There is no denying that one of the goals most people have is being able to afford early retirement. This has a lot to do with how they plan their finances early on and save up for it. However, there are some factors to consider when deciding to retire early from your career or profession. Here are some of them worth looking into.
Early 401(k) withdrawal penalties
The concept of early retirement seems to equate to a lot of wonderful thoughts. It can bring ideas of long walks on the beach or even spending time on the front porch with family and friends. Retiring early can even excite a lot of people as this gives them time to pursue their hobbies and interests in life. However, all these have a financial element to it.
When you talk about financial planning for retirement, a bulk of this would depend on your 401(k). In line with this, it is important to remember that there is a penalty for early withdrawal on that money. This is a big possibility since you are retiring early might need to have access to that funds earlier than most people.
As a general rule, you need to wait until you are 59 ½ years to withdraw money from your 401(k) without being hit with a penalty. Though there are exceptions to this rule such as hardship or even disability, the general rule is not to take early withdrawals. This will not only spare you from penalties but allow you to enjoy your fund for a longer time.
The Cost of Health Insurance
Retiring early will also pose problems with your health insurance. This is because Medicare won’t come into the picture until 65 years of age. The Census website also states that 65 years old is the average retirement age for Americans. There are options such as health insurance through your spouse and even your old employer. You can even look at how Obamacare can fill in the gap.
One thing you can do to help manage your costs with health care is to put more focus on physical health. This means getting in a decent amount of exercise and eating healthy would go a long way in keeping down the cost. Early retirement means you need to take care of your health more than ever before.
Your friends could still be working
Early retirement usually means that you could end up having a lot of time for yourself. This is because your friends might have a hard time keeping in step with your retirement plans and be in the workforce far longer than you are. It might seem to be a pretty small thing to consider but it would factor in your day to day activities.
For one, it is quite hard to look for people to spend your retirement with. It would be great to have your husband or wife with you but there would be times where you just need some of your friends to hang out with. You can also slowly start to ease out of your social circles since you are no longer in the office most of the day like them.
What you can do is to look for other people just like you – early retirees. You can even spend more time helping out in the community. That is if you have no plans on how you would spend your long days in retirement.
Making your money last in early retirement
This is already a challenge for those that are retiring at the average age. It poses a bigger problem if you choose early retirement. For one, you need to add the early years that you retire in your costs. This is because you start using your retirement fund earlier than most people. If you were able to plan for this then well and good. However, if you solely focused on simply retiring early without the financial plan for the early years then you have a problem.
This is because you run the risk of using up your nest egg earlier and might come up short during older years. What further complicates that issue is that the older you get, the harder it is to add on to your fund. With that in mind, you need to pace your expenses at the beginning especially when you retire earlier than most of your friends.
One thing you can look into when retiring earlier than most is developing and building up income positive hobbies. This benefits you in two ways. For one, you get to do something you love. At the same time, you get paid to do it. A lot of successful people have said it in the past that you need to do something you love. If you do, it will never feel like working.
This might be a little confusing to some people because when you talk about lifestyle inflation, it usually means you are earning bigger. As your income increases, you could have the tendency of increasing and upgrading your lifestyle to match your income. This usually affects your budget and eliminates your chances of being able to save up.
However, you might be surprised that time is another factor to consider when talking about an inflated lifestyle. As you know by now, early retirement usually means you have a lot of free time to yourself. With this, you could easily start filling up your free time with unnecessary expenses. This is similar to how retail therapy affects the finances of people. They believe that spending money makes them feel good not knowing that they are getting deeper in debt.
When you feel bored, you could easily end up on a shopping spree just to pass the time. You might even find yourself making unplanned big ticket expenses such as buying a new car or even purchasing expensive jewelry. You need to make sure that you keep to retirement spending plan and protect your finances from impulsive spending behavior.
Family and friends could ask for money
When family and close friends get into financial trouble, there is a chance that they would come up to you for help. Their logic behind this is that you just retired and you have a nest egg somewhere they might be able to borrow. Add the fact that they believe you do not have as many expenses as they do because you will just be staying at home.
However, you need to be vigilant and not let emotions take the better of you. Your children could be asking for financial help to pay off some delinquent loans with the promise of paying you back. Some grandchildren might ask that you co-sign for their student loans. Friends could also be asking you to help bail them out of a financial mess.
As great as it is to help out, you could be putting your retirement savings in danger. This is for the simple fact that you no longer have a regular day job to add to that fund. Also, as you get older, it could become harder for you to earn money. What you can do is to look for other things you can do to help out. Offer to babysit a few nights so they can put in some overtime work. Or even help out in their business to help them earn more.
Early retirement is a life goal not everyone gets to achieve but for those that do, there are still a lot of things to consider. USA Today also shares that a lot of Americans believe that they will be able to retire when they get to 70 years of age. As pleasant as retiring early may sound, retiring early brings a lot of unique challenges that need to be addressed to enjoy retirement