All About Early Retirement

What is early retirement?

Early retirement typically refers to the decision to retire from the workforce before reaching the traditional retirement age, which is often set at 65. While the specific age considered “early” can vary, retiring in one’s 40s, 50s, or early 60s is generally considered early retirement. It’s essential to note that early retirement is a personal decision, and what constitutes “early” can vary based on individual circumstances, goals, and cultural norms. Successful early retirement often involves a combination of financial planning, disciplined saving, and a clear understanding of one’s retirement lifestyle and needs.

What is involved in retiring early?

Retiring early involves careful planning, financial discipline, and a strategic approach to ensure that you can sustain your desired lifestyle without traditional employment income. Here’s what you need to consider.

• Finances: Conduct a comprehensive analysis of your current financial status. Evaluate your income, expenses, savings, investments, debts, and any other financial assets or liabilities. Develop a realistic budget based on your early retirement goals. Categorize your expenses and identify areas where you can cut back to increase savings.
• Health Insurance:  Consider healthcare costs when planning for early retirement. Understand your health insurance options and estimate potential healthcare expenses. Plan for the period between retirement and Medicare eligibility (typically age 65 in the U.S.).
• Your Time: Early retirement is not just a financial decision but also a lifestyle change. Mentally prepare for the transition and consider how you will spend your time and find purpose during retirement.

Health Insurance is a key consideration when planning an early retirement. Review options with a licensed Senior Resources Network agent at 855-343-1977. You can discuss Short Term Medical and other types of health insurance if it looks like you’ll have a gap in coverage. 

Will my Social Security benefits be affected if I retire early?

Yes, early retirement can affect your Social Security benefits. The full retirement age for Social Security purposes varies based on your birth year, typically ranging from 65 to 67. If you choose to retire before reaching your full retirement age and start collecting Social Security benefits, your benefits may be subject to a reduction. It’s crucial to carefully consider the financial implications of early retirement on your Social Security benefits. While early retirement might provide you with the flexibility to leave the workforce earlier, it’s essential to weigh the impact on your long-term financial security.

What are my early retirement health insurance options?

If you retire early and are not yet eligible for Medicare (which typically starts at age 65), you’ll need to explore health insurance options to bridge the gap until you become eligible for Medicare. Here are some potential health insurance options for early retirees:

• Employer-sponsored coverage: If you retire early but have access to employer-sponsored health insurance, you may be able to continue coverage through your employer’s plan or through COBRA (Consolidated Omnibus Budget Reconciliation Act). COBRA allows you to maintain your employer-sponsored coverage for a limited period (usually up to 18 months) after leaving your job. Keep in mind that you will be responsible for the full premium, including the portion your employer used to cover.
• Individual health insurance: You can purchase private health insurance directly from insurance companies. These plans may provide flexibility in terms of coverage and network options, but premiums can vary. It’s essential to carefully compare plans to find the one that best fits your needs. The Health Insurance Marketplace, established under the Affordable Care Act, also offers individual health insurance plans. You can explore different plans and coverage options, and you may be eligible for premium subsidies based on your income. Open enrollment typically occurs annually, but certain life events, such as early retirement, may trigger a special enrollment period.
• Short-term health insurance: Short-term health insurance plans are temporary medical coverage options designed to provide individuals with a limited duration of health insurance coverage. These plans are typically intended to fill gaps in coverage during transitional periods, such as when individuals are between jobs, waiting for employer-sponsored coverage to begin, waiting to enroll in Medicare, or seeking an alternative to a longer-term health insurance plan. Senior Resources Network offers many Short-Term Medical plans with a variety of terms and premiums.  

To explore Short-Term health insurance and other coverage options, get help from a licensed Senior Resources Network agent at 855-343-1977.

How much money should I save if I want to retire early?

The amount of money you should save for early retirement depends on various factors, including your desired lifestyle, expected expenses, healthcare costs, and the age at which you plan to retire. Here are steps to help you estimate the savings needed for early retirement:

• Determine retirement expenses: Estimate your annual expenses during retirement, considering both essential and discretionary spending. Include housing, healthcare, transportation, food, utilities, and any other significant costs.
• Factor in inflation: Adjust your estimated expenses for inflation to account for the increasing cost of living over time. Use a conservative inflation rate to project future expenses.
• Calculate the number of years in retirement: Determine the number of years you expect to be in retirement. Early retirement may mean a longer retirement period, so factor this into your calculations.
• Account for healthcare costs: Healthcare expenses tend to increase with age. Consider potential healthcare costs, including insurance premiums, out-of-pocket expenses, and potential long-term care needs.
• Identify sources of income: Determine potential income sources during retirement, such as Social Security, pension (if applicable), and any other sources of passive income. Subtract this from your estimated expenses to find the gap that needs to be covered by savings.
• Use the 4% Rule: The 4% rule is a common guideline for determining how much you can safely withdraw from your retirement savings each year without running out of money. Multiply your annual expenses by 25 (inverse of 4%) to get an estimate of the total savings needed.

Remember that these calculations are based on estimates and assumptions. Financial markets, inflation rates, and personal circumstances can change, so it’s essential to regularly reassess your retirement plan. Ultimately, the amount you need to save for early retirement is highly individual. By carefully considering your goals, expenses, and income sources, you can create a realistic savings plan that aligns with your vision of early retirement. 

Successfully retiring early involves careful planning and consideration of various factors. Consulting with financial professionals, such as financial advisors, tax experts, and estate planning professionals, can provide valuable guidance tailored to your unique situation and goals.