The only thing better than retirement for some people is early retirement — when you can line up your ducks in a row and bow out of the workforce before the standard retirement age. Yet there can be significant disadvantages to retiring early — making it that much more critical that you project your future income and expenses as accurately as possible. Before you hang up your hat for good, make sure you address the following five concerns:
- Inflation. A common misconception about retirement is that you will be spending less than you currently do. The truth is, you likely will be spending more because you will have the free time to enjoy leisure activities, hobbies, and interests you could not freely pursue as a full-time employee. Add to this challenge the inflation factor, and you could be looking at a 170 percent increase in living expenses by the time you reach age 80 if you retire at age 55. If you neglect to account for inflation in your retirement planning, you could be in for an unwelcome surprise later, so do your due diligence to ensure you account for both rising inflation and rising expenses.
- Change in lifestyle. The general rule of thumb is that during their retirement years, most retirees should plan on spending 75 to 80 percent of the amount they currently spend. As noted above, this amount could be much higher, not only due to lifestyle changes, but also possibly due to medical expenses. If you are unable to increase your income for your retirement, then you might have to adjust your lifestyle and forgo some of the plans you had for enjoying your leisure time.
- Health insurance costs. High health insurance premiums go hand in hand with individually purchased policies. You could be forced to spend large amounts of your retirement savings on health insurance until you become eligible for Medicare at age 65. If you wind up spending all your money on health care, then your early retirement won’t make much sense.
- Too much time, not enough money. Many retirees, finding that they have time on their hands and have too little retirement savings, turn to part-time employment to supplement their income. However, you cannot count on this option, as good part-time jobs can be even more difficult to find than good full-time ones. (Think about it: How excited would you really be to flip burgers in a burger joint as a retiree?) Additionally, you will need to account for the additional costs that part-time employment may incur, such as higher income taxes and reduced Social Security.
- Reduced Social Security. If you collect Social Security before age 65, your benefits will be reduced, and the benefits for early retirees will lag behind inflation. Check your calculations carefully: If they show you will have to begin drawing Social Security benefits at age 62 to help meet living expenses, then you likely cannot afford early retirement.
On the bright side, it is possible to retire early if you can ensure your long-term financial security. Say, for example, you have accumulated sufficient personal resources to allow for early retirement, or your company offers early-retirement incentive programs — aka window incentives, now popular method companies use to reduce the size of their workforce.
In any case, the key is to be realistic as you make your projections, and know exactly where your money will be coming from and how much you can expect to bring in during retirement. Sit down with a financial adviser to go over the details and build a plan for early retirement that won’t leave you struggling to make ends meet, but rather enjoying your newfound freedom.
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