Being early can be considered a virtue. Just think of some of the proverbs that we’ve all heard hundreds of times over the years:
“The early bird gets the worm.”
“Early to bed and early to rise makes a man healthy, wealthy and wise.”
There are many situations where being early can be a good thing. But when it comes to retirement, going too early can actually have drawbacks. That’s certainly not the case for everyone, but you’ll want to carefully evaluate your situation before you make any decisions.
Early retirement can be an intriguing prospect for many people. No more 40-hour work weeks. No more setting the alarm clock every morning. You might even finally have time to chase those “someday” plans and dreams. But the challenges are addressed in a recent article from The Motley Fool, “3 Downsides to Early Retirement¹.”
The first downside in the article deals with your retirement savings. Retirement itself can be expensive. If you want to retire early, it becomes even more so. You’ll need to save more because you’ll have more retirement years to cover financially. And you’ll have less time to save that money. How will you determine how much you should be saving?
You may want to start by creating a retirement budget. This would entail weighing your current and potential expenses. Working with your financial services professional can help you determine an estimate of your monthly expenses and what you’d need to save now to be prepared for your early retirement date.
For many retirees, healthcare is likely to be a major expense. When you combine Medicare premiums, Medicare gap coverage, long-term-care insurance, prescriptions and more, healthcare can become a large part of your budget. To reach an estimate of your monthly costs, you can add up the costs you already know, like fixed monthly costs of premiums and other anticipated amounts. Depending on your individual situation, you may consider increasing your monthly contributions to a Health Savings Account if you have years left before you retire.
But that leads us to the second early retirement drawback: You won’t have access to Medicare until age 65. This means that any healthcare costs that you incur before you turn 65 will need to be accounted for as well.
The third and final drawback is that part of your income in retirement is likely going to come from Social Security. But you can’t get that portion until you’re 62, at the very earliest. So, if you plan on retiring before 62, you’re going to need to rely on your personal savings for your monthly income. Also, if you decide to claim at age 62, you’ll lose out on a potentially higher benefit. Filing for your Social Security benefits at your full retirement age is the only way to ensure you get your full Social Security benefit.
Retiring early may be your dream. But to make that dream a reality you’re going to have to address these challenges and more. You will need to save more money in less time. Find a way to cover your healthcare costs before Medicare is an option. And you’ll have to determine your monthly income before Social Security can be used as a supplement to your savings.
Early retirement is not impossible. But it takes a thorough strategy.
Ask how we can help you begin to address these challenges.
Partial Article Source: ¹ https://www.fool.com/retirement/2019/10/03/3-downsides-to-early-retirement.aspx