While many people are forced to stop working earlier than they’d planned due to health or employer issues, others dream of early retirement. The upside of early retirement is easy to understand – more time to pursue your interests, while you are still healthy. The downside risks center on cost of retirement, and the emotional impact of changing your routine. Keep in mind that given today’s life expectancies, anybody who retires before age 65 or 66 could easily spend two or three decades in retirement. Given this reality, here are five key questions you should answer before you decide to retire early:
Q1: Do you have a realistic plan to generate income for decades?
Making realistic projections about all sources of future revenue and how much income you can draw over a lifetime really matters. Remember, cost of living will likely increase over time, requiring you to withdraw more from your nest egg in the future. To meet this financial challenge, you need a large, widely invested portfolio. Be sure to add in other sources of retirement income: Social Security, pension income and inheritance you have received or can count on receiving.
Q2: Do you have outstanding debts to pay?
If you continue to carry a home mortgage, automobile loan, credit card debt or home equity loan into retirement, ongoing payments subtract from your disposable income. The ideal situation is to have little or no debt when you head into retirement so you can be more efficient in the use of your available financial resources.
Q3: Are you going to claim Social Security benefits early?
Most people are first eligible to claim Social Security benefits at a reduced rate, when they reach age 62. Full retirement benefits are paid to persons who retire between ages 65 and 67, depending on the year of birth. Early retirees must prepare to either substitute for Social Security benefits in earlier years or accept smaller Social Security payments throughout their lives.
Q4: What is your plan for health care?
One of the costliest aspects of early retirement is paying for private health insurance after you leave work and before you are eligible for Medicare. Explore your options for health care exchanges and private insurers. Perhaps you are covered under a former employer’s plan for retirees. Remember, persons in their 50s and 60s often pay the highest premiums for health insurance, so this will represent a significant expense.
Q5: Are you emotionally prepared for a dramatic change in your life?
Leaving the routine you’ve been living for decades is a significant adjustment. Before leaving the workforce, envision your new life after retirement. Plan to stay active and connected to people; provide yourself the the kind of stimulation you were accustomed to while you worked.
Early retirement is likely to work out best for those who plan ahead. Answering these five questions in an honest and comprehensive way is a good starting point.
Michael W. K. Yee, CFP
1585 Kapiolani Blvd., Suite 1100, Honolulu
808-952-1222 ext. 1240 | michael.w.yee@ampf.com
Michael W K Yee, CFP®, CFS®, CRPC®, is a Financial Advisor and CERTIFIED FINANCIAL PLANNER practitioner™ with Ameriprise Financial Services, Inc. in Honolulu, HI. He specializes in fee-based financial planning and asset management strategies and has been in practice for 30 years. Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment advisor. Ameriprise Financial Services, Inc. Member FINRA and SIPC. © 2014 Ameriprise Financial, Inc. All rights reserved. File # 1065887
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