Do you want to retire early? Not really looking forward to working until you are 62, 65 or even 67? Not sure what to do in order to retire early? With stocks on the fast track for all-time highs and housing on an improved recovery you may not be alone in thinking you can now retire early. It seems that after the terrible financial years from 2007 to 2009 it seems things may be back on track. While the economy is not breaking records, unemployment is still too high, interest rates are at all-time lows but stocks and most likely your 401(k) are doing great. And prior to the implementation of the Affordable Health Care Act people who did not want to pay outrageous health insurance premiums before becoming eligible for Medicare now have options they did not have before. An early retirement not only seems likely, it is possible for many. But let’s go through what you may need to consider before you pull the plug on the 40 hour week and shift to the golden years of retirement.
For many an early retirement was off the table before they even had a chance to take a serious look at it for one reason, healthcare had to wait until you were 65 and were covered under Medicare. And private companies are reducing pre-retirement benefits for those who have not reached age 65. And let’s face it as we get older many of us are faced with pre-existing conditions that made health insurance impossible or extremely expensive. And while people born after 1960 have a full retirement age of 67 most people retire at 65 when they become eligible for Medicare.
Welcome the Affordable Health Care Act which now makes health insurance available to older Americans at what they are calling much more affordable prices and you can now forget about pre-existing conditions as those will no longer keep you from obtaining health insurance. If you are 60 you will pay no more than three times that of a 20 year old on the state exchanges. No one said getting old would be cheap but under the new law getting older does not mean sky high health insurance premiums which prior to the new law were closer to five times that of a younger person. But the Affordable Health Care Act does not mean you should not shop around as many private insurance companies may actually beat the premiums on the state exchanges. Just as with any insurance there are many factors that will go into your premium but the new law will give those who were high risk or uninsurable a chance at an early retirement without losing your health insurance from say age 60 to age 65 when they become eligible for Medicare.
Start looking now and provided you are signed up by December 15th your coverage will begin January 1st. And as you will now be retired your income in theory will be lower and you may qualify for a subsidy and the quoted price may not be the final price you have to pay. To qualify for a subsidy a single person has to make less than $45,000 and a family of four it is $94,000. Again you have some homework to do prior to making such a decision.
Now the earlier you retire in theory the more money you will need as you will hopefully be living longer while you are in your retirement years. And most people who are going to retire want to invest in safe investments such as bonds. But with interest rates at near historic lows that is not a good combination for a fully funded retirement or at least one at the level you desire. So what do you need to do to retire early? It is estimated that in today’s environment you need to start saving about 18% of your income from age 35 to age 65. Now that is an average so some years you may save more and in some years you may save less but the key is to start early. Money compounded over 30 years will grow at rates that would really surprise you but if you were to start an extra five or ten years and say start at age 25 instead of 35 you would be shocked at how much larger your nest egg would be. The more you can put into your retirement accounts at an early age the more likely you will be able to retire early. In order to retire better you need to be willing to maybe live on less now.
Some keys when you are young or regardless of age are do not live in debt and pay off the debt you have. And once the debts are paid off do not adjust your standard of living due to the fact you now have some disposable income save it. Get your house paid off and shop for deals in high ticket items such as cars. Then save, save, and save some more.
Now that you are entering an early retirement it may also be time to consider selling your house that chances are is too big for you now that your children are on their own. And with the housing market having rebounded fairly well in most major markets it may be time to lock in some gains and downsize if it does indeed make sense. Look for areas that have lower property taxes as well as maybe cheaper housing in general. The key to making this change work is to really make your living expenses lower and do not simply move and exchange costs with no benefit. But if your house is paid for and the expenses are manageable there may be no legitimate reason for you to downsize. Consider staying put and retire right where you are.
Now at this part of your journey to early retirement it is time to plan the first ten years or so. Now you will be living on your retirement funds and if you are lucky you may have a pension. The key to a truly successful retirement is to delay taking your Social Security as long as you can. If you are like me and your full retirement age is 67 you can actually get about an extra 8% a year if you delay until you are 70. So do not count on interest rates to outpace historic inflation as a ten year bond is yielding less than 3% right now. And as you have retired early you will be living longer in your retirement so in the time between your retirement and when you will start collecting Social Security you cannot dip too much into your principal. If you do dip into your principal you run a real risk of outliving your funds. As you will be in retirement longer you will need to be more active in your investments and fixed returns will not sustain you for 40 or so years in retirement. Equities are more risky but they will allow for income appreciation and have historically outpaced inflation. Now retirees need to have a diverse portfolio but not one made entirely of fixed returns but one that may be reliant more on equities to produce enough funds to last you through your longer retirement.
Following these suggestion may not guarantee you an early retirement but they will not hurt. And it is never a bad idea to be insured for health issues so point one is always a good idea no matter if you are in retirement or not. Living debt free and saving as much as possible for when you do decide to retire is never a bad idea either. And if anyone learned anything from 2007 to 2009 it is we should always live within our means as far as our housing is concerned. Start early and plan for things and you will be able to retire a few or maybe even several years early.
