Wouldn’t it be great if you could stop working before you get too old?
Nearly everyone dreams of doing so, but the reality of early retirement requires a more practical approach than mere hopes and wishes.
If the idea of retiring early appeals to you, this article will help you figure out the most important things to keep in mind before walking out of your office for the last time.
What is Early Retirement?
In the United States, the full retirement age is 66 years and 2 months or 67 years, depending on when you are born. You are taking early retirement if you stop working anytime before the statutory retirement age.
For some people, the dream is to stop working at age 50, and it is not surprising to find people looking forward to retiring by age 40!
The goal is not just to stop working early, though. It is living your best life in retirement. To achieve this, many people work hard to earn extra income, spend less, and save more. This allows them to accumulate enough wealth to retire comfortably.
However, there’s more to retirement planning than creating a solid financial fortress. This is especially true if you have your sights set on early retirement. You need to be ready on all sides.
Here’s how to know if you are truly ready to stop working early.
How to Know You Are Ready to Retire Early
It is easy to focus on the freedom that comes from not having to work anymore when you are thinking about early retirement.
But retiring early doesn’t just remove the hassles that come with working; it also means you are foregoing additional earnings that may support and give you a potentially more comfortable lifestyle if you were to delay your retirement until the official retirement age.
That’s not to say you can’t have a great retirement if you’ve made the necessary preparations. But how do you know you are ready to retire early?
Here is a checklist to help you figure out if you are ready:
1. You have a sizeable nest egg
Having enough money in your retirement account is by far the most important sign that you are ready to take early retirement.
Depending on your age when you retire, you may not be eligible for Social Security. This means you will have to depend on your savings to cover all your expenses until you reach the eligible age.
But how much is “enough” money?
This is a purely personal decision, but aiming to amass up to 25 times the amount of money that will cover your annual expenses is a solid plan.
Regardless of whether that’s a plan you want to follow, you must know how much money will support you when you stop working.
Next, set that amount as your retirement savings goal. You know you have “enough” money when you meet and exceed that amount.
2. You are mostly debt-free
No matter how much you’ve accumulated in your retirement savings, you may run out of money too quickly if you have to make large payments after you retire.
It is important to pay off your debts before you retire early, as this will make your savings go further.
In other words, as you are working toward saving enough money, it is also a great idea to pay off your mortgage, loans, and other large debts.
3. You have healthcare in good order
One of the things that can cut deep into your savings is the cost of healthcare. You are ready to retire early only if you have your healthcare covered, at least until you reach the Medicare-eligible age of 65.
While you could purchase private health insurance if you plan to retire early, a more cost-effective option would be to qualify for coverage through your spouse’s Medicare plan.
Alternatively, you could use tax-free deductions to pay for qualified medical expenses if you have a Health Savings Account (HSA), regardless of your age.
4. You can access your savings without penalties
You may have saved up all the money in your retirement account, but the funds are not yours to keep 100%. There is something known as taxes that you will likely pay when you make withdrawals.
But beyond taxes, there are penalties for early withdrawals. You will continue to lose money and reduce your savings if you keep paying unnecessary penalties.
One of the signs that you are ready to retire early is that you have made arrangements for penalty-free withdrawals.
Here are some ways to set up penalty-free retirement plan withdrawals:
Sign up for a 457 retirement plan if you can.
Have a 401(k) plan, wait until you reach 55 before you retire, and don’t roll over the account into an IRA.
Have a series of SEPP withdrawals until you reach 59½ years or for at least five years (whichever is longer).
5. You can stick to your reduced retirement budget
Determine how much your fixed income will be in retirement and practice living on that budget for a few months.
If you can stick to that lower budget, you are likely ready to adjust to living on a fixed income permanently.
6. You have a defined plan in place
The idea of endless time freedom can be exciting. But like most shiny things, the excitement will eventually fade. What will you do with all that time?
You are ready to retire early if you have clearly defined routines in place that will replace your previous schedules. Without this, you may end being bored and unhappy with early retirement.
Understand Your Monthly Expenses
One of the major things that can make any retiree run out of their savings too quickly is not having a firm grasp of their monthly expenses.
Of course, you can’t be in charge of what you spend monthly if you don’t understand or figure out how much money will be enough to cover your monthly expenses.
Here is a simple way to determine your monthly expenses:
Print your bank statement for the past two years. Make sure to have the statement from all your bank accounts.
Add up all debits for the previous two years.
Divide the result by 24 (two years).
This will give you a more accurate monthly expenses figure that you can work with. Finding out what you spend monthly will be of no use if you don’t use that information to plan how you spend money in retirement.
Of course, all of this won’t matter if you make way more than you spend.
Consolidating Your Accounts
Here’s one small but important detail that many retirees – both young and old – leave out when thinking about retirement: they fail to bring their investment accounts together.
Don’t be that retiree that forgets about the existence of one of his or her several investment accounts. Having too many accounts doesn’t help you and it certainly doesn’t make things easy for your heirs. How do you keep track of and manage 7, 10, or even 15 different accounts?
It is okay to have a couple of retirement plans. It is also a great idea to have several investments. A great way to reduce risk and increase earnings is to diversify your portfolio.
However, the best thing you could do for your many investments accounts is to keep them in one institution. The goal is not about finding the best financial institution.
Instead, it is to help you easily see all your investments in one place. You should be able to see the impact of changes in one account on your entire assets. It is more convenient and will help you manage your funds better.
How Many Hours Can You Work as a Retiree?
Sometimes, things won’t turn out the way you plan, and you may have to take up part-time or flexible jobs in retirement to earn extra income or to keep from getting bored.
Whatever your reasons for working as a retiree, it is important to know how many work hours you can put in after retiring officially. That’s because working after retirement can affect your tax situation, health insurance, and Social Security benefits, depending on your age when you retire.
Here is a simple guideline to keep in mind if you plan to work in retirement:
You are considered officially retired if you spend between 15 and 45 hours per month in a job that does not require a lot of skills.
You are considered officially retired if you work less than 10 hours a week.
You are no longer considered retired if you work for more than 45 hours in a month.
Quitting work permanently is great if you have a fair idea of what awaits you on the other side of flipping the switch from worker to retiree.
Seek professional help if you have to, but don’t jump into early retirement until you are certain about your decision and have everything checked.
John E Chambers is an experienced financial advice expert. Born in Chicago, he has a master's in Industrial Finance, but he has spent decades offering investment advice to businesses and individuals alike. He is the founder of RetireeWorkforce.com and wants the website to be valuable for retirement advice. In addition, he writes articles that help users jump-start their retirement plans and choose the best investment options. If not pondering over stock market statistics or reading some magazines, you can find John spending time with his family. As an early retiree, John also offers unique insights into what post-retirement life is like.