3 pitfalls to plan for
Many people dream of early retirement. While there’s no technical way to define that term, many say it means retiring prior to your mid-60s.
Meanwhile, recent Motley Fool research finds that 51% of Americans retire at age 61 or earlier, while 23% retire between ages 62 and 64. This means that in reality, a lot of people actually retire on the early side.
But no matter what age you’re targeting for early retirement, make sure to keep these potential hiccups in mind so you can work around them.
1. You may not have access to your savings penalty-free
If you’ve been building a nest egg in an IRA or 401(k) plan, you should know that you’ll generally need to wait until age 59 1/2 to tap your savings penalty-free. Clearly, if early retirement to you means ending your career at 61 or 62, this won’t be an issue. But if you’re aiming for age 57, you may need a backup plan.
If you know your goal is to retire early, though, you have time to come up with that backup plan. For you, that might mean socking away money in a taxable brokerage account so you can leave your IRA or 401(k) alone until you’re old enough for penalty-free withdrawals.
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2. You might have to wait a while to claim Social Security
You’re entitled to your full monthly Social Security benefit based on your individual wage history once full retirement age arrives. If you were born in 1960 or later, that age is 67.
You’re allowed to sign up for Social Security as early as age 62. But for each month you claim your benefits before reaching full retirement age, they get reduced on a permanent basis.
Meanwhile, you may be planning to retire as soon as you’re eligible to take IRA or 401(k) plan withdrawals without a penalty. In that case, you may want to make sure you have enough savings to live on, since Social Security won’t be available to you for a number of years.
3. You might pay a small fortune for health insurance
Medicare eligibility begins at age 65. If you’re planning for an early retirement, there’s a good chance your career will come to an end before you’re entitled to sign up for Medicare. So you’ll need to figure out what you’ll do for health coverage until Medicare becomes available.
If you’re thinking of going without health insurance for a few years, you should know that that’s a very dangerous thing to do – at any age, but especially when you’re on the older side. So rather than making that your plan, explore different health coverage options.
You may be able to retain your old workplace plan for a period of time, albeit at a high cost. Or, you may decide to stay on board as a part-time employee for a number of years if doing so renders you eligible for continued health coverage. Doing so doesn’t make you a full-fledged early retiree — but it may be a reasonable compromise if you don’t want to shell out an exorbitant amount of money each year for health insurance.
Early retirement is something many people aspire to. But keep these pitfalls in mind and, ideally, find ways to work around them well before your career is set to wrap up.
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