4 Things You Need to Think About Before You Retire Early

Thursday, April 29, 2021 | Melissa Brock
4 Things You Need to Think About Before You Retire Early

My best friend's husband, aged 38, is retired by anyone's definition. He patters around the house in slippers, checks his million-dollar investments every so often, then maybe takes an early afternoon snooze.

He's a model of the investment strategy known as FIRE: Financial Independence Retire Early. But not everyone can retire using this extreme example. You can retire at 55 and still consider yourself an early retiree. What do you need to know before joining these elite ranks?

What is Early Retirement? 

Defining "early retirement" might seem ultra subjective, but you can use Medicare as a baseline. The government also considers early retirement as any age earlier than 65, when Medicare benefits kick in. 

But early retirees have to plan for more than just the absence of Medicare benefits or insurance in general.

Things to Think About Before you Retire Early 

Take a look at a few things you may need to think about before you retire. Note: We didn't compile an exhaustive list, only a small snapshot. 

What Will You Do in Retirement?

How do you want to spend your retirement? Reading all the books at your local library? Move to another state or country? Sail the seven seas? 

As for my best friend (the one whose husband is a FIREer), she says she can quit her job at any time and live off her investments. But she's not sure she knows what she'd do with herself. 

If you're ogling for FIRE, make sure you know how you'll spend your days. Does something else give you a greater purpose, such as volunteering? 

No matter your age when you retire, you'd hate to work hard to get to retirement, achieve your dream, then think, "Gosh, now what?"

How Much Money Do You Need to Live On? 

Ah, the burning question. You may hear that you need 70% of your pre-retirement yearly salary to live comfortably. Other sources may claim that you need 80% of your pre-retirement income when you leave your job. Tricky truth: The amount looks different for everyone. 

It's important to make realistic estimates about your retirement expenses. Get a budget app and know exactly how much you spend per month. If you spend $10,000 regularly per month, figure out if you can live off of $8,000 or $7,000. These estimates can help you comfortably determine your cost of living.

Where does that 70%-80% come from? It comes from the fact that you will no longer pay into Social Security. In addition, retirees also get off the hook for putting money toward a 401(k) or another savings plan. Think of the other expenses you won't have to pay for anymore: fancy office clothing, gas for getting to and from work, pricey lunches with colleagues and more.

Have you paid off your mortgage? Can you confidently say your health is excellent? If you plan to move to an expensive city or have failing health, you might need your full income pre-retirement — or more.

What's Your Health Insurance Situation?

What will you do for health insurance if you're too young for Medicare? 

The Affordable Care Act (ACA) allows people to purchase qualified health insurance plans on their own. However, that doesn't mean that ACA plans come cheap. Do your research to learn about the best options for ACA plans. FIRE movement members may ask themselves whether they can get competitive ACA plans in a different state.

Another option: The Consolidated Omnibus Budget Reconciliation Act (COBRA) could allow you to continue group health benefits for a limited period before you turn 65. If you retire at 64, for example, you could use COBRA until you turn 65 and can get on Medicare. However, it's pricey: You may have to pay the entire premium for coverage up to 102% of the cost.

How Much Can You Withdraw?

A common rule of thumb: An investor with a portfolio of 50% stocks and 50% bonds could withdraw 4% of his or her portfolio and adjust by the rate of inflation year thereafter.

For example, if you have $1 million in savings, you could withdraw $40,000 in the first year and adjust that amount over the remainder of your life. But as you've probably noticed, a $1 million retirement doesn't translate to much per year in income. 

Working a little longer can help you pad your nest egg and also help you delay Social Security benefits, which rise the longer you stay in the workforce.  For every year you delay your claim past your FRA, you get an 8% increase in your benefit. 

Also, don't forget to pay attention to the IRS' required retirement account withdrawals for retirement accounts after age 72 (called required minimum distributions). You can't take withdrawals from your retirement accounts without penalty before age 59 ½. 

Have You Thought of All the Pieces?

Retiring early requires you to make decisions — decisions that you shouldn't take lightly. Naturally, you'll have a different set of decisions to make if you're 38, like my friend's husband, compared to what you'd face at age 62. (By the way, you might not even want to consider FIRE unless you have about 25-30 times your annual expenses invested.) 

Besides some serious thought, make sure you have a pretty good calculator or financial advisor to give you a boost.

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