Many people dream of retiring early.
But not too many should.
That’s because the financial consequences are often long-lasting and irreversible. For starters, people who retire early may not be able to get their old job back should plans not work out. And finding a new job is frequently a challenge. Especially for anyone over 50.
Also, most people receive some kind of health-care coverage through their employer. But with early retirement, not only do they lose that, they also are not yet qualified for Medicare. Insurance for those gap years at middle-age is pricey, and increasing regularly.
Thanks to the Affordable Care Act, everyone is guaranteed access to an insurance policy despite any pre-existing conditions. But that doesn’t mean people don’t pay for it. In fact, without employer-subsidized coverage, monthly premiums can range from $400-$2,000 a month, depending on the type of coverage selected.
And even once people are eligible for the government entitlement at 65, it doesn’t cover everything. Medicare recipients are only covered fully for hospital stays. All other parts of the coverage still requires customers to pay deductibles and portions of their medical and prescription bills. Medicare gap insurance is also expensive.
Another pitfall lies in deciding to start receiving Social Security benefits at the earliest time. As soon as checks begin arriving, there is no turning back. A person cannot change her mind and ask for the checks to stop until later in life. And starting at the earliest point gives the minimum monthly payment for the rest of their life. Those who do not start taking payments at their full retirement age but instead delay it are rewarded handsomely by the government with much higher monthly checks. Again, for life. Hence, not only is starting payments at the earlies time irreversible, it is also costly.
Tapping early into retirement funds is also potentially perilous. It reduces overall principle, potentially cutting future growth significantly. IRAs have high early withdrawal fees too. The tax benefits of traditional IRAs will no longer be possible either; once funds are withdrawn, deferred taxes are due. People considering this move should make sure to include any early IRA withdrawals into their total taxable income as they may suddenly find themselves in a higher bracket than expected.
On the other hand, if someone has carefully planned an early retirement years in advance, and has stuck to a strict budget with a commitment to build enough retirement income to last for 3-4 decades, it may work. Especially if they have budgeted enough money for rising health-care costs, inflation, emergencies, and maintaining quality of life.
A contingency plan is critical. Perhaps early retirement becomes boring. Or it no longer seems as financially feasible as it initially did. A larger-than-normal emergency fund to cover unexpected emergencies for several years is paramount. And, in the worst case scenario: is the person prepared to reduce his quality of life, including cutting expenses or selling a home, to adapt to unforeseen problems?
At Silverman Financial, we are eager to work with our clients to make their dreams come true. If you are considering an early retirement, we can help you determine if it is feasible based on your personal situation.