The COVID-19 pandemic and soaring stock market have led more than a million workers to leave the workforce since February 2020.
And, according to a recent survey, early exits from the workforce could become a new normal, with nearly half of all Americans expecting to retire before turning 62. But, to be successful, they will need careful planning and money management.
Let’s take a look at how you can prepare to retire at 62 without risking your financial or emotional health in later years.
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Should You Retire Early?
Most people dream of early retirement. After decades of working, they envision a slower and relaxed life filled with vacations, hobbies, and grandchildren. But, for some people, the early excitement wears off and boredom sets in. After all, most of our lives and social circles revolve around work, and retirement can disconnect them.
There are a few questions to ask before pursuing early retirement:
- Do you have a plan to stay active? Early retirement brings a lot of free time, and it’s essential to have hobbies and social activities to avoid falling into a sedentary lifestyle. For example, you may want to consider volunteering or playing a new sport.
- Will you still feel fulfilled in life? Many people find fulfillment in their careers, and retirement can eliminate that sense of self-worth, so it’s critical to ask yourself where you’ll find fulfillment. Again, volunteering may address some of those concerns.
- Do you feel financially secure? Early retirement requires more savings than late retirement and may require lifestyle changes to live within new budget constraints. Retiring without a sense of financial security can lead to constant stress and anxiety.
- Do you have any health concerns? There’s always a trade-off between having more healthy years to spend freely and saving enough to pay for any unexpected healthcare bills down the road. You should candidly assess your health to evaluate that trade-off.
There is no easy or generalized answer to these questions. For example, some studies have shown that working longer results in a longer lifespan since people have a greater purpose. On the other hand, many stressful and sedentary jobs can lead to a shorter lifespan. Therefore, the right decision depends on your unique circumstances.
How to Prepare for Success?
There’s always an opportunity cost to early retirement. When you start drawing down your savings, you miss out on the potential appreciation of those savings over time. Similarly, if you take Social Security early, you miss out on higher monthly payments over your lifetime. Fortunately, proper planning can help you make these trade-offs.
There are four significant steps to prepare for early retirement:
- Determine your requirements. Calculate your current monthly expenses and forecast how much you’ll need during your retirement years. If you plan on changing your lifestyle, make sure your expectations are realistic (especially with drastic cuts).
- Calculate your income. Determine how much income you’ll have available over time. Ideally, you have enough to draw down 4% of your retirement savings each year and cover your required annual budget without relying on early Social Security.
- Plan for your healthcare. Determine how you’ll keep health insurance coverage between age 62 and age 65 when Medicare is available. You may need to pay for private insurance out of pocket during the three-year gap, and that can be expensive.
- Consult a third party. Regardless of your financial knowledge, it’s always a good idea to consult a third-party expert before making such a huge life decision. Financial planners can help you think through the process and ensure that you’re not missing anything.
Of course, the two most significant considerations are taking early Social Security and paying for health insurance. Early Social Security often involves a 20% to 30% reduction in lifetime benefits (including spouses), and private health insurance is a five-figure annual cost. As a result, you shouldn’t make these decisions lightly.
In addition to these steps, you may want to consider your need for life insurance or long-term care insurance, as well as any desire to leave a financial legacy to your children or charity. If that’s the case, you may need to work a little longer to save up enough money or plan to devote some of your retirement budget to these causes.
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The Bottom Line
Early retirement is a dream for many people, but it carries many financial and emotional risks. Fortunately, you can mitigate many of these risks with proper planning and money management. The key to success is having realistic expectations during retirement and conservative estimates when assessing your finances.
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