Early Retirement Archives

People work because they like to work or because they have no choice. Some of them find work that they love, and at best, they may ease off on their workload because of other interests or commitments. Others work to earn money and build a nest egg for their later years. In either case, you can always pursue your dream of early retirement if you have prudently planned your finances.

How Do You Make Early Retirement A Reality?

How do we know when we have enough money to live on? This requires determining a reasonable estimate of how much money we will need after retirement, after adjusting for cost inflation, and the foreseeable future trends of the economy. While the economy and inflation are factors that can be uncertain, we can have greater control over our basic needs and even build a cushion for the extras.

We can start by understanding our present financial standing and then make a plan for early retirement. Ask yourself the below questions, and the answers should help you make a detailed plan to turn your dream of early retirement a reality.

Are You Debt-free?

Being debt-free means you have no future payments to account for in your budget. Therefore, ensuring that your debts are cleared has to come first. Your monthly expenses may need to be cut down drastically while you are still working so you can pay off your debts that much faster.

Have You Saved Enough?

Saving money towards retirement from the time you start working may sound a little restrictive. But, it is a sound step towards building enough savings to retire on. It’s an added incentive if you plan to retire early and pursue other interests. Whether you have saved adequately can depend on your financial needs post-retirement. Retiring before social security kicks in could mean that your savings should cover the expenses that would have otherwise been covered through your social security.

Is Your Healthcare Covered?

Healthcare is one of the most significant expenses and can make a deep dent in your savings unexpectedly as many people know since the ACA law went into effect driving up health care costs and limiting choices. Retiring earlier than the age when you become eligible for Medicare means having a backup for health insurance. There are two ways to achieve this. You can either go on your partner’s health insurance plan or get coverage through private health insurance. Starting a Health Savings Account (HSA) earlier would be helpful.

Can You Stick To Your Budget?

Retirees have to live on a fixed income, and it is usually lower than they had when they were employed. So, creating a reduced monthly budget and sticking to it is imperative. You may want to start this plan a few months before you retire to get into the habit. To be safe, have two lists drawn up: one that covers only the basic expenses that you can’t do without, and the other a slightly relaxed budget to include a few you don’t need but would like to have.

Some of us may manage to save substantially with a basic budget bringing the retirement age even closer. Others may desire a slightly relaxed lifestyle and may plan a later retirement. Regardless of the plan, a healthy financial lifestyle is one where you have a budget, and you cultivate the habit of staying within that budget.

Have You Made The Right Investments?

Fixed income post-retirement suggests that you aim to maintain rather than grow your income. This means that you must plan for lower-risk investments. While the returns may be lower, they are also less risky investments. Talking to a financial planner when you are still working and can make a few investments to help you later would be wise.

Do You Have A Plan For Unexpected Expenses?

If nothing else, the COVID-19 or Wuhan virus pandemic has taught us that life is unpredictable. Unexpected expenses may crop up post-retirement. It’s smarter to have a backup plan by either accumulating a few assets that can be sold for better returns or building them into your savings plan. You may still have to prepare yourself for taking up some part-time work that can tide you over.

Key Takeaway

Retirement brings about a profound change in our lives, no matter whether it happens early or late. It would be wise to think beyond financial security and include other retirement aspects such as the free time now that you are not working. Perhaps, a plan to occupy yourself with something you have always wanted to do but never could is in order? Having a backup plan for happy times post-retirement could be a poignant incentive to make you work towards early retirement.

As the economy continues to grapple with the effects of Covid-19 or the Wuhan virus, many American workers are being forced to retire early. Early retirement can lead to financial struggle and you may find it hard to meet your living expenses. Here are seven useful tips that will help you and your family in this difficult situation.

Reduce Your Expenses

The first step after an unexpected early retirement should be to cut down your spending. Focus only the essential purchases, and make changes to your lifestyle so that you have sufficient monthly funds available to pay for the critical outgoing expenses such as insurance and mortgage payments.

Avoid the Temptation of Using Your Retirement Money

Your first instinct may be to dip into your 401k account, but that is almost always a bad idea in a forced early retirement. The first reason is that you may not have crossed the age of 59½, which means you will face a 10 percent penalty on the amount withdrawn.

Secondly, cash withdrawals that occur earlier than planned will hurt the compounding effect of your savings, and your overall retirement income will considerably reduce.

Move 401k Funds to a Rollover IRA

Rather than withdraw money from your 401k, it may be better to start a rollover IRA with your broker or bank and move your 401k funds into this account. You will receive all the tax benefits, which are greater because of the 2017 tax cuts, of 401k with a rollover IRA, and the early withdrawal limitations are also the same.

However, a key difference is that a rollover IRA will open a plethora of investment options for you. Depending on the prevailing market opportunities, you may invest in stocks, mutual funds, bonds, ETFs, REITs, or other securities to multiply your money.

Utilize State Sponsored and Employer Benefits

Employers often provide insurance coverage, which also covers the spouse. If your spouse’s employer is offering this coverage, utilize it to the maximum. If your forced retirement occurred because a disability, you could be eligible to receive social security disability payments.

If you have been laid off from your current job, but you want to continue working, you should apply for unemployment benefits while you search for a new job and there is going to be tens of thousands of jobs returning from China by the end of this year.

Buyout Package

Employers sometimes offer a voluntary retirement buyout package, which typically includes a severance pay, lifetime annuities, paid insurance, and some other benefits.

If your employer has offered you such a package, you may consider accepting it, if you believe that a layoff may still eventually happen if you don’t accept the offer. The money you receive through this package can be invested in a debt mutual fund or annuity in order to create a monthly income.

Evaluate Your Pension

If you are eligible for a pension, you should evaluate whether receiving it in monthly installments or as a lump sum would suit your interests more. If you have a trusted financial advisor by your side, or you are sufficiently experienced in making direct market investments, you may benefit more from a lump sum payment.

You can strengthen your financial asset base with smart investments. On the other hand, if you prefer a more consistent monthly income, you may choose to accept the installments option. In any case, you should be aware that if even partial funding of your pension was done using pre-tax dollars, your pension income will be partially taxable.

Keep this point in mind as you try to make withdrawals from multiple accounts while minimizing your tax liability.

Assess How Long Your Savings will Last

Make an objective estimate of all your available funds and income to understand how long your money will sustain based on your current budget and expenses. This will give you an idea of where you need to moderate your expenses and how it will impact your lifestyle.

First look at the major expenses, such as healthcare and housing. Thereafter, move on to assess other expense items, such as utilities, food, clothing, personal care, and entertainment. Compare the monthly household costs to the total amount you may be drawing from your retirement accounts and social security.

With this comparison in place, factor in your life expectancy to estimate how long your funds are going to last at your planned withdrawal rate. If you worry that you may come up short, you will need to review your current expenses or look at additional ways to generate income. You could create a new income either through part-time work or through income or dividend producing investments.

6 Signs That You Are Ready For Early Retirement