As of 2018, the average retirement age in the United States is 63. However, a lot of people dream of an early exit from the working world. Retiring early is an exciting prospect, but it’s easier to fantasize about than to make happen.
Most of us have been planning for retirement in some way, but making the decision to retire early demands some serious financial and lifestyle considerations. If you’ve moved up your target retirement date, now is the time to start working to make it reality - and thinking about these critical things.
Consider the Costs
How much will your retirement cost you? It might be more than you expect. According to the AARP, a retiree could need nearly $1.2 million in assets to support at 30-year retirement. This dwarfs the average cost of other famously large expenses, such as a college education or a home purchase.
Exactly how much your retirement will cost will depend on a variety of factors, including your expenses, income, and health. Financial rule of thumb says that a retiree should replace 70 to 90 percent of their annual pre-retirement income to retire without a serious lifestyle shift. So, if you earned $150,000 per year before retirement, expect to need $105,000 to $135,000 each year you are retired — if you intend to live as you do now, that is.
So for a retiree making $150,000, retiring even 5 years early could add over half a million dollars to the cost of retirement – plus, those extra years are coming when you’re younger and more likely to be active and spending money.
Accelerate Your Savings
Expert consensus is that, for a normal retirement outlook, an employee should save around 15 percent of their wages each year, starting in their 20s. Mind you, this figure is for an average retirement — retiring early will require additional savings. If you’re hoping to retire early, it’s time to ramp up your saving habits.
If you haven’t already, establish a savings target based on how much you spend annually, when you want to retire, and other factors including lifestyle goals and taxes. A financial advisor can help evaluate the things you need to consider. Because early retirees are working on a shorter-than-normal timeline, may also consider a savings sprint: Retirement research firm Hearts & Wallets determined that wage-saving rates of 25 percent or more, over 8 to 10 years, were common for early retirees.
The conversation around savings is also a good time to consider your lifestyle. Are you being as smart with your money as you can be? It’s no secret that small expenses add up to big costs, so sit down with your financial advisor and take a close look at where your financial priorities are — they may need to change if you want to hit your savings target.
Plan Retirement Accounts Carefully
Retirement accounts are a critical part of nearly every retirement plan. The funds held within your 401(k), IRA, or Roth IRA can go a long way in helping you retire comfortably, but when you retire early, things work a bit differently.
With both a traditional IRA and a 401(k), early retirees run the risk of suffering a 10 percent early withdrawal fee if they access their funds before they turn 59 ½. There are hardship and disability exceptions, but even if you qualify you’ll still pay income taxes on the funds you withdraw.
Early retirees may choose to roll over their accounts to a Roth IRA, paying taxes on their funds during this conversion. The advantage of doing this is that you can withdraw the amount you contributed at any time, tax- and penalty-free. However, any earnings on contributions you’ve made may be subject to taxes and even penalties, depending on how long you’ve had your Roth IRA and how old you are when you withdraw.
Withdrawal rules are complex, so if you’re planning to retire in your 50s or earlier, it’s important to plan with your financial adviser to ensure you have funds available.
Make Sense of Health Coverage
Healthcare can be a challenging question for early retirees: Not only could they be without their company-funded insurance plan, but Medicare coverage, which starts at 65, can be several years out. Choosing the right health insurance is important, especially as you get older.
Consider your options: Does your employer provide continuing coverage for retirees, and are you eligible? Similarly, if your spouse is still employed, can you and your family receive coverage under their plan? These are frequently the best options.
Alternatively, retirees could look into the ACA, but with an uncertain future for the program, it may not offer the peace of mind they’re looking for. There is always the option of purchasing a policy from an insurance provider, but this can come with considerable expenses and should be factored into the overall cost of retirement.
Make Sure It’s Right for You
For some of us, early retirement may require too much of a lifestyle change, or may just not be financially possible. It can take serious planning, compromise, and commitment, and it’s essential that anyone considering it gets a clear picture of how feasible it really is for them. These choices can have lifelong impact, and time may be better spent preparing for a healthier retirement later on.
Here at Baird Retirement Management, we understand what goes into a retirement plan. We have helped countless professionals in the oil, gas, and chemical industries confidently exit the workforce — early or not. We’re ready to work for you.