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5 important things to consider before retiring early, according to a financial planner

Jovan Johnson   

5 important things to consider before retiring early, according to a financial planner

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  • Early retirement is popular with my clients right now, and I always offer the same advice.
  • If you're retiring early, make a plan for your new free time. And plan for healthcare and other costs.

A common theme that I have been noticing with my clients lately is the desire to retire early. Many people are considering an early or partial retirement for more fulfilling roles. However, the reality of leaving work early can be far different than expected.

Early retirement is not for everyone. According to an Employee Benefit Research Institute (EBRI) 2020 survey, only 11% of today's workers plan to retire before age 60. If you fall within the 11% crowd, there are a few things you need to consider before deciding on early retirement.

1. Figure out what you want to do with your time during retirement

During our working years, we typically have many activities happening throughout the day to keep us occupied. Whether you are passionate about various hobbies, volunteering your time, or traveling the world, it is essential that you figure out how you want to spend your time during retirement. Many people believe that they will be able to easily fill their time, only to find themselves bored during their transition.

Now is the time to partake in all the things that you may have put off for years. Make sure that you come up with a plan for early retirement.

Related: The best retirement plans »

2. Know that there may be a lack of human/social connection due to your peers still working

With a traditional retirement, many of your peers/friends will also be retired or nearing retirement. Therefore, you could have endless dinner parties, brunch dates, and time with the people you love and care about the most.

With early retirement, many individuals start to experience a lack of social interaction since their peers are all likely still working. While you may have time to play golf or go to the beach during the day, your friends who are working 9-to-5 don't have that luxury.

In fact, I have seen clients opt for partial retirement and work part-time just so that they can continue to engage with their peers. If you do not have a big family, grandkids, or the ability to make new friends to occupy your time, this is something to consider before retiring early.

3. Be realistic about your monthly retirement income needs

Many people approach early retirement the same as traditional retirement when it comes to their budget. However, you will spend more money than you think during early retirement.

In the early years of retirement, when you are younger, healthier, and have a lot of free time, you may find yourself spending more than you did before retirement. It is common for new early retirees to splurge on travel, home renovations, relocations, and other retirement activities. With no work to do, you are constantly seeking new activities to partake in, which usually have a cost.

Some other expenses that you may have compared to traditional retirement are mortgage payments, childcare expenses, and debt payments. To prepare for all these expenses, it is important to create a budget and structure where you pay yourself on a set frequency, like a job.

4. Plan for unexpected medical expenses or future needs

It is inevitable that medical expenses will be one of your largest expenses during retirement. While it is nearly impossible to plan for exact medical expenses, it is important to have a big cash cushion set aside for these needs. When you are analyzing how much of a cushion to set aside, consider factors such as where you plan to retire, how healthy you are, and your estimated life expectancy.

In addition, Medicare doesn't start until age 65. This means that you will most likely have to apply for private health insurance until then. Private health insurance can be costly, as you do not have the benefit of your employer covering some of the cost. It is essential that you consider this expense before retiring early.

Another thing to consider is the fact that healthcare costs increase annually due to inflation and other factors. To plan for these expenses, you should consider at least a 4-5% annual increase for out-of-pocket healthcare expenses during retirement.

5. Create passive income to help make your money last

With improved healthcare and technology, many people are living much longer. The greatest risk to a successful retirement is that your money will run out at some point. According to recent research, the average life expectancy in the US was 76.6 years in 2021. Let's say you decided to retire at age 40. You would have to make your savings last for 36.6 years, on average, compared to 11.6 years if you retire at age 65. This means that your savings would have to last much longer.

If you are not sure whether you will have enough money to sustain your needs throughout retirement, it may be beneficial to consider creating some passive income streams during your early retirement years. Whether you plan to invest your money in long-term funds that pay dividends or have a rental property that generates positive cash flow, you will not regret having an additional stream of income during retirement.

This article was originally published in May 2022.