How many people do you know who retire early, only to find themselves back in their old jobs because they ran out of money or starting a new venture because they couldn’t get a job and needed to work? Here are six things to keep in mind before you announce your retirement, courtesy of Investopedia’s recent article, “6 Signs You Are Ready to Retire Early.”
- Debts Paid Off. If the mortgage is paid off, and you don't have any loans, big credit card balances, or other debt, you won't have to worry about writing out big checks for bills in retirement. Therefore, your savings and retirement income will be available for you to enjoy life after work and free to use, in the event of an emergency.
- Savings. If your investments meet or exceed the amount you were hoping to save, it’s another good sign you could take early retirement. However, if you didn't line up your retirement savings plan for early retirement, you’ll have to recalculate the length of your savings with these additional years. Depending on your age, you may not yet be eligible for Social Security or Medicare. As a result, your savings will need to cover expenses, until you reach the eligible age.
- Early Withdrawal Penalties Avoided. If your 59th birthday was six months ago or longer, you're eligible to take penalty-free withdrawals from any of your 401(k) plans. This typically applies to other qualified retirement plans but check with the IRS to be sure yours is included.
If you’re a wannabe early retiree with a 401(k), if you continue working for your employer until the year that you turn 55 (or after), the IRS lets you withdraw from only that employer's 401(k) without penalty when you retire or leave, provided you leave it at that company and don't roll it into an IRA. However, if an employee retires before age 55 [except as noted above], the early retirement provision is forfeited, and the 10% penalty will be incurred for withdrawals before age 59½. You can also set up a series of substantially equal withdrawals over at least five years, or until you turn 59½, whichever is longer. However, similar to withdrawals from a 457 plan, you'll still have to pay the taxes on your withdrawals.
- Healthcare Costs. Early retirees must have a plan in place to cover health costs during the years after retiring and before becoming eligible for Medicare at age 65. If you have coverage through your spouse's plan—or if you can continue to get coverage through your former employer—it’s another signal that early retirement could be an option. COBRA may also extend your healthcare coverage for a period after leaving your job. However, without your former employer's contributions to your insurance coverage, your bills with COBRA may be higher than other options. You can also buy private health insurance. If you have a Health Savings Account (HSA), you can use tax-free distributions to pay for your out-of-pocket qualified medical expenses, regardless of what age you are. Note that if you leave your job, you won't be able to keep making contributions to the HSA.
- The Ability to Live on Your Budget. Retirees on fixed incomes, like those with pensions and/or retirement plan withdrawals, typically have lower monthly incomes than they did when they were working. Practice sticking to a retirement income budget for at least several months and test your reduced retirement budget to get a feel for how hard living on a fixed income can be.
- You Have an Action Plan. Why bother retiring early, if your only goal is to drive your spouse crazy? Without a purpose, many people find themselves spending more than they can afford on travel, shopping as a leisure activity and dining out more often than they ever did before. That’s not necessarily a bad thing, but there needs to be a reason for early retirement other than overspending. Have a plan and a purpose that will keep you engaged with the larger world and lead to fulfillment. Some people find themselves busier during retirement because of their many charitable and recreational activities, and that’s a great reason to retire early.
Reference: Investopedia (May 16, 2019) “6 Signs You Are Ready to Retire Early”