A checklist for early retirement

By Shelly Gigante
Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
Posted on Sep 7, 2018

If you’ve ever yearned for an early retirement, you’re not alone.

A small, but growing contingent of working Americans have made it their mission to eliminate paycheck dependency well ahead of the traditional age of retirement.

According to the MassMutual 2018 State of the American Family survey, 14 percent of households earning $75,000 or more with at least one dependent under age 18 indicated that they planned to retire between ages 50 and 55, up slightly from 12 percent in 2013. And 24 percent said they planned to retire between ages 56 and 60, up from 18 percent five years earlier —an optimism no doubt fueled by the strength of the stock market in recent years.

The mostly millennial-led FIRE community, which stands for “financial independence, retire early,” is also gaining traction on social media with 5,600 followers on Facebook alone. Many proudly declare that they plan to exit the workforce in their early 40s.

But planning to retire early and following through are two different things.

Tanja Hester, a former communications strategist and blogger who retired in 2017 when she was 38 and her husband, Mark, was 41, tells readers on her blog that there is far more to early retirement planning than merely stockpiling money.1

“Early retirement won’t magically fix everything we wish were different about us or our lives, and it comes with its own set of pitfalls and stresses,” she wrote. “To some of us, those things are worth it, but we can only know that if we do some real introspection and planning, and not just financial planning, but also planning around personal fulfillment, health, and self-worth.”

To start with, you must carefully consider:

  • Your reason for wanting to retire early
  • Health insurance coverage
  • Physical and emotional wellness

 

Explore your reason

FIRE aficionados should be sure they have a clear vision of what it is they hope to achieve by retiring early. Is it to volunteer more, travel the world, play a more active role in a nonprofit you support? The better defined your plan, the more likely you are to meet your expectations.

“Not liking your job — being clear on what you’re retiring from — is not enough of a reason to retire early,” Hester wrote.

If it’s a better work-life balance you seek, try changing employers or using your work experience to shift gears into a more forgiving industry.

Or, consider going back to school to retool and start an encore career.

Indeed, an early retirement means different things to different people. Some view it as a total departure from the workforce, which requires significant savings depending on the age at which they retire. Others define it as having enough personal savings set aside to quit their day job and start a home-based business, do part-time consulting, or pursue a more meaningful (but lower paying) job.

A retirement plan that builds in flexibility and allows you to supplement your savings as needed can help you sleep easier at night. Just be sure you understand what you’re likely to get out of an early retirement, and what you’re giving up.

How much you need

It goes without saying that you can’t quit work until you’ve got enough saved, but just how much do you need? That depends on your expenses, your age, and your health insurance coverage, said Monica Dwyer, a financial advisor with Harvest Financial Advisors in West Chester, Ohio, in an email interview.

It may help to segregate your savings goal into two distinct phases: the money you will need available to cover the bills before you reach the age of Medicare and Social Security eligibility, and the money you need saved in your tax-deferred retirement accounts (401(k)s and IRAs) to provide for your needs after you reach age 59-1/2.

Remember, you can’t start claiming Social Security until age 62 at the earliest, and many retirees delay benefits until at least their full retirement age, which is between age 65 and 67 depending on your birth year, to permanently augment the size of their monthly benefit.2

(Learn More: Filing for Social Security retirement benefits )

Similarly, you can’t withdraw money from your tax-deferred retirement accounts such as your traditional Individual Retirement Account or 401(k) until age 59-1/2 without incurring taxes, plus a hefty 10 percent penalty.3,4  

That means you’ll need enough saved to get you over the hump until your retirement accounts and Social Security become accessible.

Be sure to factor in projected expenses, such as college tuition costs for your kids or a wedding for your daughter, if you plan to chip in, said Dwyer. And, consider the potential costs associated with becoming a caregiver for your aging parents down the road.

A 2015 survey by the AARP and National Alliance for Caregiving found 34 million Americans had provided unpaid care to an adult age 50 or older in the prior 12 months.The average family caregiver spends roughly $7,000 per year, or nearly 20 percent of their annual income, on out-of-pocket costs, according to AARP estimates.

(Calculator: How much should I save for retirement? )

“Be realistic about your expenses and live on them for a couple of years before you decide to plunge into retirement,” said Dwyer. “I would say that if you can live comfortably off of 3 percent of your after-tax savings, then if your money is invested properly and the market performs at average or even slightly below, then you can retire early. But I would advise you to talk this over with someone who can do some long term planning with you.”

Expect the unexpected

An oversized emergency fund of at least a year’s worth of living expenses is a must for early retirees, creating a buffer for years when the stock market may be limping along or a medical expense crops up.

