Things to Consider Before Retiring Early

Retirement right at 65 isn’t the same goal it used to be. You might be considering early retirement and basking in those golden years for as long as you can. But for those considering early retirement, you might find things aren’t as golden as they seem.

No matter when you plan on retiring, there are a few things you should keep in mind as you begin the process.

Just remember the content of this article is of a general nature and is not meant to replace professional retirement or financial advice. As we discuss some of the different areas to consider as you retire, your own situation will be unique and your retirement decision is ultimately your own.

Health Care and Early Retirement

One of the big things you might not think about with early retirement is healthcare coverage. Most people assume that you enroll in Medicare when you retire, but that’s not the case for early retirees. In order to enroll in Medicare, you have to be 65 (or younger if you're disabled and qualify). Those retiring earlier than 65 can’t sign up until they’re eligible.  

For those who are looking at early retirement, your healthcare options might not be what you were planning. Until you are eligible for Medicare, you will either have to purchase a marketplace health plan or have a spouse still in the workforce and use their health plan.

Reviewing your healthcare coverage options before retiring can help avoid coverage gaps and potential headaches.

Retirement Before 60

If you are planning on retiring before you’re 59 and a half, you may experience an even greater financial hurdle: accessing your retirement accounts. If you retire before that age, you’re going to face penalties when accessing your accounts.

While the government typically enforces a 10% early-withdrawal penalty for taking money out of your retirement accounts early, there are ways to get around the penalties.  

Those with Roth retirement accounts can access their personal contributions at any age. Although it is worth noting that you may still owe taxes and penalties if you withdraw any earnings before age 59 and a half without having a qualifying reason.  

Another way to avoid penalties is the rule of 55. If you're turning 55 or older this year and quit your job, you can get penalty-free access to the 401(k) associated with that employer. It doesn't give you penalty-free access to other retirement accounts, so that’s something to bear in mind.  

Retiring Early Can Impact Your Total Savings

Let’s say you’re able to access your accounts. What’s in them? Early retirement affects the compound interest on your retirement savings account. When you’re not contributing to the account, you’re not adding money to feed additional interest. Basically, it prevents you from getting the most out of your retirement savings account.  

Time is your friend when you are saving for retirement. Let’s say you put $250 a month into retirement savings (which equals $3,000 a year) and have been doing that consistently for 30 years. If you’ve been doing that, you'll have about $237,000 saved when you retire, assuming you haven’t made any withdrawals and earned an average of 6% annually on your investments — which isn’t half bad considering you only put in $90,000.

But what happens if you work 10 more years and retire at 65? If conditions are the same as in our first scenario, you could have a whopping $464,000. But how does 10 years make your investment nearly double? You’ve only added an additional $30,000, so where is that increase coming from? Simple: It’s coming from another 10 years’ worth of interest.

You’re not only gaining interest on all the principal you contributed for those first 30 years, but also on that additional 10 years of contributions and all the interest that has compounded for four decades.

Housing and Retiring Early

Retiring without a mortgage is a great goal; however, many seniors still have home mortgages when they retire. And even those who have their homes paid off will still deal with all the other fun fees that define homeownership, like utilities and maintenance fees.

Early retirement might make it harder to pay off mortgages when you’re not bringing in what you used to earn at work. Whenever you’re retiring, your home is a serious expense to make sure you have accounted in your retirement plan.

Early Retirement and Your Social Life

When you think of early retirement, you might be excited by the idea of hanging out with friends and family. But the truth might be more complicated. For starters, if your significant other is still working full time, you might experience a disconnect from one of you working and one of you staying home. And even when both of you are retired, many couples find it difficult to spend all day everyday together.  

Retirement is a lot of free time. Having friends and loved ones to spend time with helps, but it may also be lonely at times. You are used to the schedule of working and having things to occupy your day. With that gone, many seniors can fall into a post-retirement depression.

When considering retirement at any age, evaluating your social and emotional needs is an often overlooked but important aspect to take into account.  

Conclusion

Early retirement is an appealing idea but can also cause some serious headaches. Like with any major life decision, there’s a lot of important variables you’ll need to weigh as you determine when retirement is right for you.  

If you are approaching retirement or considering early retirement, we can help! We can help you with your retirement account rollovers, health insurance questions, and more. We are happy to help you navigate your retirement years.