Mon. Dec 4th, 2023

The pandemic has caused many people to assess their priorities, and if you are considering retiring earlier than originally planned, you aren’t alone. Whether your job has changed due to COVID and is no longer as appealing or you’d simply like more time to spend with family, leaving the workplace before age 65 may suddenly seem like a more realistic possibility.

You may feel emotionally ready to retire, but it’s important that you make sure that you’re financially ready for it, as well. Retiring early may change your financial plan and require you to make some adjustments to your saving pre-retirement, expenses post-retirement, or both. Or it’s possible that you don’t have a financial plan at all, in which case it’s even more critical to take stock of your financial situation before you decide on retirement.

Below are some suggestions for actions that you can take to decide if you are ready to retire early and, if so, to set yourself up for a financially secure future out of the office.

Understand Your Living Expenses

There are many unknowns in retirement, but one of the things that is most under your control is how much money you spend. You can’t predict precisely what your expenses will be later in your life, but knowing what your lifestyle costs now is essential to determining whether you are financially ready to retire early.

Especially if you’re retiring before age 65, there’s a good chance that your first years of retirement will require relatively larger portfolio withdrawals as you wait for Social Security or pension payments to begin. These early withdrawals can take a significant bite out of your portfolio, which can be especially costly early in retirement as you also lose future investment growth on those dollars. In order to know if your portfolio can sustain you through more years without income, you need to know how much money you expect to spend per year.

Before you decide whether you’re ready to retire early, take the time to sit down and really understand your living expenses. There are many ways to do this: you can enlist the help of one of the many budgeting apps and software programs, analyze your credit card statements, build a budget in Excel, or use pencil and paper. However you decide to approach it, be thorough and capture a complete picture of what you spend in a typical year.

You should also consider how your expenses may change, especially in the years between retirement and any social security income starting. Will your mortgage be paid down soon? Do you have insurance premiums that will come to an end with retirement? Does your home need renovations? Listing your predictable changes in expenses will help you plan for the early years of retirement.

Once you have a good sense of your expenses, you can compare them to the size of your investment portfolio. While you’re still employed, you may have an opportunity to save more or begin to spend less in a way that will help ensure you’re ready to retire early.

Make Catch-Up Contributions

If you’re over 50 years old, you have the opportunity to increase your savings into retirement plans between now and your actual retirement date through catch-up retirement contributions. You’re able to set aside an extra $6,500 annually into defined contribution plans like 401(k)s, 403(b)s, and 457; an extra $3,000 into SIMPLE IRAs or 401(k)s; and an extra $1,000 in regular or Roth IRAs. If you’re able to make a catch-up contribution, you’ll lower your taxable income in the year of your additional savings as well as set aside more funds towards your retirement portfolio.

Have a Plan to Take Care of Your Health

Before you decide to retire early, make sure you have appropriate healthcare coverage in place. With COBRA often prohibitively expensive and Medicare only available after age 65, those who retire early will need to plan to fill any gap in insurance. The Affordable Care Act offers a range of plans that may be suitable for early retirees, or you may be able to maintain coverage through your employer or through associations or membership organizations you’ve previously joined.

Another important consideration, especially for today’s retirees, is long-term care. Costs for nursing homes and home health aides continue to climb, and it’s estimated that 70% of those turning 65 will need long-term care at some point in their lives. Long-term care can be a significant and lasting expense, and you should be familiar with the possible financial impact as you consider retirement.

If you have not already purchased long-term care insurance or put aside extra savings in case of a health emergency, there are options available to help you plan for the costs. Whether or not long-term care insurance makes sense for you, you should make sure to have a plan in place before you retire.

Review the Asset Allocation of Your Investment Portfolio

Apart from the size of your portfolio, you should also consider the allocation of your portfolio as you decide if you’re ready to retire early. What may have been an appropriate allocation for your portfolio earlier in life may not have the risk profile that you need as you approach retirement. Take a holistic look at your assets to ensure that you are taking on an appropriate level of risk for when your income disappears.

When in Doubt, Find Help

There are many considerations when deciding if you’re ready to retire early, and I’ve only outlined a few of the most important here. If you’re unsure whether you’re prepared, you can always seek out help in the form of a qualified financial advisor who can help you answer many of the questions I’ve posed. A financial advisor can help you take stock of your current financial picture and create a plan for guiding you to retirement, whenever that may be.

Disclosure: This article is for informational purposes only and is not a recommendation of a particular strategy. The views are those of Adam Strauss as of the date of publication and are subject to change and to the disclaimer of Pekin Hardy Strauss Wealth Management. Follow me on LinkedIn. Check out my firm’s website or follow us on Twitter.

By senior