Many workers look forward to escaping the demands of the working world as soon as they’re able to. But whether you’re a Financial Independence, Retire Early (FIRE) proponent or someone just looking to retire a bit early at age 62, you’ll need to prepare for your years in retirement. And that means carefully considering more than just your income, even if income is the most crucial issue you’ll want to address.
Here are five things to do if you want to retire early and what to watch out for.
1. Figure out what you’ll do with your time
It might seem counterintuitive, but you may have trouble figuring out what to do with all your soon-to-be free time. That’s one of the biggest problems reported by new retirees. Surprisingly, some even find themselves longing for the structured time and camaraderie of the workplace again.
“Before anyone retires, irrespective of what age they are or plan to retire at, they have to develop their personal narrative,” says Dan Sudit, partner at Crewe Advisors in Salt Lake City. “Paint the picture of what life will look like on that date.”
You’ll want to determine how you’ll spend your days. Sure, you won’t be locked down to a job that keeps you from traveling anymore, so you can plan trips. But what will you do when you’re not traveling? Will you take up a hobby that you’ve always wanted to do?
“What do you plan on doing when you turn [age] 62? Travel? Work on your garden? Work on your golf game? This will help determine what your cash flow needs will be,” says Sudit.
2. Set up a sustainable income
Once you’ve figured out how you’re going to spend your time, you can think about how you’re going to fund your lifestyle, whether you’re planning to party like a rock star or live a little more modestly.
“Generating an accurate and detailed assessment of your post-retirement income needs and expectations is a critical, but often neglected, step in the process,” says Bradley Newman, CFP, lead financial advisor at Fort Pitt Capital Group in Harrisburg, Pennsylvania.
Newman suggests relying on regular income from bonds and dividend stocks rather than trying to depend on capital gains that are sporadic or may never arrive.
As you’re planning your income strategy, you’ll want to make realistic assumptions for what your investments can earn, the taxes you’ll pay and inflation. Inflation can really tear up a retirement income plan, perhaps not immediately, but over time, as your fixed income becomes worth less.
“You want to set aside sufficient resources to ‘immunize’ your lifestyle the best you can,” says Sudit. “If you are planning on retiring at [age] 62, you will be young enough where inflation will impact your future expenses during retirement,” he says. “But likewise, if you are 42 right now and plan on retiring at 62, make sure you are contemplating the cost of things in inflated dollars.”
And your income is not just about food, housing and transportation. It also includes things that have tended to rise much faster than the overall rate of inflation, such as health care.
“Being overly optimistic about assumptions can lull you into a false sense of security that will lead to unpleasant surprises down the road,” says Newman. “It is important that you create a detailed financial plan that quantifies the impact of inflation in 20 or 30 years.”
This Bankrate calculator can help you figure out how much you may need to retire.
3. Decide when to claim Social Security
As part of your planning process, you’ll want to carefully consider when to take Social Security. While you’re able to claim it starting at age 62, you won’t be able to receive your full benefit until later, perhaps as late as age 67, depending on when you were born. If you claim it earlier, you’ll be giving up a significant amount of money each month, perhaps over a period of decades.
So your start date for Social Security benefits can impact your retirement life for many years. Not only will you receive a lower monthly payment, but you’ll also receive less when Social Security adjusts its payout each year as part of its cost of living adjustment.
If you can live without Social Security for a few years, it could make sense to do so. The longer you can delay, the greater your benefit check, up to age 70. Of course, some individuals will want to take their benefit at age 62, but they should factor that into their income plans.
4. Line up post-retirement health care
If you’re retiring at age 62, you won’t be able to start Medicare (until age 65), so you’ll need to line up an alternative. Some may opt to move abroad for a low-cost plan or even use COBRA, but most will want to access a state-based healthcare plan. But even that can be pricey.
If you worked at a company offering insurance, “you could potentially bridge the three-year period between when you retire and when Medicare kicks in, and may be eligible for COBRA for up to 36 months, 18 months plus another 18-month extension,” says Sudit. But he emphasizes that you must meet certain conditions for COBRA and you must cover all of your insurance costs.
However, most people will probably look for a medical plan through a state-based exchange.
“Don’t be lulled into complacency of low-cost options on the exchange,” says Newman. “Although some of the low-cost options offered on the exchange are very attractive, be aware of the low thresholds of earned income required to qualify for those rates.”
If your income is from tax-advantaged accounts (such as a 401(k) or IRA), you may have trouble staying under the income thresholds for low-cost policies while still withdrawing enough money to live on, says Newman.
5. Prepare for the unexpected
You don’t want to run your retirement expenses so close to your budget that you risk financial ruin if some unexpected surprises occur.
“If you plan things too closely, and you are wrong or forget to incorporate an expense, your retirement will not be what you thought it would be and you’ll lament your decision,” says Sudit. “Just like a home remodel, anticipate cost overruns and unexpected expenses.”
Count on some of these expected “unexpected” expenses to crop up from time to time: home maintenance, car repairs or replacement, and of course always-rising medical expenses. But other expenses may really come out of nowhere, so it’s key to build a cushion in your budget.
Bottom line
Retiring early – even just a few years early – can cause some unexpected hiccups in your life. So it’s important to consider the most important issues such as your income and healthcare needs and then try to anticipate other issues that may arise, especially unexpected expenses.
