By on February 23, 2021
early retirement

Retiring at age 50 or 60 might appear ideal, but it needs careful planning and consideration. Some studies indicate that over 26% of working people consider early retirement for various reasons. The following are some reasons to consider before opting for early retirement.

  1. Amount of Debt

Reducing the amount of debt helps to free up finances used to cover expenses when the income is depressed. Individuals planning for early retirement can use a debt payoff calculator to help determine an early retirement window. That lets them know whether or not they can afford the same monthly debt repayment level even when they have reduced income once they stop working full-time.

When planning to retire early, individuals need to reduce the debt burden by paying higher interest debt, such as credit. They should also seek financial assistance to develop a personalized debt management system to help manage long-term financial obligations such as mortgages.

  1. Medical Costs

Healthcare planning is significant, especially for people seeking early retirement. Many employer-sponsored healthcare insurance plans do not cover retirees. Also, they need to be over 65 years to qualify for Medicare. Thus, early retirees need to consider healthcare plans that will cover their health expenses even when they have a depressed income.

For instance, early retirees with a high-deductible insurance plan might qualify for a health savings account, allowing users to make contributions until age 65. Hence, they qualify to withdraw tax-free funds to cover medical expenses.

  1. Sources of Income

Early retirees need a guaranteed source of income to pay for their monthly expenses. There are several essential factors they should consider before they retire. It’s crucial to note that people under age 59 do not qualify to source funds from retirement accounts such as 401Ks without paying an early withdrawal penalty of ten cents on the dollar. Also, people under age 62 cannot claim social security benefits without paying the penalty, leading to decreased monthly benefits. Thus, drawing savings earlier increases the chances of outliving retirement savings.

Early retirees should opt for other income sources, such as putting a portion of their savings into an annuity, allowing individuals to begin collecting guaranteed income immediately.

  1. Planned Retirement Lifestyle

The desired retirement lifestyle significantly affects retirement expenses. Individuals planning to spend their early retirement by traveling require more savings than people who plan part-time working or charity work. Therefore, early retirees must contact financial advisors to help determine the estimated savings needed to support a particular lifestyle. It is also crucial to consider other factors such as inflation on savings, especially for a retirement that might last for more than 40 years.

  1. Amount of Savings Needed

Individuals planning for early retirement should note that they will need more savings since they have fewer working years. Therefore, they need to have an accelerated saving strategy that will last for 40 to 50 years.

For instance, early retirees should save additional money outside the traditional savings method, such as 401 (K) that charges a penalty for early withdrawals. Instead, they should invest more in stocks, bonds, and CDs since they are available for withdrawal without age restrictions.

While many factors determine the right age of retirement, considering the highlighted factors will help determine whether early retirement is a viable option.

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5 Things to Consider Before Planning an Early Retirement