Retiring now: 8 things you must do before retiring early
“I’m so done with this job.”
“Tell me I can retire tomorrow.”
“I would like to retire yesterday.”
These are all quotes I’ve heard from clients who are within 10 years of retirement. They are fed up and looking forward to living life on their own terms.
For many, these statements are reactions of the last few years: Intense jobs that became harder during COVID and now are even more challenging; a lack of patience with waiting for retirement; and seeing their peers retire into pleasant environments while they are still working hard. If you are in your fifties, these are not an easy times.
Are you ready?
Before sending an email to your boss telling him or her that you’ve had enough, you need to figure out if you are ready for retirement. Quitting full time work years before the so called “normal” retirement age of 67 can have big financial impacts.1 So, before you tell your boss off, here are 8 things you should do before quitting your job:
1. What are my Social Security Retirement Benefits?
If you are in your fifties today and decide to retire today, you will not be able to collect Social Security until age 62. Even if you wait until age 62 to collect, that benefit will be reduced by 30% versus your normal retirement age of 67. If you are married, your spouse’s benefit will be reduced by 35%. While you will receive cost of living increases on these benefits in future years, the reduction is permanent for as long as you live.
While you may not be worried about this, you should. The majority of retirees don’t think they will live too long but the reality is that most retirees live far longer than they expect. If you live longer than you expect, you will need your income to last longer which often means that you’ll need more assets to produce income—far more.
2. Figuring out your health insurance costs both before and after age 65
And you thought your co-pay for employer health insurance was a lot… If you have an employer-provided health insurance, congrats. Your employer is typically picking up 50-75% of the cost of your health insurance. If you retire early, you get the “privilege” of paying 100% of the cost. Most of my clients don’t really think about that total cost because they don’t have to pay it. For a couple in Massachusetts that total cost is usually around $24,000 per year and
$12,000 per year for singles, depending on the plan type and coverage. If you retire early, you’ll need to start paying a lot more in health insurance. Then, when you reach age 65, you’ll need to switch over to Medicare, which you’ll still have to pay for but it is set up differently than your current company-provided health insurance.
3. Get a handle on your expenses
If you have no idea how much you spend and on what, that will need to change. Retiring early puts more pressure on your retirement investments which may have to last for 30 or 40 years or more. With longevity influenced by income, higher income retirees tend to live longer. They tend to have better access to healthcare, have better lifestyle habits and are healthier overall than the national average. These people tend to live longer. And living longer means you’ll need more money than a typical retiree.
Given these pressures, having a clear understanding of your spending and expenses can help you make your assets last longer. This is also a great opportunity to overhaul your spending. When I was working on my MBA in business school and later in the corporate world, I learned about “zero-based” budgeting. This is the process of where all expenses must be justified each year. Are there some expenses that you’ve had for years that are now low on your priority list? Now may be the time to zero those out.2
4. Save more, a lot more
Because you’re going to be spending a lot more years in retirement, you’ll need more income for a longer period of time. For most successful early retirees that means saving a lot more than your peers and a lot more than those “rules of thumb” that you’ve probably heard, e.g., max out your 401(k) contributions, squirrel away a million dollars, etc. Plus, you’ll have some additional expenses during your early retirement that others do not, such as the full cost of health insurance and possibly new expenses associated with how you are spending your new found time.
5. How are you going to spend your time?
More fly fishing? More tennis? More time with grandkids? More travel? –Knowing how you are going to spend your time is critical to planning a great early retirement. And you’re going to have a lot of time on your hands to do what you want—about 2,000 hours a year, to be exact. This can be especially difficult for individuals who have a high intensity job or a job that they don’t like. Just quitting only solves part of the problem. What are you going to do next?
Before you retire, consider trying out a few new activities. While it might be challenging to carve out new time while working fulltime, doing so now can allow you to see what it feels like to learn a new sport, hobby or activity.
For retirees who quit closer to their normal retirement age, it can take a couple of years before they really settle into the right pattern and have a good balance between “play” and retirement “work”. A few of my newly retired clients tell me that they are busier now than when they were working full-time. For those people, they are still working towards pairing back their list of tasks and improving the priority of the things that want to do most. After a career of work, it takes time to make this big change.
6. A focus on long term growth and income
Your investment strategy may need to change, too. No longer are you saving for a date that is many years away. Now you are going to need to begin drawing on your assets to replace your income and that may have to continue for many years before Social Security benefits begins to kick in. Long term drawdowns of this type can increase the risk that your investments may not recover as easily if you keep an aggressive investment approach.
At retirement, most retirees are looking for improved stability and some kind of assurance that their money will be there for them for the rest of their lives. When retirement starts earlier, that means re-organizing your investments into buckets for short-term, medium-term and long-term needs. By “bucketing” your investments, you will be able to protect some portions of your investments while allowing others to grow for the years to come when you’ll still need income.
7. Don’t forget taxes
If you are no longer working for wage income, your tax returns are going to change. What will be your new sources of income? How will they differ from wage income? Will you be living off income-producing investments, e.g., interest and dividends or capital gains from stock sales or a combination of both? Do you own investment property or a business that generates income? If not, should you? When will Social Security and Required Minimum Distributions from your IRA / 401(k) start? How will these affect your tax return?
While no one has a crystal ball on future tax rates, you can make assumptions based on current tax laws and then adjust if laws change in the future. Tax planning should be part of your early retirement plan.
8. Be prepared for change
When you start out with your early retirement, you’ll likely have a vision of what you’ll be doing in the next three to five years. As we know, life can sometimes throw out a curve ball. So, you should expect that your early retirement will change, perhaps significantly. Some things that could affect your early retirement are:
· A change in the health or financial status of you, your spouse or a close family member
· A decision to move your primary residence
· A change in the location or status of your adult children
· Birth of a grandchild(ren)
· Death of a spouse or close family member
All of these could upend your current plans. With some planning, you can be prepared for life’s inevitable changes.
Embrace your new life chapter!
Retiring early will arrive with excitement and relief of leaving your “9-to-5” routine behind. It can be both exciting and a little scary as you leave the workforce. With some planning and lifestyle changes, retiring early can work for many people. You just must be willing to be flexible today to change your future tomorrow.
If you are thinking about retiring early, give me a call. I’m here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Lyman@PlanWithFPS.com
617-653-3303
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1 If you are in your fifties today, you were born after 1960 which means that your normal retirement is age 67.
2If you haven’t yet cut your cable service, you could save as much as a thousand dollars a year.
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