Numerous employees anticipate leaving the rigors of the working environment as soon as possible. If you’re a Financial Independence, Retire Early (FIRE) advocate, or simply planning to retire at 62, you’ll need to plan for your retirement years. And this requires you to carefully analyze more than just your money, even if your income is the most important factor.
Here are five things to do and pitfalls to avoid if you wish to retire early:
#1 Determine how you will spend your time.
It may sound contradictory, but you may have difficulty determining what to do with all your upcoming spare time. This is one of the most common complaints from new retirees. Surprisingly, some individuals yearn for the structure and companionship of the office once more.
Before someone retires, regardless of their age or when they intend to retire, they should create a personal plan, says Dan Sudit, partner of Crewe Advisors in Salt Lake City. Sudit advises to think what your life wll look like when you retire.
You must decide how you will spend your days. You will no longer be bound to a job that prevents you from traveling, so you may plan excursions. However, what will you do while not traveling? Will you pursue a pastime that you’ve always desired?
“At the age of 62, what are your plans for your life?” Travel? Maintain your garden? Improve your golf game? This will assist in establishing your cash flow requirements, as stated by Sudit.
#2 Establish a viable income
Once you have determined how you will spend your time, you may consider how you will finance your lifestyle, whether you want to party like a rock star or live more humbly.
Bradley Newman, CFP, a principal financial advisor at Fort Pitt Capital Group in Harrisburg, Pennsylvania, says generating an accurate and thorough estimate of your post-retirement income requirements and expectations is a crucial but frequently overlooked stage. Instead of relying on irregular capital gains that may or may not materialize, Newman advocates concentrating on a steady income from bonds and dividend stocks.
When planning your income strategy, you should establish reasonable assumptions about the returns your assets may provide, the taxes you’ll owe, and inflation. Inflation may wreak havoc on a retirement income plan, perhaps not immediately but gradually, as your fixed income loses purchasing power.
You should set aside adequate funds to ‘immunize’ your lifestyle as much as possible, dvises Sudit. “If you expect to retire at age 62, you will still be young enough for inflation to affect your future retirement spending,” he adds. “However, if you are 42 years old and expect to retire at 62, be careful to consider the cost of products in inflation-adjusted dollars.”
And your income goes beyond food, shelter, and transportation, and it also covers items that have risen significantly more rapidly than the total inflation rate, such as health care.
Overly optimistic assumptions might lull you into a false feeling of security, leading to unpleasant surprises in the future, adds Newman. You must develop a comprehensive financial plan that estimates the effects of inflation in 20 or 30 years.
#3 Choose when to file for Social Security.
As part of your preparation, you should carefully examine when to begin receiving Social Security. Depending on when you were born, you may not be able to get your entire benefit until as late as age 67, but you can begin collecting at age 62. If you claim it early, you will lose a substantial amount of money each month, maybe for decades.
Therefore, the date you begin receiving Social Security payments might substantially influence your retirement. You will not only receive a smaller monthly payment, but you will also receive less annually as a result of Social Security’s cost-of-living adjustment.
If you can survive for a few years without Social Security, it may make sense to do so. Up to age 70, the longer you can postpone, the larger your benefit check will be. Some persons will prefer to begin receiving their benefits at age 62, but they must account for this in their financial planning.
#4 Prepare post-retirement medical coverage.
If you retire before you turn 65, you won’t be able to enroll in Medicare, so you’ll need to make other arrangements. Some may migrate overseas for a low-cost plan or even utilize COBRA, but most will seek access to a state-based healthcare plan. However, even this can be costly.
Sudit explains that if you worked for a firm that offered insurance, you might get COBRA coverage for 36 months, 18 months plus another 18 months extension, bridging the three-year gap between retirement and Medicare eligibility. However, he notes that you must satisfy specific requirements for COBRA and pay for your whole insurance premium.
However, most individuals will likely seek coverage through a state-based market.
Newman advises, not be seduced into complacency by low-cost alternatives on the exchange. Although some of the low-cost solutions available on the exchange are highly enticing, be aware of the low-income requirements necessary to qualify for these rates.
As Newman points out, if you receive income from tax-advantaged accounts (such as 401(k)s or IRAs), it may be difficult to remain below the income criteria for low-cost insurance while withdrawing enough money to support yourself.
#5 Anticipate the unexpected.
You should not keep your retirement spending so close to your budget that you risk financial disaster in the event of an unexpected expense.
If you over-plan and make a mistake or fail to include an expenditure, your retirement will not be what you anticipated, and you will regret your decision, says Sudit. Similar to a home renovation, anticipate cost overruns and unforeseen fees.
Expect some of the following “unexpected” costs to arise from time to time: house upkeep, automobile repairs or replacement, and the ever-rising cost of healthcare. However, unexpected bills may appear out of nowhere. Therefore it is essential to maintain a financial buffer.
Early retirement, even if it’s just a few years early, might result in unanticipated obstacles. Therefore, it is essential to analyze the most critical concerns, such as your income and healthcare requirements, and foresee additional issues that may develop, particularly unexpected bills.