Retiring early can sound like a dream, but there’s a lot more to think about than just how to fill all your free time. It can be done, but there are some special challenges. Here are three things you need to prepare for if you plan to make an early departure from the workforce.
1. Your savings has to last a lot longer
The biggest difficulty with retirement planning at any age is that you don’t know exactly how long your savings has to last. Maybe you’ll only live until 70, or perhaps you’re one of the lucky few who make it to 100 or beyond. You can estimate your life expectancy based on your personal and family health history, but you can never be certain.
Those who underestimate the length of their retirement could find themselves in serious financial trouble down the road, and this is especially true for those who retire early. If you retire at 50 and live until 100, that’s 50 years of retirement. It’s not easy to estimate how much money you’ll need during that time, especially since you don’t know what health concerns or emergency costs may come up.
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The best way to reduce the risk of running out of savings is to plan for a long retirement. Expect to live until at least 90, unless you have good reason to believe you won’t live that long.
You may also want to develop a backup plan if you notice yourself burning through your savings more quickly than anticipated. Maybe that means cutting back on travel or discretionary purchases. Or maybe it means finding a part-time job to help you cover some of your costs. Figure out what will work for you.
2. You may have trouble accessing your retirement savings early
Even if you have a substantial nest egg, you may have trouble accessing it if you retire before age 59 1/2. The government typically imposes a 10% early-withdrawal penalty if you take money out of your retirement accounts before this age, though there are ways around this.
If you have Roth retirement accounts, you can can access your personal contributions tax-free at any age, though you could still owe taxes and penalties if you withdraw any earnings before 59 1/2 without a qualifying reason.
If you’re turning 55 or older this year, you may be able to take advantage of the Rule of 55. This says if a worker quits their job in the year they turn 55 or older, they get penalty-free access to the 401(k) associated with …….