Saving enough money and projecting your living expenses accurately is no easy task. Perhaps that explains why less than half (47 percent) of the higher income respondents to MassMutual’s survey said they were confident in their ability to retire at their intended age.

It helps to work with a trusted advisor who understands your financial goals and can help you solve for variables, including whether your house will be paid off, tax efficiency, the effects of inflation (which erode purchasing power), and whether the numbers only work if you move to a more tax-friendly state with a lower cost of living.

Dwyer said she had one client who was so fed up with his professional job that he was ready to quit and take a part-time gig earning $12,000 per year at a big box hardware store. He changed his tune when she calculated that, based on his current salary, he could simply tough it out for two more years and then retire for good, rather than spending the next 10 years toiling away at a job that he may also dislike.

Think, too, about your safety net in case your early retirement plan doesn’t work, Hester wrote in her blog. “How will you make sure that your whole plan doesn’t get sunk, especially after you’ve given up a well-paying job, by a natural or financial disaster?”

Consider, for example, whether you should budget for homeowners or renters insurance, whether you will carry life insurance, and how you will ride out Wall Street’s inevitable bear markets, she suggests. Will you be able to go back to work, if needed, to generate some supplemental income?

Healthcare coverage

The fly in the ointment for many FIRE fans is healthcare coverage. You aren’t eligible for Medicare federal health insurance until age 65, so unless your spouse plans to continue working and can cover you on his or her health plan, you’ll need to factor the costs of private insurance into your budget.

Depending on the size of your family, private coverage can set you back several thousand dollars a month.

During the accumulation phase, while you are still working, it may help to select a high deductible health plan with a health savings account (HSA) component, if available through your employer.

HSAs allow account holders to save tax-free for medical expenses. The funds you contribute may earn interest and whatever you don’t spend at the end of the year can generally roll over year to year for future healthcare costs. As such, they can potentially be used as an emergency fund of sorts for medical costs. (Learn more: HSAs and retirement )

Regardless of which tool you use to save, (money market funds or taxable brokerage accounts are also options), you will need to have enough set aside to cover you premiums and out-of-pocket medical expenses for the rest of your life — not just until you reach the age of Medicare eligibility. Healthcare costs are often underestimated by retirement savers.

According to the Fidelity Retiree Health Care Cost Estimate, a 65-year-old couple who is covered by Medicare and retires this year will need $280,000 in today’s dollars for out-of-pocket medical expenses in retirement, not including any costs associated with long-term care.6

“Your healthcare expenses will increase at a much faster clip over time than your other expenses, so make sure that the planning tool takes that into consideration,” said Dwyer.

Ultimately, she said, you want to be sure that you’ve covered all your bases so your family is protected.

Your physical and emotional well-being

Lastly, spend some time planning for your emotional and physical well-being. Will you miss the social interaction of a work environment? Does your spouse support your goal of an early retirement? Will the workweek feel lonely if most of your friends and family are still doing the 9 to 5 grind? And will you form new friendships by participating in clubs, joining the gym, and volunteering in the community?

Hester said there are many ways to keep your mind and body healthy, but you must have a balance and visualize ways to stay active and fulfilled.

For her part, Dwyer suggested including your closest confidants in the planning process before you take the plunge. Have him or her “run through the plan with you and tell you as a third party, who knows you, if they think that this can work or not,” said Dwyer. “Will you be bored? Will you miss your current job? How will retirement really look and feel afterwards? This is your thought partner and it has to be someone that has good judgment.”

Making the switch from collecting a paycheck to living off your savings is a challenging task at any age. For those who intend to retire early, however, it’s all the more crucial to plan ahead — and consider all options — so they can make the transition to financial independence with confidence.

Learn more from MassMutual…

What people don’t know about Social Security, but should

Is it OK to retire with a mortgage?

Need financial advice? Contact us

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Our Next Life, “10 Critical Questions to Answer Before You Make the Leap to Early Retirement,” Nov. 11, 2015.

Social Security Administration, “When to Start Your Benefits.”

Internal Revenue Service, “401(k) Resource Guide – Plan Participants – General Distribution Rules,” May 29, 2018.

Internal Revneue Service, “What if I withdraw money from my IRA?” Aug. 12, 2017.

AARP, National Alliance for Caregiving, “Caregiving in the U.S.,” 2015.

Fidelity, “How to plan for rising health care costs: Tab for your health care post-age 65? Try $280.000 for the average couple,” April 18, 2018.

The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of MassMutual.