Your Comprehensive Guide to Achieving Early Retirement: 5 Key Steps for Success

Have you ever envisioned the age at which you want to retire and made plans accordingly? While early retirement is not a new concept, the COVID-19 pandemic has significantly influenced people's perspectives on work and long-term financial planning. Factors such as downsizing, vaccine mandates, health concerns, or the desire for more leisure time outside of the office have contributed to a substantial increase in the number of retirees. In fact, experts estimate that the retiree population has grown by 3.5 million in recent years. This trend highlights a crucial realization: with adequate time, appropriate resources, and prudent spending habits, achieving your long-term financial goals is feasible, whether you retire tomorrow or several years from now.

Defining Early Retirement

In general, early retirement refers to leaving the workforce before the age of 65, which is the minimum age to qualify for Medicare benefits. Research indicates that the average retirement age for men is 64, while women typically retire at 62. However, early retirement is not suitable for everyone, and it involves more than just preparing for the absence of Medicare benefits. In the following sections, we will outline five simple steps that can help you prepare yourself (and your finances) for early retirement.

Step 1: Assessing Pension and Social Security Benefits

For many retirees, Social Security and pensions serve as the primary sources of income during retirement. While it is possible to start receiving these payments earlier, doing so will result in reduced monthly benefits. The full retirement age is currently 66 for individuals born between 1943 and 1954. This age gradually increases for those born between 1955 and 1960 until it reaches 67. If you were born in 1960 or later, full retirement benefits become payable at age 67.

Step 2: Creating a Post-Retirement Budget

To ensure a smooth transition into early retirement, it is essential to evaluate whether your retirement savings will adequately cover your expenses. Begin by calculating your potential monthly income from pensions, Social Security, and savings. Then, compare this figure to your projected monthly expenses in the scenario where you retire five years earlier than expected and are eligible for Social Security and pension benefits.

Determining Your Income Requirements

The specific income needed will vary based on an individual's lifestyle, spending habits, and circumstances. However, the following expenses are generally considered:

1. Monthly mortgage payments or rent
2. Interest payments on other debts
3. Vacations or trips
4. Major purchases or home repairs
5. Entertainment and recreational activities
6. Out-of-pocket medical expenses
7. Charitable contributions
8. Taxes

It is crucial to prepare for unforeseen circumstances, such as unexpected life events or home repairs, as well as the possibility of not fully paying off your mortgage by the intended date. If it appears that your early retirement income may fall short of covering these expenses, consider the following options:

1. Delay retirement to a later date
2. Increase current savings to bridge potential future gaps
3. Reduce your budget to minimize future gaps
4. Explore opportunities for consulting or part-time work
5. Assess whether a reverse mortgage may be a suitable option

In certain situations, such as the need for sudden funds for home repairs, a cash-out refinance can be an effective tool. If you would like to learn more about this option, reach out to your local Mortgage Advisor or refer to relevant resources available.

Step 3: Reassessing Spending Habits

Now that you have created a post-retirement budget, it is crucial to evaluate your current spending habits and make necessary adjustments. This proactive approach will ground your spending behaviors and facilitate an easier transition into retirement. For example, downsizing and moving to a more affordable home or neighborhood can potentially reduce your mortgage payment, property tax, and insurance expenses, while also freeing up equity that can be invested to generate additional monthly income in the future.

Average Household Expenses by Age Group

For many individuals approaching retirement, the decision to downsize and manage spending habits is closely tied to a more significant question: what type of retirement lifestyle can you afford? While some expenses may decrease, others might actually increase. Experts suggest planning ahead by assuming that you will spend approximately 80% of your pre-retirement income annually during retirement.

Average Household Spending by Age Group

Step 4: Establishing a Savings and Investment Plan

To achieve financial security during retirement, it is crucial to strike a balance between growing your income and implementing protective measures. Many individuals find it beneficial to have a few years' worth of living expenses invested in stable and liquid assets, such as money market accounts, short-term bonds, or certificates of deposit (CDs). It is also advisable to diversify the rest of your savings across stocks, long-term bonds, and other fixed-income investments. Generally, the greater your current income, the smaller the percentage of your working income you will need to replace once you retire.

If you are not yet able to retire but wish to start saving now, consider enrolling in a 401(k) plan if it is available. Some employers offer contribution matching or annual increases in your savings rate. However, be mindful of the annual limits set by the government on how much you can contribute. You can find the most up-to-date figures through reliable sources.

If you have additional questions about your finances or require further guidance, it is advisable to seek assistance from a financial advisor. Reach out today to receive recommendations specific to your local area.

Step 5: Prioritizing Health Insurance

Even if you make significant changes like downsizing, unexpected medical expenses can deplete your savings during the years between early retirement and Medicare eligibility at age 65. If retiring early means losing employer-sponsored health insurance, you must find alternative coverage until you can apply for Medicare.

Many retirees choose to continue their employer-sponsored coverage through COBRA (Consolidated Omnibus Budget Reconciliation Act). COBRA is not an insurance provider but a law that mandates employers to offer former employees the option to temporarily maintain their health insurance coverage at their own expense.

Other options include enrolling in a health insurance plan through the Health Insurance Marketplace or joining a partner's health insurance plan. It's worth noting that certain organizations, such as AARP, may offer discounted coverage.

What's Your Next Step?

Planning for early retirement involves various considerations that cannot be fully addressed in a single article. If you have any questions or desire more information, we recommend reaching out to your local Mortgage Advisor or exploring our extensive collection of blogs.

The contents of this article are not provided by, or approved by, FHA, HUD, or any other government agency. At the end of a reverse mortgage, borrowers must repay the loan, potentially requiring them to sell the home or use other funds. Charges associated with the loan include an origination fee, closing costs, mortgage insurance premiums, and servicing fees. The loan balance increases over time, and interest is charged on the outstanding balance. Borrowers remain responsible for property taxes, hazard insurance, and home maintenance. Failure to meet these financial obligations may result in the loss of the home. Interest on a reverse mortgage is not tax deductible until the borrower makes partial or full repayment.