Many people hope to retire early so that they can enjoy their freedom at a fairly young age. And you too can have this goal. But early retirement can be a harder thing to achieve than you realize. Here are a few reasons why you may need to rethink your plans.
1. Your savings may not be enough
If you are retiring in your 60s, you may need your savings for 20 to 30 years. If you retire a decade earlier, your savings will need to last even longer. Thus, by retiring too young, you run the risk of not having enough savings to meet your needs.
Remember, it’s one thing to watch an impressive retirement savings balance onscreen when you check your IRA or 401 (k) plan. But it’s another thing to see how much income you will have left on an annual basis.
If you have a million dollars in reserve but need your savings to last up to 40 years, you may need to take a cautious approach to withdrawals. This could mean limiting yourself to 2% of your savings per year. With a nest egg of $ 1 million, that represents an annual income of only $ 20,000.
Incidentally, if you keep all of your retirement savings in an IRA or 401 (k), you will be penalized for accessing that money before age 59 1/2. And so, if you retire early, you will need to have money in another account that will not impose penalties for withdrawals.
2. You will have to pay for health care
Once you turn 65, you will be entitled to health coverage under Medicare. But what will you do before that happens?
Going without health insurance is a bad idea. A single injury or illness could cost you thousands of dollars in medical bills, so it’s important to ensure coverage of some sort. However, this coverage could end up getting expensive. And, it may not be as comprehensive as the coverage you’re used to under an employer-sponsored plan.
3. You may have to settle for a lower social security benefit
If you retire in your 50s, Social Security will be absent for a while, as the youngest age at which you can claim benefits is 62. Social Security – Claiming benefits at this age will leave you with less Social Security money for life. And that could prove problematic, especially as your nest egg starts to shrink.
4. You can be bored
It is not always easy to go from a full-time work schedule to days of total freedom. Of course, the first few months of early retirement can be overwhelming. You could travel, relax, and enjoy a more relaxed pace.
But over time, early retirement could become a pretty boring prospect, especially if you are forced to live sparingly and don’t have the money to keep traveling the world. And so you can end less happy as a result of your retirement, no more.
Early retirement is a great idea for many people. But it is important to go prepared. It means making sure you have really saved enough (and have money in an accessible account when you’re younger), figure out health insurance, develop a strong Social Security reporting strategy, and be creative about ways to stay busy. As long as you can tick these boxes, you can put yourself in a great position to leave the workforce in front of your peers without kicking yourself afterward.