Dreaming of a tropical getaway, a mountainous RV trip or limitless time with friends and family? The idea of retiring early probably sounds like a pretty sweet proposition. But how can you tell when you’re financially prepared to take the plunge? And what are some economic signs to be aware of before making a big decision such as this one?
We’ve assembled some key factors to keep in mind before retiring “early.”
One of the biggest reasons people retire at a particular age is access to potential funds at the federal level. Between Medicare and Social Security, there are reasons to wait until typically age 65 or age 66, respectively. While these funds should be supplemental to the money you’ve saved and invested over time, reliance on them might negate your ability to retire earlier than the standard 65 years.
So speaking of your savings, your balances in these deposit accounts will play a huge role in your ability to retire early. Whether they’re high-yield accounts such as 401(k)s or stable-yield accounts such as Roth IRAs (or even simply your interest-earning savings account), how much you’ve stashed away and how early you began will be a major factor in your ability to retire. The biggest thing to keep in mind is penalty fees on early withdrawals—crunch your numbers to determine if the hit you might take for cashing in before the target date will pale in comparison to the long-term benefit of retiring early.
In fact, some types of retirement accounts don’t typically charge a fee for early withdrawal—457s or a basic Money Market Savings, for example, usually fit this description.
So how about your debts? Be they credit cards, personal loans, college loans or mortgages, limiting the number of large monthly payments you’ll be required to take can be a big boon to the bottom line of early retirement. The less money you’ll need to put toward principal and interest payments on loans, the more you can put toward covering potential healthcare costs and everyday expenses. Monitor your comfort level with how much is enough money to have in your pocket at any one time.
Speaking of healthcare, one of the most commonly cited reasons to stay employed is the opportunity to capitalize on employer medical benefits. Retiring early would mean you are likely too young to access Medicare and lose the benefit of employer-provided health insurance. Half the battle might be to simply live a healthy lifestyle to curb preventable illness, but not all health hurdles are predictable. One way to prepare for this is to stash away a large amount of money in a stable health savings account (HSA) over time—aim for enough to cover deductibles for any potential health crises you might encounter in the time between your early retirement and age 65.
While early retirement might not be the ideal fit for everyone, planning for an eventual retirement can give you a whole lot to look forward to. Find out what Sioux Falls Fed offers by way of retirement savings here.