Early retirement: A checklist
- November 19, 2009
- 0 comments
- Posted in Latest Posts, Retirement
Some people retire early by choice. Some reluctantly take a buyout package (they see the handwriting on the wall). Some lose their jobs before they’re ready. Whatever your situation, early retirement takes a lot of discipline. You might live another 40 years or more and don’t want your money to run down before you do. If you’ve hit the jackpot with stock options, quit reading now. You’ll do fine. But if you’re wondering whether you can afford to retire, or whether you still need to earn some money, here’s what to consider:
–How much income can you can you rustle up? Early retirement works best for people with reliable pensions or whose spouse still works. To help pay your bills, you can afford to draw 4 percent of your total savings and investments in your first year of retirement. In each subsequent year, take just a little more to keep up with the latest inflation rate. (If you make larger withdrawals, it’s unlikely that your money will last for life.) You might be able to add to your nest egg by selling your house, buying something smaller, and investing any remaining cash. Some retirees have other sources of income such as annuities, royalties, or rents from property they own. (Note: Don’t count interest and dividends as a separate stream of income. They’re effectively lumped into your 4 percent withdrawal.)
–How much do you need to live on? Create a retirement budget, covering all the expenses you expect. If your income is high enough to pay for everything, you’re fine. If not, you need to stay at work, find another job (maybe part-time), or reduce your expenses. If the only answer is “spend less,” then the sooner you rearrange your life, the better. If you dawdle, you’ll be taking too much money out of your savings pot.
–When will you start receiving Social Security? You can start as early as age 62. But that permanently reduces the size of your check, not only for you but for your spouse if he or she will collect on your account. If you die first, your spouse will have less income than if you had waited until your full retirement age to collect (probably around 66). Wait, if you possibly can.
–What about health insurance? If you have a choice, don’t even think of retiring until you know you can fill the health-insurance gap. Freedom doesn’t feel free when you know that a bad diagnosis—for yourself or your spouse—could wipe you out. Some companies offer coverage to their early retirees (the lucky ones!). Alternatively, you can stay in the group plan for 18 months at your expense. If you’ll need a part-time job, try teaching or other government work, where you’ll probably get into the group plan. Corporations such as Home Depot, Wal-Mart and Costco also cover part-timers, although there are waiting periods before benefits begin.
If you have to shop in the open market, trouble awaits. Policies are hugely expensive and you might be turned down due to “pre-existing conditions.” If you do find insurance, the premiums will jump if you get sick. You’ll probably have to accept a large, annual deductible, meaning that you’ll pay a lot out of pocket for even an ordinary illness. If you go into business for yourself, you might find a one-person group policy that beats the cost of individual coverage. In states that require two employees to create a group, hire your spouse. Use a health insurance agent to help you through the individual-policy maze. You have to hold out to age 65 before Medicare will come to your rescue.
–Where will you live? Consider a smaller house or apartment, in a lower-cost part of your state or elsewhere in the country. But first, plot a health-insurance strategy. If you’re covered by an HMO or are in your company’s local plan, you’ll probably lose your coverage if you move away. If your insurance is portable (as some large PPO plans are), the same policy might cost you more in another state.
--Do you have any debt? It’s hard to retire if you still have a mortgage or are carrying large credit-card debts. The blueprint for early-retirement planning couldn’t be simpler: steady savings, modest expenses, and no debt.
Tags: early retirement, retirement checklist
