A lot of people dream of retiring early, but doing so can have drawbacks. For example, claiming Social Security retirement benefits before reaching the age of 67 usually means you will receive less of a benefit.
Waiting longer to claim could result in a bigger financial benefit, but many people are forced to retire earlier than expected. The results from a 2017 survey from the LIMRA Secure Retirement Institute revealed that 53 percent of people retired earlier than planned, often due to health problems.
Due to rising healthcare costs, it's important to have a sound financial plan whether you want to retire as planned or have to leave the workforce early. You may find that you're putting more money toward healthcare to cover unexpected costs. If you delay retirement, you may be able to extend your employee benefits, including healthcare coverage, which can cover bigger medical bills with lower out-of-pocket liabilities. Healthcare is just one factor to take into account if you are considering retiring early. Here are four important implications of early retirement that you should know.
1. Expect a longer retirement
The time has come to start spending what you've been putting away for years. Every penny counts, and it's important to work with your financial advisor to figure out how much you can withdraw each year without worrying about running out of money. We're living longer than ever before, so it's crucial that your strategy is built to survive in the long term.
You'll need a conservative starting withdrawal rate to give your portfolio longevity. It differs by client, but the common rule of thumb is to withdraw no more than between 4 percent and 5 percent of savings in your first year of retirement. After that, adjust the withdrawal amount every year for inflation.
Be sure to consider how you plan to spend your retirement years. For instance, you might want to withdraw more in the first few years if you are planning to travel. And for women, who live longer and make less than men, it's extra important to save more.
2. Plan for heavy withdrawals from your assets
If you retire early, you'll have to withdraw money until your Social Security and/or pension benefits kick in. These early withdrawals are more likely to expose you to sequence-of-return risk in your early retirement years, meaning that two retirees who have the same amount of money can actually have entirely different financial outcomes, depending on the state of the economy when each enters retirement.
Remember, no one can predict when a steep drop will hit your portfolio. Unpredictability is an important factor to consider since you'll be living on a fixed income. In the event of an unexpected drop, your plan may have to be adjusted under the watchful guidance of a financial advisor.
3. Account for high healthcare costsIf you retire early, you will have to finance you health insurance premiums and out-of-pocket healthcare costs until Medicare kicks in at age 65. One option to consider is a Health Savings Account or a Health Reimbursement Arrangement - two tools that can help you manage your healthcare spending.
4. Retiring early will affect your Social Security benefits
When you claim Social Security retirement benefits early, you'll have to accept a reduced benefit throughout retirement. But if you delay retirement until full retirement age, your Social Security retirement benefits will be increased by a certain percentage, depending on your date of birth. A handy planner that calculates the impact of early retirement on Social Security benefits is available here.
By working with a financial advisor, you can better understand the pros and cons of retiring earlier than planned, and the effect it may have on your retirement savings and lifestyle. The earlier you can start planning for retirement, the better.