The standard retirement age in America is 65, but many workers set ambitious goals to retire early. If you’re looking forward to retiring early, it’s important to prepare for retirement with a solid savings plan and financial strategy.
While it’s possible to retire at 62 or even younger, there are many considerations to take into account before you stop working full time. By understanding the issues you may need to address when planning for early retirement, you’ll ensure you can retire at your goal age and live a comfortable retirement life.
Table of Contents
1. Delaying Social Security
Before you retire, consider when you’re eligible to begin receiving Social Security benefits. While you may qualify to receive these benefits at age 62, you’ll receive a reduced amount if you begin claiming them. Your benefit reduction is based on your age and the number of months you retired early before reaching your full retirement age. The longer you delay your Social Security benefits, the higher the amount you’ll receive. However, the latest you can begin claiming benefits is when you turn 70.
If you’re still set on retiring at 62, consider other sources of retirement income until you’re old enough to receive your maximum Social Security benefit amount. If you have other savings or retirement accounts, you may want to utilize these resources for the first few years before beginning to claim your Social Security.
2. Finding Health Insurance Coverage
Health insurance coverage can be another added expense you should consider if you want to retire at 62. If you currently have health insurance through your employer, the coverage will end when you stop working. You don’t qualify for Medicare coverage until you’re 65. That leaves a few years where you may be responsible for your own health insurance coverage.
If you retire before your spouse and they’re enrolled in a company-sponsored health insurance plan, you may be eligible to add yourself to that plan. If this isn’t an option, you may need to shop around with private insurers and find a health insurance policy that’s affordable but offers adequate coverage.
Another option is to forego health insurance coverage and pay for medical expenses out of pocket. However, if you’re not financially prepared to take on expensive and unexpected medical bills, this strategy could put you into substantial medical debt.
3. Working Part Time
A part-time job may not seem enticing if you’re looking forward to retiring early. However, working part time is one of the best ways to earn extra income during retirement. Find a job you’re passionate about that offers a flexible schedule so you can still enjoy your retired life.
If you earn enough income and can afford to delay Social Security benefits, you’ll set yourself up for a higher retirement income in the future. If you wait until after full retirement age to claim benefits, you’ll qualify for delayed retirement credits, which increase your Social Security benefit payments.
4. Planning Withdrawals
Planning out when you’ll need to withdraw income from your investments and retirement savings accounts is crucial. If you retire too early, you could run out of savings and may need to go back to work full time to cover your living expenses. While being diligent and motivated to contribute to your retirement plan is important, make sure you can afford to live off the income you take home now.
Long before you stop working, it’s important to crunch some numbers and figure out the monthly income you think you’ll need in retired life. Be sure you have enough retirement income to cover your expenses and still enjoy your new retired life.
You may need to adjust your costs of living and cut down on your usual expenses if you still plan to retire early. When you quit working at 62, keep in mind, you’ll have a few extra years without a full-time income to cover with your retirement savings account and investments.
5. Consolidating Accounts
If you have several retirement accounts, it may be beneficial to consolidate these accounts into one. The IRS has several tax-related rules about taking distributions from these accounts. Consolidating them into one account that’s associated with the least amount of tax liability may save you money when you begin to take withdrawals.
If you turned 70.5 years old before January 1, 2020, or you’re 72 years old, the IRS requires you to begin taking distributions from your IRA if you haven’t already started. The minimum distribution amount you must take depends on how much is in the retirement account. However, you can choose to take more if you want. One consolidated retirement account makes it easier to ensure you’re following these tax laws correctly.
While it’s assumed that diversifying your investments is the best way to make money, sometimes streamlining these accounts makes more sense. In addition to avoiding certain taxes and fees, if you consolidate your retirement accounts into one, it’s easier to manage your income. As you contribute to the account, you may also find it easier to rebalance and keep track of progress toward your retirement goal.
6. Paying Off Debt
Your financial health directly affects the age at which you can retire successfully. While it’s important to focus on saving for retirement, it’s even more important to get out of debt now so you don’t take that debt into retirement with you.
When you retire, you’ll more than likely live on a fixed income that includes your retirement savings and Social Security benefits, if you qualify. Even with a part-time job, you may still be living on a tight budget in retirement so you won’t have much room to pay off debt. If you don’t address this debt quickly, it’ll continue to grow and you may need to go back to work full time just to pay it off.
If your goal is to retire at 62, pay attention to the debt you have in addition to the retirement savings you need to accomplish your goal. Before you quit working, pay off this debt by:
- Creating a strict monthly budget that includes paying towards your debt.
- Eliminating unnecessary expenses, such as cable streaming services or going out to eat.
- Paying more than the monthly minimum that’s due.
- Increasing your income by taking on a part-time job or starting a side hustle.
- Speaking with creditors if you’re having trouble paying.
- Not taking on any additional debt.
If you have a lot of debt, it may be beneficial to consider a debt consolidation service. By consolidating several debts into one, it’s easier to develop a payment plan to eventually become debt-free. If you retire with debt still hanging over your head, you may find it impossible to live on a fixed income so it’s crucial to only quit working when your debts are paid off.
If your goal is to retire at 62, you’ll need to create a realistic retirement savings plan and stick with it. It’s important to consider the financial factors that may affect your retirement life before you quit working. By taking these issues into consideration, you can be sure you’re financially prepared to retire early.
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