5 Essential Things to Consider Before Retiring Early

Many people are thinking about taking early or partial retirement to pursue more fulfilling careers. However, the reality of leaving work early can be far from ideal.

Not everyone is cut out for early retirement. Only 11% of today’s workers plan to retire before the age of 60, according to an Employee Benefit Research Institute (EBRI) 2020 survey. If you are among the 11%, there are a few things you should think about before retiring early.

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

It is critical that you figure out how you want to spend your time during retirement, whether you are passionate about various hobbies, volunteering your time, or traveling the world. Many people believe that they will be able to fill their time easily, only to become bored during their transition.

Now is the time to do everything you’ve been putting off for years. Make sure you have a plan in place for early retirement.

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

Many of your peers/friends will be retired or nearing retirement if you choose traditional retirement. As a result, you could host an infinite number of dinner parties, and brunch dates, and spend time with the people you love and care about the most.

Because their peers are almost certainly still working, many people who retire early begin to feel a lack of social interaction. While you may have time during the day to play golf or go to the beach, your colleagues who work 9 to 5 do not.

If you don’t have a large family, grandchildren, or the ability to make new friends keep you busy, this is something to think about before retiring early.

3. Be realistic about your monthly retirement income needs

When it comes to budgeting, many people treat early retirement the same way they do traditional retirement. During early retirement, however, you will spend more money than you anticipate.

When you are younger, healthier, and have more free time in your early retirement years, you may find yourself spending more than you did before retirement. Travel, home renovations, relocations, and other retirement activities are common expenses for new early retirees. With no work to do, you’re always looking for new activities to participate in, which usually come at a cost.

Mortgage payments, childcare expenses, and debt payments are some other expenses you may have compared to traditional retirement. To plan for all of these expenses, create a budget and structure in which you pay yourself on a regular basis, much like a job.

4. Plan for unexpected medical expenses or future needs

Medical expenses will undoubtedly be one of your largest expenses during retirement. While exact medical expenses are nearly impossible to plan for, it is critical to have a large cash cushion set aside for these needs. Consider where you plan to retire, how healthy you are, and your estimated life expectancy when determining how much of a cushion to set aside.

Furthermore, Medicare does not begin until the age of 65. This means you’ll almost certainly need to apply for private health insurance until then. Private health insurance can be expensive if your employer does not cover some of the costs. Before retiring early, you must take this cost into account.

Another factor to consider is that healthcare costs rise on an annual basis due to inflation and other factors. To account for these costs, you should budget for a 4-5% annual increase in out-of-pocket healthcare expenses during retirement.

5. Create passive income to help make your money last

Many people are living much longer lives as healthcare and technology improve. The most significant risk to a prosperous retirement is that your funds will run out at some point. According to recent research, the average life expectancy in the United States in 2021 will be 76.6 years. Assume you’ve decided to retire at the age of 40. You would have to save for 36.6 years on average, compared to 11.6 years if you retire at 65. This means your savings would have to last a lot longer.

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