What To Know Before Retiring Early

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Early retirement may seem like a dream come true. As a Financial Advisor in Murfreesboro, TN, we find that most clients have the goal of retiring early and enjoying the flexibility to do the things they love the most.  Since it takes planning and aggressive savings to accomplish an early retirement, we want to share a few points that we've found helpful in discussions with clients.  

Will You Have Enough Money for Your Entire Retirement?

Retirees tend to spend more money than expected, especially in early retirement. They might spend more on travel, home renovations, or other retirement-related lifestyle changes. Sticking to a budget early in retirement might not be a high priority compared to enjoying your free time, but you need to consider the later years, even as you’re enjoying the early ones. Making a budget with plenty of room for travel and other things you finally have time for will help you strike a balance.

People are living longer than ever before, which means that you've got to make your savings last longer than expected. If you talk to any group of retirees or pre-retirees, the prospect of outliving their money is likely to be one of their top concerns. Some people will live past 90 or even to 100. If your retirement lasts 20, 30, or even 40 years, how well do you think your retirement savings will hold up? What financial steps could you take in retirement to try to prevent those savings from eroding?1

Some retirees address the gap in their finances by working part-time in their 60s and 70s.  A part-time job can be an enjoyable transition and the income from this work can be an economic lifesaver for retirees. What if you worked part-time and earned $20,000–$30,000 a year doing something enjoyable and less strenuous? You might effectively give your retirement savings five or ten more years to grow.1

When it Comes to Future Healthcare Costs, You Can Never Save Too Much

Healthcare is often the greatest hurdle in retiring early.  The costs be very high to bridge the gap with private health insurance between retirement and Medicare at age 65. How many people retire with a dedicated account or lump sum to address future health costs? Some retirees end up winging it, paying their out-of-pocket expenses out of income, Social Security benefits, and savings.

While couples can save together, individuals may have considerable healthcare costs. People have begun adjusting their retirement expectations by considering projected healthcare expenses, and businesses have quietly made some changes.  Many of these future costs are unknown, but it's imperative that we plan for them. 

You Might Face Fees If You Take Early Withdrawals

If you retire before age 59½, you will pay a 10% early withdrawal penalty on most tax-deferred accounts. You will also owe income taxes on the amount you withdraw from traditional accounts funded with pre-tax contributions.1

Since the Roth IRA came into effect in 1998, its popularity has soared. It has become a fixture in many retirement planning strategies because it offers savers so many potential advantages.

With Roth IRAs, investors make contributions with after-tax dollars. Any potential earnings on investments within a Roth IRA are not considered part of the account owner’s income and, therefore, are not subject to income tax. Instead, they accumulate on a tax-deferred basis and are tax-free when withdrawn from the Roth if the distribution qualifies. With a Roth IRA, you can have a tax-free retirement income, which can be extremely beneficial.  

Compound Interest Needs Time to Work

Time is often the biggest factor in saving and investing.  The longer you work and save for retirement, the more money you will have. If you retire early, the power of compounding interest fades away because your investments will not continue to earn interest. Compounding interest works best for those who start saving early and save for as long as possible before withdrawing.

There is an old saying that compound interest “is the most powerful force in the universe,” and there is some truth to this. What makes compound interest special? Compound interest means that you earn interest not only on your principal investment but also on previously accrued interest. The results are not terribly impressive in the short term, but over thirty years or more, compound interest can be extremely beneficial.

Your House is Not Necessarily an Investment

You will need to live somewhere in retirement, whether you rent or own your home. Home ownership has associated costs, especially if you plan to sell the house at some point, including making additions and improvements and putting on a new roof. It all adds up.

Is the house you are in now an investment that you might use to finance early retirement? If you buy a house to flip it or buy it as a rental property, the answer is yes. If you buy a home to live in with hopes of selling it later, the answer may be no. Your home is an expression of your lifestyle, a wonderful setting for your life, and a place where you can enjoy privacy and comfort. As an investment, though, it is essentially illiquid, and its rate of return is uncertain.

Home values do not automatically increase over time. Over the decades, real estate values have risen, and they will probably keep growing over the short term, but perhaps not as quickly as some buyers hope. Stocks, unlike your home, do not need upkeep. You will never need to repair, reroof, or repaint a portfolio. Houses need maintenance over time, which can eat into your gains. You must also pay property taxes. If you envision your home as an income-producing asset during your retirement, that means playing landlord on some level. Many are not ready to take that step.

Remember that home values tend to increase gradually. If you see your home as an investment, consider it a long-term one. While every household is different, be careful if you plan to use your house to fund your early retirement.

The Short Version: Look Before You Leap

Early retirement is possible if you can finance your lifestyle from the day you quit working. It's a worthwhile goal for anyone willing to take the steps to make it both feasible and relatively uncomplicated. You can take these steps in tandem with your trusted financial professional, someone who has helped others pursue their goals and can tell you which situations to investigate and which ones to avoid.  As a Financial Advisor in Murfreesboro, we provide guidance to clients to help them achieve their financial goals, which often include an early retirement!


This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.