While early retirement may feel like a fantasy for some, it’s increasingly becoming a reality for many Americans. In fact, a recent study from Natixis Investment Managers found that the average American worker hopes to retire at age 62—three years before Medicare kicks in and five years before Social Security’s full retirement age.
Of course, retiring early requires careful planning and foresight to avoid outliving your financial resources. Before taking the leap, it’s important to make sure you’re prepared, both mentally and financially. In this article, we’re sharing ten powerful questions you can ask yourself to determine if retiring early is the right choice for you.
Here are 10 questions to ask yourself if you’re considering early retirement:
#1: Have I created a retirement budget?
A budget is crucial for understanding how much money you’ll need to maintain your desired lifestyle once you stop working. Before considering early retirement, you should have a detailed spending plan in place that includes essential living expenses, discretionary spending items, and other potential costs that may arise once you stop working.
It’s impossible to know for certain how your expenses will evolve throughout retirement. Nevertheless, a reasonable estimate can help you plan accordingly and reduce the risk of outliving your savings.
To create your retirement budget, start by analyzing your current spending habits. You can do this manually by combing through past credit card statements and receipts, or you can link your accounts to a budgeting app that analyzes your spending for you.
Then, consider how your spending may change after you retire and adjust your budget accordingly. Be sure to revisit your budget periodically and update it as your lifestyle goals and spending habits change.
#2: Do I have enough savings to last through retirement?
In most cases, early retirement requires more savings than traditional retirement. If you’re planning to retire early, you should have enough savings to maintain your desired lifestyle throughout your golden years and avoid financial stress.
In other words, your savings should cover your projected expenses while providing a cushion for unexpected setbacks. A common rule of thumb for retiring early is to aim for at least 25 times your annual expenses in savings.
You can also use an online retirement calculator to estimate the amount you’ll need to save based on your lifestyle goals and a variety of other factors. Going through this exercise can help you assess whether your current savings are on track and adjust your savings strategy if necessary.
#3: Is my investment portfolio aligned with my retirement goals?
As you consider early retirement, you’ll want to make sure your investment portfolio is properly diversified and aligned with your unique retirement objectives. Having the right mix of investments helps ensure your savings will last throughout your golden years.
Consider consulting a fee-only financial planner to ensure your investment strategy is optimized for your goals. This will give you an opportunity to make adjustments if necessary, so you’re not taking on too much or too little risk heading into retirement.
#4: Have I considered how taxes will impact my retirement plan?
According to a recent Thrivent survey, roughly two-thirds of retirees say if they had to advise their younger selves on a financial matter, it would be to better understand how taxes affect their retirement savings.
For example, many people don’t realize that a portion of your Social Security benefits are taxable at the federal level if your income exceeds a certain threshold. Similarly, your Medicare premiums may be more expensive if you make too much money.
Simply being aware of these details can help you avoid costly mistakes. Moreover, proper tax planning can help you maximize your retirement resources while minimizing your lifetime tax liability.
A fee-only financial planner can help you develop a tax-efficient income strategy and identify additional strategies to minimize your tax burden.
#5: Do I have adequate healthcare coverage until Medicare is available?
Healthcare tends to be one of the largest expenses in retirement. Unfortunately, Medicare doesn’t kick in until age 65.
That means if you’re considering early retirement, it’s essential to have a plan in place to bridge the health insurance gap between when you stop working and when Medicare becomes available. Proper insurance coverage ensures you maintain access to quality care in retirement and helps you avoid unnecessary financial strain.
There are a handful of options available to early retirees seeking healthcare coverage. For example, if your spouse is still working, you may be able to join their employer-sponsored healthcare plan.
Alternatively, you may want to consider COBRA if your insurance needs are only short-term. You can also purchase a plan on the Affordable Care Act (ACA) marketplace.
#6: How will retiring early affect my Social Security benefits?
Claiming Social Security before your full retirement age can permanently reduce your benefits. Thus, it’s important to understand the potential impact of early retirement on your Social Security benefits to avoid falling short of your income needs.
Be sure to familiarize yourself with your Social Security benefits statement and calculate the difference between claiming benefits early and waiting until your full retirement age (or later). In addition, consider working with a fee-only financial planner to determine the best strategy for maximizing your Social Security benefits within the context of your overall retirement plan.
#7: Do I have enough cash on hand to cover at least 6-12 months of living expenses?
Sequence of returns risk occurs when your investment portfolio declines in value early in retirement, right as you begin taking distributions. This makes it more difficult to recoup your losses when the market recovers and increases the risk that you’ll outlive your financial resources.
A cash reserve allows you to cover living expenses without tapping into your investments during a market downturn. Having this cushion helps offset sequence of returns risk, reducing your chances of depleting your retirement savings too quickly.
As a rule of thumb, retirees should aim to have at least 6-12 months’ worth of living expenses in cash or cash equivalents, like a money market fund or short-term bonds. You may need to adjust your savings strategy to build up an adequate cash reserve before considering early retirement.
Also, keep in mind that your cash reserve should be separate from your emergency fund, which is meant for unexpected expenses like medical emergencies or home repairs.
#8: Have I considered the impact of inflation on my retirement savings?
Inflation can meaningfully erode the purchasing power of your retirement dollars over time. As you consider retiring early, be sure to review your investment strategy to ensure it addresses inflation risk.
For example, you may need to increase your exposure to stocks and other growth-oriented assets, which historically have proven to be effective inflation hedges over longer periods. You may also want to consider investing in Treasury Inflation-Protected Securities (TIPS), a type of U.S. government bond designed to protect your investment from inflation.
A fee-only financial planner can help you design a suitable investment strategy to help you achieve your retirement goals and monitor it over time to ensure it remains in line with your needs and objectives.
#9: Have I discussed my early retirement plans with my spouse or partner?
Early retirement not only impacts you but also affects your spouse or partner. To successfully make the transition, you need to be on the same page about your retirement goals, lifestyle expectations, and financial readiness.
Be sure to have open and honest conversations with your spouse or partner about your early retirement plans so you can discuss the opportunities and challenges that lie ahead. In addition, consider working with a fiduciary financial advisor or coach, who can help facilitate these conversations and address conflicts as they arise.
#10: Am I emotionally prepared for early retirement?
Finally, early retirement often brings about significant lifestyle changes that can impact your sense of self and emotional well-being. Don’t forget to assess your emotional readiness as you consider making such a major life change.
It can be helpful to have a clear vision of how you’ll spend your time in retirement, with plans to stay active, engaged, and connected to others. You may want to develop a plan to pursue new passions, volunteer, or strengthen your personal relationships.
If you feel the need for continued professional engagement, consider part-time work, consulting, or starting a small business. Ultimately, how you choose to spend your time in retirement will set the tone for the next chapter of your life.
Chladek Wealth Management Can Help You Plan for a Successful Early Retirement
Taking the leap into early retirement requires an honest assessment of your financial and emotional readiness. These ten questions can be a helpful starting point for determining whether retiring before age 65 is the right choice for you.
In addition, consider working with an experienced fee-only financial planner like Chladek Wealth Management to ensure you’re on track toward your early retirement goals. We can help you evaluate your retirement readiness and develop a plan to address any gaps in your retirement plan. Please schedule a Free Financial Assessment to see if we may be the right fit for your financial planning needs.