Early retirement is a dream for many, but jumping the gun by pulling too early can let you squeeze pennies at the end of your life when your savings go dry. Before you decide to retire, it's important to make sure that all your finances are in order to avoid this ugly image.
Here are four questions you should be able to answer "yes" to if you are really ready for an early retirement.
1. Is your debt paid?
It's not that you can not retire with debt, but it takes a risk.
You must pay these balances by way of retirement savings, and there are several ways that can be reversed. If it is revolving debt, like credit cards, the debt can germinate out of control and you may end up spending your life just to get rid of the balance. If you still pay the house and there is an unexpected expense, like sudden illness, you can have no choice but to clear your pension accounts to avoid losing your roof over your head.
It's best to go into a pension free of charge, so before you take the track when you still have a credit or credit card bill, consider retiring your pension until you have paid off your debt.
2. Do you have more savings than you need for your retirement goals?
It is impossible to predict exactly how much you need for retirement because there are so many variables, including expected life, investment return and inflation. But you can and should make a realistic estimate of how much you have to live on.
Begin estimating life expectancy. Average life expectancy is 78.7 years, but your may be lower or higher based on your current health, genes and lifestyle choices.
Next, rate inflation. Your money today does not go so far tomorrow. A good estimate of inflation is 3% per annum.
When you have these figures, calculate your expected annual living expenses on retirement, be sure to add 3% to inflation each year. So if your living costs this year were $ 35,000, next year, they would be $ 36,050, and so on. Continue this process for each year from now to the end of your expected life. Or you can only use a retirement calculator. Add a little pillow to this amount if your money does not go as far as you hoped or you meet unexpected costs.
Finally, you deduct the amount you expect to receive from Social Security and Employer 401[ads1] (k) struggle to figure out how much you need to save on your own.
3. Do you have a healthcare plan?
Your pension savings are not just for general living expenses. It must also be enough to protect you when unexpected expenses occur, such as a serious illness or need for long-term care. The average couple who are 65 years old today need $ 280,000 to cover healthcare costs throughout their retirement, according to Fidelity. If you plan to retire before you are 65, you will need even more.
Medicare will cover some of your medical expenses at retirement, but you will not even qualify until you are 65 years old. If you go to retirement before then, you need health insurance either through a spouse or by purchasing your own policy.
Even when you qualify for Medicare, it will not cover everything. There are still deductions and copays that can add up to thousands of dollars if you get seriously ill or injured. If you have not thought much about the cost of medical treatment previously, you should reconsider your pension savings target to ensure that you will have healthcare costs and retire until you have saved so much.
4. Can you make withdrawal without penalty?
With few exceptions, you can not withdraw money from your pension account unless you are 59 1/2 or older. Violation of this rule will result in a 10% early withdrawal penalty, as well as due to income tax on the distribution. Unless you absolutely must, this is not a good idea. If 59 1/2 is far out for you, you may want to open a non-retirement account and save some money there or otherwise add it to your savings account. You can live this until you are eligible to take a pension account order without penalty.
If you definitely can answer "yes" to these four questions, congratulations! You are on your way to a good early retirement. But if you are not, it's better to wait a little longer until you are very financially ready.