Should I Retire Early?
Should I retire early?
The famous comedian Jeff Foxworthy often tells a joke about retirement. Jeff was talking to a colleague who asked if he had heard the news about Jimmy.
“No, what happened?”
“He retired then, boom, passed away two weeks later.”
“Wow! He should have quit working sooner. Retirement killed him!”
This, of course, is meant to be a joke. I would guess that you may have heard a real story like this. This may even be why you are considering early retirement.
Whether to retire early is a common question and something many people aspire to do. Most people consider the financial aspects but fail to think through the other possible non-financial ramifications.
Let’s quantify early retirement as before age 65. With Social Security, your full retirement benefit is between age 65 and 67, depending on the year you were born.
Are you financially able to retire?
This is the primary question most people focus on for a good reason. It’s essential to know the health of your finances for retirement. You need to know that you will be able to live without working for the rest of your life.
Retiring is about the ability to be able not to have to go to work to be able to pay your living expenses. You have what some would call “financial independence.” You have money saved and invested. There may also be other income sources to allow you to do whatever you want.
A well-thought-out plan is indispensable to retiring early.
I recently met with a client who told me he was working on his third time retiring. Twice he had tried but realized it wasn’t going to work and went back to work. We joked that he didn’t retire the first time, only took an extended vacation.
The COVID pandemic forced many people to retire earlier than planned. As a result, they, too, are back in the workforce. Returning to the workforce is okay. It happens for various reasons.
Two Things Most People Don’t Consider
1) Healthcare
Healthcare is often something people don’t think about until after the fact. Healthcare looks very different if you retire at 65 and have access to Medicare. This means you need a game plan for
handling your healthcare costs. While healthcare costs don’t prohibit early retirement, they can be substantial.
Options include the healthcare exchanges with the Affordable Care Act. There are some subsidies for specific income qualifications. You may have to pay out of pocket if you do not meet those criteria.
If you retire early and have saved some money or have assets like a 401k, IRA, mutual funds, or annuities, you can possibly use some of that money. The taxation of that could potentially help you qualify for the Affordable Care Act subsidies or other programs.
2) Retiring Before Age 60
Congress has chosen the age of 59 ½, which carries tax consequences for taking money from your 401k or IRA accounts. Extra planning is imperative if you are looking to retire in your mid-50 or earlier.
How are you saving your money? How is the money going to come out at retirement?
There are ways to take income out of your accounts and avoid those tax penalties. You must be very careful about how you structure things. Your financial or tax advisor can help you do it appropriately.
The “People” Component
Are you running to retirement or away from work?
Some people I’ve heard have goals that run toward something else. A job that pays more. Have more freedom or flexibility in your job. The same is true for retirement conversations.
Consider why you are looking to retire. Are you burnt out? Does corporate bureaucracy, with all its red tape, frustrate you? Do you feel overworked or unappreciated?
I encourage clients to think about what will drive you once you are no longer working. You can only sit around and watch TV for so much time. Much of what we watch via the news media causes stress and anxiety among us. I’ve never heard of watching TV as a reason someone wants to retire.
So what is the plan? Do you want to serve and volunteer? Spend more time with the grandkids? Start a new business? Mentor others? It doesn’t have to be all day or be your entire schedule, but I find that people find a lot of value once they retire in finding something that will give them a little more meaning and purpose to wake up for.
Reflect on how many years you will have to fill by retiring early. Instead of the usual 10 or 20, you will have 20 to 40. Think about what that next phase looks like. How will you spend the time you have on your hands and use it wisely for the time you have left?
We’re social beings and need some other things to make our lives rich and full. It’s more than just money. As you think through your strategies, consider the financial and people components.
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