Planning an Early Retirement? Here are 6 Things You Need to Consider

If you’re contemplating hanging up your work gear before the age of 67—considered “full retirement age” by Social Security, for most people—you aren’t alone. According to Money Talks News, the average age of retirement is 64 for people in the U.S.

This age may in fact even skew a bit younger, since the COVID-19 pandemic fueled an increase in retirement among adults ages 55 and older (based on recent Pew Research Center data). Increased household wealth fueled by housing prices and stock market highs has helped drive this recent labor force defection.

Before you take the plunge into the carefree days of early retirement, consider the following factors to better align the reality of retirement with your dreams.

Post-retirement health care

If you retire prior to Medicare eligibility (age 65, for most people) and don’t have coverage through another group plan, you’ll need to bridge that gap. However, know that coverage won’t come cheap: Value Penguin, a financial website, reports the average monthly cost of a Silver (mid-tier) health plan on the Affordable Care Act insurance exchange is $1,016 for a 60-year-old person.

One option, if you’re eligible, is through COBRA, a federal law that gives workers and family members set to lose their health benefits the right to choose continued group benefits. However, coverage is just temporary as COBRA is limited in length (typically up to 18 months).

Other alternatives include pursuing health sharing plans (which are limited), finding part-time work that offers benefits, or setting up a health savings account (HSA) to help cover high co-pays and other out-of-pocket healthcare costs.

If you haven’t already, you’ll also need to consider long-term care. These policies typically cover out-of-pocket expenses associated with home care, assisted living, and nursing homes: benefits not covered by Medicare and other public programs.

According to the U.S. Department of Health and Human Services, there is an almost 70% chance someone turning age 65 today will need some form of long-term care (LTC) services in his or her remaining years. Paying for such expenses on an out-of-pocket basis is costly; national monthly median costs for various healthcare services, according to Genworth and other websites we came across, are as follows:

·                Home health aide: $4,576 

·                Adult daycare: $1,603 

·                Assisted-living facility: $4,300 

·                Nursing home, private room: $8,821 

·                Nursing home, semi-private room: $7,756 

Given the rapidly aging population in the U.S., costs will only continue to increase in the years to come. Click here to learn more about your long-term care options.

When to claim Social Security

The age at which you decide to collect Social Security will determine your monthly benefit amount. Choosing to receive benefits before you reach full retirement age (when you’re entitled to 100% of your Social Security benefits) means your monthly benefit will see a permanent reduction.

More specifically, Social Security benefits increase approximately 7% each year between 62 and your full retirement age—with an approximate 8% increase each year between your full retirement age and age 70.

To illustrate, let’s assume the full amount of your monthly Social Security benefit is $1,000—the sum you’d receive if you wait until your full retirement age.

If you claim benefits at age 62, your benefit will decrease by approximately 30% to $700: meaning you’d miss out on $3,600 a year! Multiply that by five years (when you’d reach full retirement age), and that’s approximately $18,000. Alternatively, if you wait until age 70, your monthly benefit would ring in at approximately $1,266.

Savings and withdrawal rules surrounding your 401(k) and IRA

If you plan on continuing to build your savings (a good idea), know that once you turn 50, the IRS lets you make annual “catch-up contributions.” These are additional contributions you can make above standard annual limits to your 401(k)s and IRAs.

If it makes sense for your overall plan, you should take advantage of this benefit since the tax-deferred growth can significantly boost your retirement savings. As of 2022, you can contribute $20,500 to a 401(k) and $14,000 to a SIMPLE 401(k). With catch-up contributions, you can kick in an extra $6,500 for a 401(k) and an extra $3,000 for SIMPLE 401(k) accounts. The 2022 contribution for Roth and traditional IRAs is $6,500. With catch-up contributions, you can kick in an extra $1,000.

With Roth IRAs, you can withdraw sums equivalent to your contributions—whenever you want—on a penalty and tax-free basis since you've already paid income taxes on that money. However, if you wish to withdraw any earnings from your Roth IRA, you may be subject to income taxes and a 10% early withdrawal penalty depending on your age and how long you’ve had the account.

Traditional IRAs have an early withdrawal penalty that is generally assessed on those who withdraw money from their IRA prior to the age of 59 ½. The tax penalty is 10% of the money withdrawn, with the amount taxed as income. As with Roth IRAs, there are some exceptions to this penalty.

Likewise, if you want to withdraw money from your 401(k) before the age of 59 ½, you’ll be subject to a 10% early withdrawal penalty from the IRS and required to pay taxes on that money—assuming your employer even allows early withdrawals!

Upon hitting the age of 59 ½, you can withdraw money from your 401(k) without paying an early withdrawal penalty. However, the amount will be considered income and taxed accordingly.

Too much investment portfolio risk

Typically, as you get older, you should invest in a more conservative fashion. Therefore, the percentage of equity holdings (stocks) invested in your retirement accounts should decrease to reduce risk—which is especially critical since you may lack the luxury of time required for the market to bounce back after a dip.

While the actual number varies by individual, a general rule of thumb is to subtract your age from 100 to know which percentage of your portfolio to keep in stocks—with the remainder comprising safe assets such as bonds and CDs.

It’s important to know that due to longer lifespans, some experts have actually modified this “rule” and now recommend you subtract your age from 110 (or even more!) to ensure you don’t run low on funds.

Despite this widely shared knowledge, a recent report by Fidelity claims investors—specifically 37.6% of baby boomers—are exposing their retirement accounts to unnecessary risk by investing too much in stocks.

Housing that expenses won’t disappear in retirement

Even if you’ve paid off your mortgage, you’re still unlikely to avoid home repairs and/or renovations during your golden years. For example, remember that most houses aren’t designed with old age in mind. Therefore, if you’ll require wheelchair accessibility or need to expand a bathroom or convert existing space so key areas are all on one level, expenses can quickly pile up. Even a brand-new home isn’t immune to accidents and weather-related damage that homeowners insurance may not cover.

A plan to fill up your free time

Many retirees are often surprised to find that, in addition to much more time on their hands, they are also hit with negative psychological effects they hadn’t anticipated: such as feelings of uselessness or a lack of purpose. It’s estimated that for roughly a quarter of retirees, life after work summons a sense of isolation and a loss of direction. Click here to read more about the mental side of retirement and how to successfully navigate the same.

In sum: factors to consider when pondering an early retirement

Achieving the ability to retire early is an amazing accomplishment—just make sure you have all your bases covered so that your early retirement doesn’t materialize as a false start.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.