Many employees eagerly anticipate leaving the demands of the workplace as soon as they are able to. But regardless of whether you support Financial Independence, Retire Early (FIRE) or are simply wanting to retire a little early at age 62, you’ll need to get ready for your later years. Even though your money is the most important issue, you need carefully evaluate other factors as well.
Here are five things to do and things to watch out for if you wish to retire early.
1. Plan out how you will spend your time.
You might find it difficult to fill all of your soon-to-be free time, which may seem counterintuitive. One of the most prevalent issues mentioned by recent retirees is that. Unexpectedly, some people even discover that they miss the routine and camaraderie of the office.
According to Dan Sudit, partner of Crewe Advisors in Salt Lake City, “Before someone retires, regardless of what age they are or expect to retire at, they have to construct their personal narrative.” “Draw a picture of life as it will be on that date.”
You should plan out your daily activities. You can plan travels now that you won’t have to stay at a job that prevents you from traveling. But when you’re not on the road, what will you do? Will you start a new hobby that has always interested you?
“What do you intend to do when you reach the age of 62? Travel? Maintain your garden? Improve your golfing? Your future cash flow requirements will be determined by this, says Sudit.
2. Create a reliable source of income
Once you’ve decided how you’re going to spend your time—whether you want to party like a rock star or lead a more sedate existence—you can consider how you’re going to pay for it.
A crucial but frequently skipped phase in the process is creating an accurate and thorough assessment of your post-retirement income needs and expectations, according to Bradley Newman, CFP, chief financial advisor at Fort Pitt Capital Group in Harrisburg, Pennsylvania.
Instead of trying to rely on capital gains that are irregular or may never materialize, Newman advises concentrating on steady income from stocks and bonds that provide dividends.
Making reasonable assumptions about the potential returns on your investments, the taxes you’ll have to pay, and the rate of inflation is important as you plan your income strategy. A retirement income plan can be severely damaged by inflation, perhaps not right away but over time as your fixed income depreciates.
You should set aside enough money to as much as possible “immunize” your way of life, advises Sudit. “You will be young enough where inflation will effect your future spending throughout retirement if you are planned on retiring at [age] 62,” he explains. But on the other hand, if you are 42 today and intend to retire at 62, be sure to think about the cost of items in inflated dollars.
Your money covers more than simply your needs for food, shelter, and transportation. It also covers items like health care that have a history of rising significantly more quickly than the general rate of inflation.
Overly optimistic assumptions might give you a false sense of security and cause unpleasant surprises later on, according to Newman. It’s crucial that you have a thorough financial strategy that accounts for the effects of inflation over the next 20 or 30 years.
You may estimate how much you could need for retirement with this Bankrate calculator.
3. Choose when to file a Social Security claim.
You’ll want to carefully evaluate when to take Social Security as part of your planning strategy. You can begin filing for it at age 62, but your entire benefit won’t be available to you until much later, possibly as late as age 67, depending on when you were born. If you take it sooner, you’ll be forfeiting a large sum of money each month, possibly over many years.
Your Social Security benefit start date will therefore have an effect on how you live in retirement for many years. You won’t simply get a smaller monthly payment; you’ll also get a smaller payoff when Social Security lowers its payout each year to account for cost of living increases.
It can make sense to forgo Social Security for a while if you can manage it. Up to age 70, the longer you can wait, the bigger your benefit check will be. Undoubtedly, some people will prefer to start receiving their benefits at age 62, but they should arrange their income accordingly.
4. Arrange for post-retirement health insurance
You’ll need to arrange an alternative if you’re retiring at age 62 because you won’t be allowed to start Medicare until age 65. Most people will wish to obtain a state-based healthcare plan, however some may want to relocate abroad for a cheap plan or even use COBRA. But even it has a cost.
If you were employed by an organization that provided insurance, Sudit adds, “you might potentially bridge the three-year gap between when you retire and when Medicare takes effect, and may be eligible for COBRA for up to 36 months, 18 months plus another 18-month extension.” But he stresses that in order to qualify for COBRA, you must fulfill specific requirements and pay for all of your insurance payments.
However, the majority of consumers will undoubtedly use a state-based exchange to search for a medical plan.
Don’t let the exchange’s low-cost options fool you into complacency, warns Newman. “Be cautious of the low limits of earned income required to qualify for such rates, even though some of the low-cost solutions offered on the exchange are highly alluring.”
You can have problems maintaining within the income limits for low-cost policies while still withdrawing enough money to live on if your income comes from tax-advantaged accounts (like a 401(k) or IRA), warns Newman.
5. Be ready for any surprise
Retirement costs shouldn’t be kept so tight to your budget that you run the risk of becoming bankrupt if some unanticipated surprises arise.
If you overplan and make a mistake or forget to account for a cost, Sudit warns, you’ll regret your choice and your retirement won’t be what you anticipated. “As with a home renovation, plan for cost overruns and unforeseen fees.”
You should expect some of these anticipated “unexpected” costs, such as home maintenance, car repairs or replacement, and increased medical costs, to occasionally arise. However, other costs could truly appear out of nowhere, so it’s important to provide wiggle room in your budget.
To sum up
Even a few years early retirement can result in some unpleasant surprises in your life. Therefore, it’s crucial to prioritize the most crucial difficulties, including your income and healthcare requirements, before attempting to foresee other potential problems, particularly unforeseen costs.