If you're hoping to be someone who retires early by choice, as opposed to being forced out of a job, you're no doubt in good company. And there can be big benefits to retiring early, like avoiding the health impacts of a stressful job and getting to enjoy an open schedule at a time when you might have more energy.
Now you'll often hear that retiring early has the potential to be a financial disaster. But while it's true that early retirement does require some unique financial planning, it's not guaranteed to be a financial nightmare. Here are three steps you can take to pull off an early retirement without worry.
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1. Save extra to pay for health coverage
As an early retiree, you might need your savings to last longer than someone who retires on time. So it's a good idea to make sure you have a robust IRA or 401(k) plan going into retirement.
That said, it's especially important to save extra for health coverage if you intend to retire well before the age of 65, which is when Medicare eligibility begins. If you know off the bat that you might need to pay for health coverage for five years or more, have dedicated funds for that purpose separate from your general savings so you can be confident you have the ability to cover that expense.
One good option, in fact, may be to contribute funds to an HSA during your working years and carry that money into retirement. You may end up with expensive deductibles and copayments if you're forced to buy your own health coverage as an early retiree, and your HSA balance could make it easier to cover those costs.
2. Grow a solid nest egg to avoid an early Social Security claim
You're entitled to your full monthly benefit from Social Security at full retirement age, which is either 66, 67, or somewhere in between, depending on when you were born. If you're retiring early, you may not even be eligible for Social Security right away, since you can't claim benefits prior to age 62.
However, as an early retiree, you may be inclined to sign up for Social Security as soon as your 62nd birthday arrives. Doing so, however, will slash your monthly benefits for life. And that could prove problematic, because you're reducing a guaranteed income source.
As such, if you know you want to retire early, make sure your nest egg is equipped to cover your living costs in full for a few years in the absence of Social Security. That should give you the option to put off your filing and lock in higher monthly benefits for the bulk of your retirement.
3. Come up with a plan for what you'll do with your time
Many people seek to retire early because they long for more free time. But one hiccup early retirees tend to encounter is having too much free time.
To avoid regretting your early retirement decision, spend some time thinking about what you'll do with your days as a fairly young retiree. You may decide that you're looking forward to a combination of volunteer work and travel, which could strike a nice balance of both unpaid and paid entertainment.
Or, you may already know that you're not retiring completely in that you intend to start a business selling baked goods. That, too, could be a great way to fill your days. But it's important to have a plan either way.
A lot of people get tripped up in the course of retiring early. But if you take steps to avoid the common issues that early retirement tends to bring about, you can set yourself up to enjoy that decision to the fullest.
