Early Retirement Hurdles: The Big Misses

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Most of us have learned firsthand that the pandemic has changed the way we work. For many, it’s also transforming their retirement timelines. At the end of the first quarter of 2021, there were at least 1.7 million more older workers than expected who retired due to the pandemic, according to the Schwartz Center for Economic Policy Analysis. Numbers like these point to the current surge in early retirement.

Job loss has pushed many into retiring ahead of schedule. For others, the pandemic underscored that life is fleeting—nudging them to step out of the workforce to enjoy these years doing things that make them happy. Whatever your reasons, you may find yourself considering an early retirement. It’s a big decision that requires some strategic financial planning. Let’s dive into the biggest financial considerations to keep in mind.

What Will Your Lifestyle Be Like in Retirement?

Retiring earlier than you’d originally planned could translate to a different retirement vision. Maybe you’re feeling inspired to retire abroad or devote more of your time and resources to a hobby that brings you joy. Fishing off the beach can be wonderful and rejuvenating as an after-work activity. But with more time on your hands in retirement, you might want to buy a boat and dial up the fun. Of course, bigger aspirations will likely increase your expenses during this chapter of your life.

No matter how you envision spending this time, potential retirees are wise to think about what their expenses will look like when they’re no longer working. Ballpark the numbers for an entire year, then multiply that out to cover your expected lifespan. Doing this with a financial advisor who understands your values can help you create a savings target that supports your goals. At the end of the day, they can provide the right guidance so that you don’t outlive your nest egg.

Potential Hurdles to Consider

Once you have a general sense of how much an early retirement will cost you, the next step is getting strategic about how you’ll generate income when you’re no longer working. Your age plays a very big role. Here are some important things to mull over:

  • Medicare doesn’t begin until 65. If you’re younger than this, you’ll likely have to plan ahead for increased medical expenses as you won’t be eligible for Medicare just yet. That means paying for health insurance premiums and deductibles, as well as other out-of-pocket costs that could add up.
  • You can’t begin collecting Social Security until 62. Even if you’ve reached this age, continuing to delay it can pay off big time over the long run. This is because your monthly payment will increase with every year you wait, especially if you go beyond your full retirement age. Those who cash in early could reduce their benefit by up to 30%, which could have a financial ripple effect that impacts your retirement.

If the numbers above end up feeling overwhelming, it might make more financial sense to delay retirement if possible, especially if health insurance is available through your employer.

How Will You Finance Your Early Retirement?

Those who feel good about retiring early will then need to think about which income sources they’ll draw on to support their lifestyle. Without Social Security, you may be relying heavily on your 401(k) and other investment accounts, as well as cash savings, whole life insurance, and any pensions or income-generating annuities that may be on the table. The idea is to step back and look at the big picture, then make a strategy that minimizes taxes.

When you begin taking 401(k) distributions in retirement, you’ll be taxed on these withdrawals. Take too much and you’ll end up in a higher tax bracket — with a bigger tax bill. Over time, this can deplete your wealth and prevent you from enjoying the savings you’ve worked so hard to build. A skilled financial advisor can help you make a plan that balances your 401(k) distributions with other tax-friendly income sources. If you’re planning ahead for early retirement, you might consider a Roth IRA conversion to reduce your tax burden later on.

Inflation is another factor. Depending on your financial situation, you may have to take on more risk in your investment portfolio to keep pace with inflation over the course of a longer retirement. Again, having a “true advisor” in your corner is critical. You want someone who really knows you and your finances. It’s about more than money. Financial planning is meant to support the vision you have for the life you want. At JJ Burns & Company, this is our driving force. If you’re considering an early retirement, set up some time with us today to start making a plan.

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