Who wouldn’t love the idea of being done with work before age 50 — or even by age 40 — and living their best life?
For many people, the dream of retiring early drives them to work hard, save more and spend less. These are great goals and can ensure that you have enough wealth to retire on. However, many savers focus so much on building the wealth they need to retire early that they neglect to plan for some of the realities that come with early retirement.
If you’ve got your sights set on early retirement, there are three things to keep in mind as you make your plans.
1. How will you handle healthcare?
One of the biggest expenses many households face is healthcare. Not only that, but there’s a good chance some of your healthcare costs are subsidized by your employer. If you have an employer-sponsored healthcare plan, you’re (probably) used to paying less for your coverage.
All that changes when you retire early. Most Americans are only eligible for Medicare benefits when they turn 65. While there are exceptions, there’s a good chance that you’ll be paying for your own healthcare — and doing it without the help of your employer — for years before you can turn to help from Medicare.
And, even after you qualify for Medicare, there are still some issues with coverage and Medicare doesn’t handle everything. So, even when you do reach age 65, you still need a plan for healthcare.
It’s especially important, though, to come up with a way to cover your healthcare costs in between when you retire and when you turn 65.
One option, if you qualify with a high deductible healthcare plan, is to put money into a Health Savings Account (HSA). You can get a tax deduction for your contributions to your HSA, and the money grows tax free as long as you use if for qualified healthcare expenses. It’s even possible to invest HSA funds. As a result, you could potentially build up a tidy healthcare nest egg that can help you cover some of your costs down the road.
Don’t forget to check your state’s healthcare exchange to look for low-cost healthcare plans. A good healthcare ministry plan can also provide you with affordable health plans.
Compare your options and consider alternative ways to pay for healthcare during this time. Recognize that you’ll bear the entire cost of your healthcare without help from an employer from the time you retire early until the time you reach age 65.
2. What money can you access outside your tax-advantaged retirement accounts?
While tax-advantaged retirement accounts are an essential part of efficient long-term planning, don’t forget that you’ll have a tough time accessing them penalty-free before age 59 ½.
You might be trying to max out your 401(k) each year, but what good is that if you end up having to pay a 10% penalty on the money when you withdraw it during early retirement.
Take a step back and look at the reality of your situation. Rather than putting everything into 401(k)s and IRAs, it might make sense to divert some of your retirement savings to taxable investment accounts. You’ll still have the advantage of the long-term capital gains rate when you liquidate some of your assets during early retirement.
Another strategy is to use a Roth IRA account in your calculations. You can withdraw your contributions (not earnings) to a Roth without penalty at any time, so that’s another way you can access some of your money before age 59 ½. However, if you dip into your Roth earnings, you could end up paying early withdrawal penalties.
Consider other ways to produce revenue, such as starting a business or renting out real estate. There are various ways to start now to build up passive income so that when you retire early, you have income without the need to touch your tax-advantaged retirement accounts. Every dollar of earnings during early retirement significantly reduces the size of the nest egg you need to build to retire early.
Look at setting up different repositories of money so you can access what you need — when you need it. Include your long-term Social Security strategy in this planning. No, you won’t access Social Security until much later in your retirement, but having a plan for your money during early retirement, regular retirement and later retirement years can help you set up a system that allows you access.
3. What will you do?
Finally, know what you will do with your time. Many people retire early only to go back to work two or three years later. Part of the issue is that a job can be such a big part of life that it’s hard to fill the hours left open upon retirement.
As you prepare for early retirement, think about what you want to do, and what would give meaning to your life. Do you want to volunteer in your community? Travel the world? Take up a hobby? A little bit of everything?
There are those who decide on a second act, perhaps teaching as an adjunct at a local community college or tutoring elementary school kids. Others want to travel for a couple of years before devoting time to a cause they want to support.
However you do it, think about what could fill your hours and provide meaning. For many of us, there are only so many games of golf that we can play, or so many hours we can sit on a beach before things start to feel stale.
Early retirement is a great goal. However, it’s important to be prepared for it. Take the time to plan financially and mentally and you’ll be much happier.
Originally seen on Forbes.com