Retirement planning starts with retirement spending. Ideally, retirees are mortgage free and relatively debt free before they leave the working life behind. In retirement, a key strategy is to maintain low monthly staple expenses.
Therefore, if you want to devise a financial plan that will allow you to retire early, consider cutting back your basic household expenses a year or more before your target retirement date. Some retirees choose to downsize their home, which also tends to reduce property taxes, homeowner’s insurance and maintenance costs.
Also, use that time to shop for cable, internet or cell phone plans that may be cheaper and suit your needs in retirement. Be aware that seniors often get additional discounts they may not be aware of, so be sure to explore those options. By reducing your pre-retirement cost of living, you can reduce the amount of income you’ll need after you retire.
Build up Coffers
Another way to plan for retirement is to increase your savings while still earning income. You should have more than the typical emergency fund when you retire – so you won’t deplete it before you die. You also don’t want to have to take large, unscheduled withdrawals from retirement accounts because that would deplete your principal and potentially reduce the ongoing income you receive from those sources.
Social Security
Remember that if you start taking benefits before your official retirement age, you will lock into a lower payout level for the rest of your life. So even if you can afford to retire early, it’s a generally a good idea to hold off tapping Social Security until full retirement age or even up until age 70, when you earn additional income credits. Factors to consider in making this decision include your health and life expectancy, needs for income and other retirement assets. Remember, Social Security will last the rest of your life with cost-of-living increases and no investment market risk, so it is one income source you should wait to maximize as long as you can.
By establishing an account at the Social Security website, you can check your benefit amount at various ages based on current earnings; these projections are updated every year. If you are married, consider both spouses’ benefits as it might be better to start one early while allowing the other benefit to accrue.
Pension
If you expect a pension from your employer, you can request projected payouts to help devise your early retirement plan. If you have the option to receive either annuity payments or a lump-sum distribution, you might want to consult with a financial advisor to determine your best option within the context of your entire portfolio of assets.
Investment Accounts
If you have a 401(k), 403(b) or traditional IRA, remember that once you turn 73 you must begin required minimum distributions if you haven’t already. As a general rule, the common strategy for drawing down invested assets in retirement is to use taxable accounts first, tax-deferred accounts second and tax-free accounts (e.g., Roth IRA) last. Roth IRAs do not require distributions at any age and can continue to grow throughout retirement.
Rule of 55
There is a legal strategy for tapping 401(k) or 403(b) retirement funds before the age of 59½ without incurring a penalty. The Rule of 55 enables you to make a series of substantially equal periodic payments from a former employer’s retirement plan (not a rollover account) between the ages of 55 (50 for a government defined-benefit plan) and 59½. While this strategy waives the 10 percent early withdrawal penalty, distributions are still subject to income taxes.
Health Insurance
If you wish to retire before age 65, consider your health insurance options.
- Employer-sponsored coverage through COBRA
- Health insurance marketplace plans at HealthCare.gov
- Joining your spouse’s health insurance plan
- Potential discounted coverage through membership organizations (e.g., AARP)
When you become eligible for Medicare, you must apply during the seven-month period that begins three months before you turn 65 and three months after your 65th birthday. If you do not apply during this enrollment period, you may face penalties.
Long-Term Care
If you’re thinking about early retirement, you may not be thinking much about nursing home expenses. However, long-term care can be quite expensive, so it’s important to plan for it early so you don’t run out of money when you need it most. Help from family can reduce the need for paid long-term care in your later years, so you may want to consider moving closer to them before or after you retire. Note that Medicare generally does not cover ongoing long-term care, although it may provide limited coverage for skilled nursing and rehabilitation services. As a result, you’ll either need to self-fund, purchase some form of long-term care insurance, or spend down your assets in order to qualify for Medicaid long-term care assistance.
An early retirement plan usually involves a number of moving parts, so carefully consider withdrawal strategies and your specific tax situation in order to develop a plan that works best for your circumstances.
