Early retirement is a dream for many employees, and there are many things to consider before handing in your two weeks notice. Many retirement benefits are geared toward employees who are 62 and older. If you are lucky enough to retire early, there will be extra challenges to overcome. Here are four things to do before taking an early retirement in your 40s or 50s:
Finances. Early retirement can be difficult on your finances because you will not have access to some resources until you reach a certain age. You can start receiving early Social Security benefits at age 62, but you’ll have to accept a reduced check. If you wait until full retirement age (66 for most baby boomers), then you can receive the full amount.
It can be difficult to fund an early retirement because there are many financial penalties for retiring early. Retirement accounts such as 401(k)s and IRAs can be accessed before age 59 1/2, but you will generally have to pay an early withdrawal penalty. Some pension plans also don’t start to pay out until you are a certain age. So, it is essential to make sure your income can support your expenses. Figure out what your income will be and try living on that income for a year before you retire. If you find that your retirement income cannot support your lifestyle, then you will have to either reduce your budget or work and save a bit longer.
Health care. Health care is another big challenge early retirees will face. Health insurance costs more and more as you get older. And for people with pre-existing conditions, it could be very difficult to obtain coverage at all. If you are covered through your employer and are planning to retire early, you need to figure out where you will obtain health insurance. Medicare coverage starts at age of 65, so if you are close to this age, perhaps you can use COBRA to bridge the gap. Other health care options for an early retiree include coverage through a spouse, finding a part-time job with health care coverage, private health care, and perhaps moving to a country with public health care. Health insurance is expensive, but vital as we get older.
Retirement accounts. If you are considering an early retirement, then you probably have a pretty significant 401(k) account balance. When you leave your employment, it can be beneficial to roll over the 401(k) to an IRA. Many 401(k) accounts have a limited investment selection and you will have many more choices in an IRA. It is important to minimize fees, and in an IRA, you can choose low-fee mutual funds from providers like Vanguard and Fidelity.
Saying goodbye. Retiring from your job can be a euphoric experience, but don’t forget to say goodbye to your friends and co-workers. Many of us depend on instant messaging, company e-mails, and the office phone to stay in contact. This won’t work once you leave your employer. Make sure you get your friends’ contact information before you step out of the office for the last time.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.