What They Don’t Tell You About Early Retirement
Collaborative Post
Even if you’ve loved your job ever since you had it, there may be times that you wish you could stop work and just creep into retirement earlier than you expected. Nobody wants to ride a packed train with fellow commuters or have to stand any longer than is necessary on said packed train.
Early retirement isn’t really for everybody, though. In some instances, you may be pushed into retirement due to ill health or an accident, and while you can get some help with your finances after an accident with organisations such as injuryclaims.co.uk, you still may not feel ready for it. For those who do take the plunge into early retirement, they may find themselves twiddling their thumbs and not really knowing what to do. With that in mind, here’s a short list of things that they don’t tell you about early retirement so that you can be ready for it if it happens with you.
Healthcare can be expensive in some parts of the world. If you’ve had an injury or an accident, you may find that your compensation should carry you through until your pension drops. Before you reach retirement age, you may not get access to subsidised care in some regions, such as the US. This means you’ll still need to pay for it as usual. It doesn’t always come cheap, but if you’ve had a decent payout after an accident or an injury then you might find it to be OK.
It’s not a good idea to jump into your pension early. Some people think it’s the best idea for them if they retire early and tap into that nest egg, but it can actually cost you a lot of money. There are early withdrawal penalties from most pension accounts, especially those that are tax deferred. In the US this includes 401K plans and traditional IRAs. There are options for getting IRA money before you turn 60, but it’s tricky and it can cause a lot of penalties. The last thing you want is to have to pay into a pot for your entire life only to have some of it deducted because you decided to access it early.
You may have to wave goodbye to compounding interest. When you’re saving for retirement, time is your best friend. If you’re putting money away each month you’ll have around, you’ll have a decent chunk of it when it comes to retirement. This assumes that you make no withdrawals and you earn an average of 6% annually on your investments. If you do end up working at least 10 more years and retire a bit later, you could nearly double your pension pot. It’s important that you realise the power of compounding interest so that you don’t have to wake goodbye to it.
You could live at least another 30 years. If you decide to retire at 55, which is 10 years before retirement age in the US, you may think you’ve got a decade to use up your pension pot, but that’s not always how it works. You may have to make your savings last year for an additional 30 years on average, especially if you decide to retire early. We’re living longer than ever before, which means you have to account for that. You could have an entirely new and longer life when you retire, but if you can’t afford to put yourself through that retirement, you may end up having to go back to work, which is just not ideal.
You may spend a lot more money than you think. Did you know that you could spend a lot of your retirement money very quickly? A typical rule of thumb is that you’ll spend around 80% as much in retirement as you do when you work. You won’t be shovelling any money into your retirement account anymore, and you might not be commuting every day, but you will still have to pay bills and you will still have to pay off potentially a house. You’ll also still have to pay Social Security tax if you live in the US. In the early years of retirement, where you feel healthier and newly freed from the 9 to 5, you could spend as much or more than you did before retirement as a way to splurge on yourself.
Your bills aren’t retiring. If there’s one thing that people forget, it’s that when they retire, their bills don’t. This means that you may not have an income anymore, but your bills still need you to have something coming in to be able to pay them. Even if you’ve paid off your mortgage, you will still have other expenses that aren’t going to go away. If you’re retiring early and you don’t have access to a pension pot, how do you plan to fund your life?
It’s not easy to make an extra income. If you quit your long term job in order to retire early, but you find you have to go back to work a few years later, you may very much struggle to get into the workplace. Sure, there are always jobs for people of any age, but whether they say it’s OK or not, age discrimination still happens. You may have other retirement goals too, such as looking after grandchildren or travelling with your partner. Part time work is not flexible and it’s not easy to find, so you need to consider how you’re going to fund your lifestyle for the next 30 years after you retire early.
You’re going to find yourself with a lot of time on your hands. You have a 40 -hour gap in your week that you need to fill when you retire. Initially you may be so excited about the prospect of not having to work again that you’ll spend all of your time lazing around, but that doesn’t last. You need enrichment and you need things to keep your brain busy. Long walks and curling up on the couch with a good book are great, but you do need to have active things to do, and you do need to consider how you feel about not being at work anymore. Depression is very real among the retired community for this reason.
This article is for information only. Please consult a financial professional before making major financial decisions.
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