Retirement is a big transition that you need to prepare for. Retiring before age 60 has even more challenges. While there are many financial obstacles for early retirees, personal challenges could be even more difficult. Here are some ways you can ease the transition into early retirement:
Finance. Early retirement can be financially challenging. Leaving your job will reduce your income significantly, and your retirement benefits may not kick in right away. The earliest age that Social Security benefits will be available is 62, and leaving the work force early could negatively impact the size of your Social Security checks. You also generally can't access your individual retirement accounts (IRA) until you are 59 1/2 without incurring a 10 percent penalty. You need to take these ages into consideration and plan accordingly.
If you are thinking about early retirement, you probably have other sources of income. These sources can be from your pension, spousal income, rentals, investments in taxable accounts, CDs, or peer to peer lending investments. You need to add all these up to come up with a monthly income figure.
Income calculation. For example, if you want to retire at age 55, then you need to estimate your retirement income at various ages. You may want to delay retirement account withdrawals to avoid the early withdrawal penalty or postpone signing up for Social Security in order to get bigger payments later on in retirement. Here's an example of retirement income streams you might begin to tap at various ages:
55-60: Income from a pension, spouse's job, rentals, savings, or investment accounts
60-67: Add income from IRA and Roth IRA withdrawals
67-70: Add income from Social Security
70+: Add income from required minimum distributions from retirement accounts if applicable
The biggest challenge is funding retirement from 55 to 60 because of the reduction in income. Once you get passed this stage, you will have your IRA and Social Security to draw upon.
Expense calculation. The other side of cash flow is your monthly expenses. Some of your expenses will go down when you retire, but some other costs will increase. Job related expenses will drop, and you can estimate some of these.
--Transportation. You won't have to drive to work anymore and could save a lot of money on gasoline and parking. By eliminating one vehicle, you would save even more on car payments, insurance, repairs, and maintenance.
--Clothing. Work clothes can be expensive, and you won't need them after you retire.
--DIY. You can "do it yourself" instead of paying for conveniences such as getting a car wash and hiring a gardener. You will have much more time to do everything in retirement and can often avoid paying someone else to do it. And if you don't know how, you have plenty of time to learn.
--Saving. Since you're already in retirement, you don't have to save for retirement, but you should still maintain an emergency fund in case you need it.
Other expenses may go away if you time it right:
--Mortgage. This requires long-term planning, but if you are able to make extra mortgage payments and pay off your mortgage, you won't have this big bill to deal with in retirement.
--Child education expenses. Hopefully all your kids are grown up and have completed their education programs by this point.
--Possibly lower tax. Most retirees pay lower tax than when they were working full time, but that depends on your situation.
Some expenses could increase:
--Health care. One big challenge for early retirees is health care. Medicare benefits do not begin until you are 65. If you retire at 55, you need to purchase health insurance from another source for 10 years. There are a few health care options to consider, but they are likely to be more expensive than your current employer-sponsored health insurance.
Take a retirement test drive. It's a good idea to take a retirement test drive. Try living on the amount of retirement income you expect to have and see if you can do it. Retirement can also be a difficult emotional challenge. Many of us identify ourselves though what we do. Going into retirement can make you feel less useful, restless, or bored.
If it's possible, arrange a three month or even longer sabbatical to see if retirement is really for you. If you have trouble coping with having a lot of time on your hands, then perhaps you should consider working a few years longer.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.
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