Who doesn’t want to retire early?
OK, sure, some people love working and prefer to keep doing so well past their 60s, even if they’re wealthy. But for many, a big part of living the American dream is to be able to retire before age 65, giving them more time to enjoy life on their terms.
According to a survey, the COVID-19 pandemic has made more Americans consider early retirement. And notably, those with frugal spending habits were more than twice as likely to consider retiring early than those not as thrifty. That trend leads to this question: how many are quitting work too soon or are considering doing so when insufficiently prepared? Early retirement might sound like a way to win extra time in one’s personal life, but the financial realities can be challenging and costly.
Managing the early retirement process without causing undue damage takes know-how and careful planning. People need strategies to absorb some of the long-term costs of a non-salaried lifestyle by considering housing, taxes, and the budget for food, entertainment, travel, and the like. Early retirement is terrific when you’re ready, and here are some key points to consider when evaluating whether it’s a viable option for you:
- Consider options with your home. Housing can consume more than one-fourth of the average household’s budget. Downsizing to a smaller dwelling, renting part of your current residence, refinancing for a shorter-term mortgage to save on interest, or creating a savings instrument through the sale of your house are ways that you can significantly change your early retirement equation.
- Determine your location in light of taxes. Part of the care that goes into a successful early retirement is the concept of location. Would moving make early retirement more feasible? Where you choose to live is deeply intertwined with how you can live after your work years are over. States that do not levy income tax can create savings for early retirees facing an extra decade of making their nest egg last. Property tax and state and local sales tax are other vital factors when considering which state to reside in during retirement.
- Identify and minimize all expenses. This means everything – all your monthly payments and the big-ticket items like travel and cars. Finding ways to reduce them may make early retirement viable. Controlling expenses for early retirees means re-approaching even basic concepts, such as transportation. For example, owning and maintaining a car can run into the five-digit realm during the vehicle’s life – particularly when said life spans more years for the early retiree. Public transportation options and rentals can create significant savings. If you travel abroad, which many retirees have the often-cited desire to do, pick places where your dollar is worth more because of exchange rates.
- Do the math on your savings. Do you have enough in your retirement accounts, such as a 401(K), to last you 25 to 30 years or more? That’s a big part of the bottom line when weighing whether to retire in your late 50s or early 60s. With far fewer people receiving pensions, having sufficient savings to supplement Social Security is important. Check with your financial advisor for ways you can accurately estimate the amount of money you’ll need annually to support the lifestyle you desire.
- Eliminate debt. Retire lingering debts before you decide to retire. They eat into your savings and standard of living. Credit cards, personal loans and auto loans tend to have higher interest rates and lack tax benefits. You want to give yourself more money to work with in retirement, so think what eliminating that $400 monthly car payment and $300-$500 in combined credit card payments will do for you. You don’t want the stress of paying off debt when you no longer have your work income.
- Delay taking Social Security as long as possible. Can you live without Social Security until the benefits peak for you at age 70? Remember, Social Security is not intended to completely cover one’s finances in retirement; benefits from Social Security, on average, replace only about 40 percent of pre-retirement income. And early retirement isn’t the ideal time to start taking Social Security. The sooner you receive Social Security benefits, the lower they will be. For example, suppose you were born in 1960 or later and start taking Social Security at age 62, the earliest eligibility age. In that case, your monthly benefits will be 25 percent less than if you waited to full retirement age at 67. But on the flip side, for each year you postpone taking the benefits from 67 to 70, you’ll get an additional 8 percent in your monthly check.
Retiring early can be tempting but you need to be careful planning. The earlier you start planning and putting that strategy into action, the earlier you can put yourself into a position to retire and do so with confidence.
About Mark S. Gardner
Mark S. Gardner (www.RetireWellDallas.com) is president of Retire Well Dallas, a wealth management company helping families with pre- and post-retirement planning and specializing in tax advantage strategies. He is a member of Ed Slott’s Master Elite IRA Advisor Group℠, focusing on advanced retirement account strategies, estate planning techniques, and new tax laws, including tax reduction methods for retirees as they transition into the distribution phase of retirement. Gardner is certified in the Social Securities Claiming Strategies (CSSCS) designation. He spent 23 years at Bear Stearns, overseeing the local wealth management department and managing over $175 million for high-net-worth individuals and families’ monies.