Do you dream of wrapping up your career early so you can pursue other interests? The idea of early retirement appeals to many of us, but it takes more than dreaming. It also requires careful planning, diligent saving through your working years and effective investment of your retirement assets. Pulling the retirement trigger early is a big step, and your long-term financial security will likely depend on doing things right from the start. Here are six steps you can take to get a sense of where you stand on the path to early retirement.
1. Map out a vision of your retirement
If you’re leaving the workforce, be sure to have a clear idea of what you plan to do with your newfound freedom. Your plans will likely dictate the amount of money you will need each year to pay for your lifestyle. Knowing the price of your dreams is key to determining whether you’ve saved enough money to fund a long retirement. Mapping out where you will live, what activities you plan to pursue and potential travel itineraries will tell a lot about your financial readiness.
2. Determine if work will come into play
Many retirees pursue other lines of work that will generate income. Is consulting, changing industries or becoming a small business owner part of your plan? Be realistic about what your potential salary might be and if your new pursuit will come with employee benefits. If you need liquid assets to set up your business or volunteer project, be sure to add those costs to your budget.
3. Take stock of your available assets
Assess the money you’ve set aside for retirement to determine whether it is enough to meet your goals. Carefully consider whether the amount you assume you can withdraw each year from savings is sustainable. The key test is to make sure that the amounts you withdraw in the early years of retirement don’t put you at risk of outliving your assets. Look into working with a financial professional who can help you craft a plan to pay yourself through your entire retirement.
4. Consider your timing on Social Security
You can begin drawing Social Security benefits at age 62. The major caveat is that your monthly benefits will be 25 percent lower than they would be at full retirement age of 66. If you plan to withdraw benefits early, adjust your retirement budget accordingly. If you plan to claim full benefits, you need to fill the gap with income from other sources. Remember if you earn income from work after tapping into Social Security (but prior to full retirement age), your Social Security benefits may be reduced based on the amount you earn.
5. Plan for health care coverage
If you retire before age 65 (the age at which you become eligible for Medicare), you need to find another source of health insurance coverage in the interim. Your former employer may offer retiree coverage, or you may have the option to continue coverage at your expense for a period of time (typically up to 18 months after you leave your job). If a spouse has coverage through an employer, that might be a cost-effective solution. Otherwise, you need to purchase coverage on the market. Keep in mind that as you grow older, health insurance tends to become more expensive. Make sure you budget for health insurance as you plan an early exit.
6. Prepare for unexpected expenses
As with any stage of life, unexpected events can occur that require a significant expense. You need a sufficient cash reserve in place to cover costs like a major home repair or medical issue. Also evaluate if long-term care coverage makes sense for you, in case you need specialized care later in life.
This checklist is just a start. A well thought out plan can help you begin retirement early with a sense of confidence you’ve taken the right steps to be properly prepared.
Armando DiRienzo is a Financial Advisor and Vice President with Metzger, DiRienzo & Associates, a financial advisory practice of Ameriprise Financial Services, Inc . He offers fee-based financial planning and asset management strategies and has been in practice 17 years. To contact him call 973-549-6702, 200 Campus Dr. suite 150 Florham Park NJ, 07932 or visit www.mdflorhampark.com
Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.
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