A Checklist for Retiring Early

Retiring early can be a great idea — if you can afford it.

Unfortunately, few people plan for retirement as well as they should, regardless of when they want to retire. Part of the lack of planning may be due to confusion about how to calculate the amount of retirement savings that will be needed. A common “quick” calculation might be to save 8-10 times your final salary to retire by age 67 but that may or may not be enough to sustain the retirement lifestyle you desire. For example, for someone with an annual salary of $50,000, that would equal having $400,000-$500,000 saved in retirement funds. Without knowing whether the retiree has other sources of income, this over-simplified estimate could fall short or it could be more than the necessary amount.

Another way to estimate how much is needed is to use a specific retirement calculator or to get expert help to run the numbers. There are many retirement calculators that can help you consider the variables and assumptions needed for a more accurate estimate of how much you may need in retirement savings. MSA provides a calculator called, “How much will I need to save for retirement?” as a starting point for your estimate, but there are many other calculators available, such as FINRA’s retirement calculator.

Especially when retiring early, retirement might last 30 to 40 years or more, so one factor to consider in planning for a lengthy retirement is understanding your own family history and health risks. Consider using the Social Security Administration (SSA) Life Expectancy calculator for an estimate based on data from this agency. Keep in mind that it does not take into account factors such as health, lifestyle or family history, which may influence life expectancy.

Beyond saving more money for retirement, which may be a good place to start, here’s a checklist for retiring early:

When to Start Federal Benefits
The Social Security Administration has rules for when Social Security benefits can be collected. The longer you put off collecting them, the more money you may be able to get up to age 70. To receive the full amount of benefits, you must reach full retirement age. Check out the agency’s retirement planner to determine your full retirement age.

If your full retirement age is 67 and you choose to collect Social Security benefits at age 67, you’ll get 100% of your benefit amount. Keep in mind that if you continue to wait past age 67, you could get over 100%, but only up to age 70.

In contrast, if you start retirement early, you may receive a portion rather than the full amount. For example, if you start your retirement benefits at age 62 — the earliest age to receive them — your benefit may be reduced.

Back to the other end of the scale, delaying those benefits until after full retirement age can allow you to be eligible for delayed retirement credits that would increase your monthly benefit.

Medicare benefits can begin at age 65. Retiring before then will most often require having private health insurance until you’re eligible to go on Medicare.

When to Start Retirement Benefits
Retirement plans also have restrictions on when they can be used. Money can be withdrawn from most retirement plans without paying a 10% penalty at age 59½, but there are some exceptions to tax on early distributions. For example, there’s a provision for taking out 401(k) funds without a penalty at age 55 if you retire early. Your employment must have ended.

How much income will you need?
Determining how much income you’ll need in retirement isn’t easy since there are many expenses to consider.

One suggestion may be 70-100% of your annual pre-retirement income is needed. The most accurate way to estimate how much income you will need is to prepare a retirement budget that includes your actual expenses if you can predict them. Income can come from retirement accounts, Social Security, pensions or other savings you might have. You may also have IRAs, investment accounts, rental property and dividend-paying stocks. In addition, you could supplement income with part-time work.

While no one can predict how much your retirement assets may grow or decline each year, some experts recommend withdrawing no more than 3-4% from your retirement savings each year as a starting point. Your individual results and circumstances might indicate a different result, so get help if you need it.

List Your Expenses
Your expenses in retirement will likely differ from those in your pre-retirement years. For example, without a daily commute, you’ll probably spend less on gas and other transportation expenses. You may also move somewhere that’s cheaper to live, or you may no longer have a mortgage payment.

That said, other expenses may increase:

• Health care
• Travel
• Home remodel
• Or maybe even bikes, a new car or other retirement toys

As with any stage in life, planning for emergency expenses can also be part of the financial equation:

• Do you have enough health insurance or money set aside to pay for emergency medical care or if you have to move into a long-term care home?
• Can you afford a major car repair?

Easing into Retirement
One way to see if you’re able to afford retiring early is easing into part-time work. You can start by decreasing work to four days a week, then possibly more if you continue to find it affordable.

Or maybe you want to try working part-time for your employer and turn a hobby or other skill you’re passionate about into a side job.

Another option is to try living on a percentage of your current income, like 70% of your salary for six months or so, and you can see how it affects your lifestyle. It might be easier than you think and allow you to retire early without worrying about how much money you have coming in. Or it could be challenging and lead to an adjustment of expectations about your situation.

Whether you want to try to save more, or make sure you have a more solid retirement plan, your Money Coach can help. Work with a coach who is a Retirement Specialist. Together, you can review your current financial habits and develop a plan. The first step is easy — call 888-724-2326 today.

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