Whenever I meet with prospective clients, “tomorrow” is the number one response to the question of when they’d like to retire. The answer is usually tongue-in-cheek, because most people aren’t in a position to retire altogether. Nevertheless, there are some clients for whom early retirement is a real possibility, and in planning for early retirement we recommend the following four tips.
Establish a realistic budget – while it can be tempting to make a retirement plan work by assuming lower expenses, resist that temptation. Build a realistic budget – one you’re certain you can live within – and make sure you include line items for one time expenses and healthcare. Speaking of healthcare…
Understand your healthcare options and costs – if early retirement means before 65 for you or your spouse, make sure to price out healthcare policies and to include healthcare costs. Once you reach 65, you’ll be eligible for Medicare, so in planning for that, you should include the cost of Medicare, plus Medigap insurance and drug coverage (or Medicare Advantage if you’re planning on going that route). Additionally, given that healthcare inflation has run above baseline inflation for the last two decades, your plan should account for the growth in those costs.
Carefully Consider when to draw Social Security – it is possible to begin drawing regular social security benefits as early as age 62 and as late as age 70*. Full retirement age for most people considering social security is somewhere between age 66 and 67, and the drawing benefits early can result in a substantial reduction of those benefits. Likewise, for every year you delay drawing Social Security beyond full retirement age (up through age 70), you earn delayed retirement credits, meaning that your monthly payment increases. The upshot of all of this is that in some instances, plans can be more likely to succeed if clients delay taking social security at the outset of retirement, and instead depend upon higher portfolio withdrawals to meet their financial needs in the initial years of retirement. The Social Security Administration provides a calculator on the impact of choosing when to draw social security here.
Understand your pension options – pensions are becoming less and less common, but we work with both teachers and federal government employees who still have pensions. Two critical decisions to make about pensions is when to begin drawing the pension and, if you have a significant other, what survivor option to choose. Furthermore, some federal government pensions have the additional complexity of changing payout amount once social security becomes an option. In any event, understanding the ins and outs of your pension is a key part of planning for early retirement and the following article provides an overview of how you might analyze your options.
If you are considering early retirement and want to work with an Intown Atlanta financial advisor to understand your options, contact Minerva Planning Group to schedule an introductory call.
*- Technically, you could begin drawing benefits after age 70, but there is typically no financial rationale for delaying start of benefits past age 70.