Early Retirement 7 Basic Rules You Need To Know
Do you dream of punching out on the time clock for good at age sixty, fifty-five or perhaps even younger? While this is a universal desire, it can be more than just a dream. Early retirement can certainly be a reality. However, if you want to say goodbye to your job at a young age, you may have to make certain preparations, sacrifices or trade-offs. While every individual will have to plan a little bit differently to make it happen, here are seven rules that you will want to follow if you see early retirement in your future.
- Factor Inflation: No matter how you slice it, inflation is and will always be a critical variable in early retirement. Inflation can influence your living expenses and your returns on investments. While you may fear a higher inflation rate in the future, remember that there has been a fear of this for the last several decades. No one is sure when and how higher inflation will arrive. While your plan for retirement should include inflation, trying to prepare for extreme inflation just does not make sense. Remember, you can always control your personal inflation rate and perhaps maintain some control on how inflation affects your life in the future.
- Prepare for Longevity: When you start planning for your retirement, you will calculate and recalculate how much income you will have and how much you will need. However, think long and hard about how long you need to plan to support yourself. With great health care, people are living longer than ever before. Living past 100 is much more widespread than it was in the past, so this is a fact that you must prepare yourself for too. If you retire at 55, you may have 50 years of life still ahead of you. Are you prepared for this? What are your backup plans?
- Can Part Time Work Make It Possible?: While you may not be able to imagine working full-time in your golden years, would you mind part-time, at home, consulting or freelance work? Think about the different ways that you could still earn money without actually working your real job. There could be a happy medium that allows you to retire early, but that does not mean a complete end to your earning years. Talk to your current employer and see if there are options “in-house” for you to keep working part-time after you retire. If not, connect with others in or out of your industry now and see what possibilities might exist for future work opportunities.
- Consider Tax Consequences: Taxes are one of those things in life that you cannot seem to escape. While you often get some breaks as you age (perhaps paying less in school tax, for instance), you will not completely get away from good ole’ Uncle Sam. When you make any big change in your life, there will be significant tax consequences. These may be good for you in terms of tax liability; however, they could be bad. Talking with your tax preparer and looking over your current withholdings will help you get a better idea of what to expect. Before you dive in and officially retire, make sure you do have some idea of what to expect when it comes time to file that first tax return. Otherwise, you could find yourself very surprised!
- Don’t Count on Social Security: Social Security is likely going to be part of your retirement plan. There is no doubt; social security will exist in some form—especially in the near future. However, it does not make sense to count on it as a major part of your retirement income. Social security is out of our personal control, and if something does go wrong with the system, you do not want to suffer because of it. Make sure you have a backup plan for social security. Allow this to be your “extra fund” or slush fund—do not count on it to pay your mortgage each month. If you do that, you could find yourself in a very awkward position if the social security system ever crashes or even faces a temporary setback.
- Learn about the Age 55 Exception: If you want to pull from your IRA early (before age 59 ½), you should be prepared to pay a 10% penalty on those funds. However, there is an exception that could save you this penalty. Often called the age 55 exception, it is available when BOTH the following apply: The withdrawal occurs after an employee separates from service from an employer that maintains a qualified plan. The separation happens during or sometime after the calendar year when the employee turns 55. Talk to your financial advisor before you do anything, but it may be possible for you to gain access to IRA money early—without penalty—by taking advantage of this particular exception.
- Do What’s Right for You: While it is important to follow the “rules”, more important is doing what is right for you and your family. Check out all of your options and do not be afraid to break the rules if it feels like it is the smart decision for you. However, it is usually worth getting a second opinion. If you do not have a financial advisor, check with your bank or mortgage lender and see if they can recommend someone. For a decision this significant, it is worth talking with someone who has seen things from the inside. No matter when you retire and how well prepared you are, make sure you take care of yourself emotionally. Retiring is a big step—even if it is something that you feel like you want. Prepare for a broad range of emotions and do not be afraid to follow up on those feelings by talking with an expert. If you prepare yourself financially AND emotionally, you are likely to find that the early retirement is one of the best decisions you could make for you and those you love.
Article by Karmen Busch