Early retirement is growing in popularity, with more than a third of millennials and nearly half of Gen Z workers hoping to retire before age 60, according to a recent Goldman Sachs survey. It sounds like an exciting opportunity to pursue your own dreams after decades spent in the workforce, but it doesn't always work out that way.
Some do retire successfully in their 50s, but others run afoul of the following three issues. If quitting the workforce ASAP is part of your plan, be sure you have a strategy for these challenges.
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1. You'll need a larger nest egg
Retiring early means you may have to fund 30 or more years of living expenses. Social Security will cover some of that, but you'll have to save most of it on your own. And with fewer years in the workforce, you'll have to set aside a larger percentage of your income each year.
Say you expect to spend $60,000 in your first year of retirement and your expenses will increase by 3% annually due to inflation. A 20-year retirement would cost you just over $1.61 million, while a 30-year retirement would cost roughly $2.85 million.
Those who aren't confident that they can meet these higher savings goals may be better off delaying retirement. It might not be what you wanted, but it beats running out of savings prematurely. Alternatively, you could gradually reduce your hours rather than leaving the workforce all at once so you don't have to rely exclusively on your personal savings at first.
2. You could face penalties for accessing your retirement savings
Most retirement accounts charge you a 10% early withdrawal penalty if you take money out before you turn 59 1/2. This is problematic for early retirees, but there are several ways to avoid it.
First, withdrawals may qualify for an exception to the early withdrawal penalty if they're used for a specific purpose. This includes things like buying your first home, paying for a large medical bill, or becoming permanently disabled.
Some other ways to access your retirement savings early without paying a penalty include:
- Tapping your Roth IRA contributions: Roth IRA contributions are always tax- and penalty-free, no matter your age. This isn't true for earnings, though.
- Rule of 55: This rule enables workers who quit their jobs in the year they turn 55 (50 for certain public safety workers) to access their funds from their most recent employer's 401(k).
- Substantially Equal Periodic Payments (SEPPs): This is where you agree to take regular retirement account withdrawals for the longer of five years or until you turn 59 1/2. Failure to take required SEPPs results in a penalty equal to all the early withdrawal penalties the SEPPs were supposed to help you avoid, plus interest.
Keep in mind that even if you avoid the early withdrawal penalties, you'll still owe taxes if the money comes from a tax-deferred account, like a traditional IRA or 401(k).
3. You won't qualify for Medicare right away
Medicare forms the backbone of most seniors' retirement healthcare plans, but you can't apply until you turn 65. You'll need another way to pay for your medical care in the meantime. If your spouse is still working, you may be able to get insurance through their employer. Or else you can buy an individual health insurance plan, though you'll have to budget for this in your retirement plan.
Whatever you do, don't skip health insurance. You might think that you won't need to visit the doctor because you're in excellent health. But injuries can happen unexpectedly and even one ER visit could seriously derail your retirement budget.
If any of the above issues surprised you, revisit your retirement plan. Make sure you have a strategy to tackle these issues before you leave the workforce so you can avoid serious financial struggles down the road.
