Early Retirement

Retiring early can bring pleasures as well as pitfalls. Before you take the big leap, carefully consider your readiness by looking at all the parts of the puzzle.

Early retirement has no definite age. It could be defined as leaving the work force before federal benefits such as Social Security are available–age 62.  Or, leaving before one can tap into traditional retirement funds such as IRAs and 401(k)s–age 59 1/2. For this discussion, let’s call it retiring in the 40s or 50s.

We all love to think of retirement as having days of (mostly) free choices–to visit friends, participate in a hobby, or just hang out at home.

Early retirement can reduce the stress of jobs and commuting, and allow time for volunteer opportunities. More people over age 55 are exploring activities they’ve always wanted to try, and even starting new businesses.

On the other hand, early retirement can bring new pitfalls, especially if it starts involuntarily because of health or unemployment. It puts a strain on finances, since no new money is usually earned. It begins a period of draw-down of  the financial assets, which can be scary for many people.

Planning for retirement needs to take inflation and longevity into effect too. Retirement savings of large sums like $500,000 will generate about $20,000 per year if the often-recommended drawdown rate of 4% per year is used. Even half a million dollars may have trouble trying to pay for over 30 years in retirement.

Retirement planning naturally raises some questions. How long will my money last? When should I start drawing Social Security? How cautious should my investments be? Where can I find health insurance? Here’s a calculator from Bankrate.com that will give you some idea of how long your money will last.

Even if you’ve never consulted a financial planner before, now is the time to set up a meeting. Planners can help answer the above questions, and give you a fresh view of what to expect. Look for a fee-based CERTIFIED FINANCIAL PLANNER™ or search NAPFA.org to find one near you.

Taking early retirement can make it harder to get back into the workforce if you decide to re-enter later. While some employers are friendly to hiring older workers, the over-55 age group was hit hard by unemployment in the recession of 2009-10.

Early retirement also raises the need to get health insurance from sources other than an employer, until Medicare begins at age 65. If your health is good, you can usually get individual coverage from a place like e-Healthinsurance or a professional organization through which you have a membership. You can also use COBRA rules to get an extension of your coverage with a former employer for a limited time.

Health insurance coverage is a must, so look into this before leaving the work world behind. If none of the above sources will cover you, many states offer a high deductible plan for catastrophic health coverage. Check your state’s online website for more information.

Early retirement also brings social adjustments. Connections with co-workers are lessened, but other relationships may get started. Spouses may need to adjust to both being at home more regularly.

In retirement, the need for productive fulfillment may get channeled into new ventures or hobbies. Allow time for these adjustments, and talk to others going through it.

Successful early retirement will be related to your ability to put the pieces of the life-needs puzzle into place. It’s a matter of your motivation and willingness to make trade-offs, and perhaps live on less money to have more freedom of time.

Early retirement also doesn’t have to be all-or nothing. You might try the ramp-down approach, where you cut back on work days or hours gradually.

Just make sure you’re as prepared as possible before you take the big leap to a long retirement which could last 30-40 years.

I recently read an insightful and inspiring book about retirement planning, by John E. Nelson and Richard N. Bolles. It’s called, What Color Is Your Parachute–For Retirement. It’s about finding satisfaction in the last half of one’s lifetime.

In the big picture, preparing for retirement is more than planning for financial security. It’s also about allowing time to fulfill some of your special dreams and goals. As Mr Spock of Star Trek fame used to say, “Live long and prosper.” Choose your best path to accomplish that goal.

Robin Applegarth CRPC®

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