Planning for Early Retirement

Retiring Before Social Security Age

If you are planning for early retirement, there are a few very important differences to consider compared to planning for retirement at "normal" retirement age.

There are two that make early retirement costs significantly higher than normal retirement costs. The first is, of course, the income for years before Social Security age when the total amount has to be funded by savings.

The second potentially high expense is health insurance coverage. Some workers who started working early and stayed with the same employer long enough may be eligible for employer sponsored coverage for retirees.

Typically, companies require 20 years of service for an employee to be eligible. Otherwise health insurance coverage must be purchased individually for the years prior to age 65 when Medicare coverage starts.

If these two expenses can be covered by your retirement savings and investments, you then need to think about how you want to spend your time in case those choices require more money. Travel is usually the next most expensive item early retirees must provide for. Go here for a retirement checklist.

Early Retirement Options for Income

Income options include after-tax savings or investments, a pension, an IRA, a 401k, or a combination of any of these.

Under normal circumstances, there is a penalty for withdrawing from retirement accounts before age 59 1/2. Although the standard age for withdrawing from retirement accounts such as IRAs and 401ks is 59 1/2, it is possible to access these types of accounts before that age for an even earlier retirement without paying the penalty.

No 10% penalty

There is an exception to the early withdrawal penalty for both IRAs and 401Ks, but the rules for each are very different.

For IRAs, the penalty can be avoided by taking substantially equal periodic payments. There are strict requirements and guidelines for setting this up, so be sure to consult an advisor to be sure it is done accordingly. A wrong step will cost the 10% penalty.

Accessing 401K accounts prior to age 59 1/2 without penalty is slightly easier. The exception here applies for people who quit working in the year they turn 55 or after, for the 401k account at that employer. Learn more about types of retirement accounts and rules here.

Non-Financial Early Retirement Considerations

Besides the financial aspects of planning for early retirement, it is important that you and your spouse or partner brainstorm together about what you each expect from retirement and what your early retirement plans will be, such as how to spend your time, where to spend your time, what you will do for hobbies, how much you will travel, visit family, and so on. Most of these plans will affect the cost of early retirement. This may involve some give and take from both parties, and in some cases some serious negotiations so that both parties can enjoy retirement to the fullest. Go here for more on early retirement planning.


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