Prepare Yourself for These Unwelcome Surprises of Early Retirement

early retirement
Picture of Beau Bryant

Beau Bryant

For most people in the workforce, the traditional retirement age is 65, but it’s possible to retire earlier than that if you are disciplined with your finances and diligent in your planning. Early retirement may sound appealing – especially after a difficult day at work – but it comes with its own set of unique challenges. In the article below, we outline six unexpected financial pitfalls and what you can do to avoid them if you decide to retire early.

#1 – A Taxing Situation

No sooner are the candles out on your retirement cake, than the government shows up to take its share of your savings. Maybe not quite that soon, but the tax-deferred retirement accounts you’ve built up over the years become fair game for income tax once you start making withdrawals based on whatever tax bracket you fall into at the time.  

Social Security is also more complicated for early retirees. You can’t start collecting your benefits until age 62, and if you were born in 1960 or after, you won’t be eligible to receive your full Social Security benefits until you’re 67 years old. When you do, anywhere between 50-85 percent of those benefits can be subject to income tax.

Keep an eye on your tax bracket. With combined income from pensions, employee stock options and other deferred income, you could find yourself in a higher tax bracket than before you retired, which translates to higher income taxes.

The Workaround

Taxes are unavoidable, but careful planning can help you mitigate how much they eat into your retirement savings. Start by determining the right plan for your needs, whether it’s a traditional IRA, Roth IRA, or 401(k). Also, familiarize yourself with the rules around charitable giving options, and find some qualified charities to support that will also lower your tax bracket.

SEE ALSO: 12 Ways to Find Fulfillment – and Avoid Boredom – in Retirement

#2 – A Bad Market for Retirement

Picture this: Just as you settle into retirement, the stock market take a nosedive, and your portfolio takes a massive hit. At the same time, you still need to make withdrawals to fund your cost of living. Now your retirement nest egg is dwindling at a pace that is both unexpected and expedited. This concept is often referred to as the sequence of returns risk. If you’re budgeting for retirement based on a certain return on your investments, you are much more vulnerable to this risk.

The Workaround

You can’t control the performance of the stock market. Instead, plan ahead to determine how to minimize the impact of a weak market. Many investors choose less volatile assets, such as bonds or certificates of deposit (CDs) as they near retirement age. Those assets can always be reinvested when the market rebounds. Of course, another strategy you can employ is to reduce your spending if you encounter this situation.

#3 – Great Un-Expectations

The only certainty about the future is that it is uncertain, regardless of our hopes or expectations. Even if you can afford to quit working earlier than most people, you could find yourself faced with unexpected expenses that leave you dipping into your savings much more than you had planned. Perhaps your car needs serious repairs, or the cost of living increases significantly during your retirement. Maybe you become ill and have mounting medical bills. Suddenly, that money that you spent decades saving is diminishing at a much quicker pace, and no new money is coming in to replace it.

The Workaround

Once again, it’s time to look at your plan. Consider the unexpected and factor those expenses into your budgeting. Additionally, be sure to account for potential inflation to provide a little extra wiggle room. Early financial literacy is key to making this workaround feasible. Don’t wait to learn how to budget until you’re already facing financial trouble.

#4 – More Expensive Medicare

Medicare is a valuable program for most retirees, helping to defray the costs of healthcare. However, eligibility typically doesn’t start until age 65, leaving most early retirees without this option.

Once you are eligible to receive Medicare benefits, there are still some potential pitfalls. Medicare premiums are based on your income; the more you make, the more you pay. This is known as the Income Related Monthly Adjustment Amount (IRMAA), which is most often related to Part B. Just like with income tax, watch your income bracket to ensure you don’t throw off your budget because of an unnecessarily high premium.

The Workaround

If your spouse or partner still works, see if they can add you to their health plan. Some employee sponsored programs may require you to enroll in Medicare when you reach 65, so pay careful attention and plan for that eventuality if needed.

SEE ALSO: 5 Wealth-Building Habits to Secure Your Financial Future

#5 – The Price of Private Health Insurance

As we mentioned above, most individuals aren’t eligible for Medicare until age 65. But… you retired early (i.e. before 65). What now?

If you are unmarried or your spouse’s health care doesn’t cover you, you will likely need to find private health insurance. That gets pricey, especially if you are not eligible for the premium tax credits offered through the Affordable Care Act.

The Workaround

One short-term solution could be the government’s COBRA plan, which extends your employer’s health coverage under certain circumstances. It can last for 18 or 36 months. If that is not an option or it won’t get you to Medicare age eligibility, you can work part-time to secure health coverage.

#6 – Failing to Plan for Long-Term Care

Long-term care is the bane of most retirement planning – regardless of when you retire. No one wants to think about not being able to care for themselves, but it happens to about half of seniors over age 65. It’s costly, and it’s typically not covered by Medicare and only partially covered by other insurance plans. Failing to plan in advance could mean paying more for a fast solution later on – or worse, having to settle for a second-rate care provider.

The Workaround

Discuss this with your family members in advance and outline a plan. How will you pay for coverage? Who can help contribute? Dividing the cost among a large family may make it easier on everyone. You could also look into life insurance plans with provisions for parental care, which may help cover you.

If children or extended family aren’t viable options, you can seek long-term care insurance. It can be costly, but if you know what to expect, you can budget appropriately for it and reduce the financial burden on your retirement savings.

Need more guidance on retiring early?

The draw of early retirement is obvious: You’re still young and fit enough to do all the things you want to be doing instead of working. However, there are certain downsides associated with retiring at a younger age.

The financial experts here at Resolute can work with you to develop a plan that lets you achieve your dream to retire early by taking into consideration all of the common pitfalls listed above — and more. If you’re interested in starting a conversation to personalize your retirement plans, please reach out to us today.

The views expressed represent the opinion of Resolute Wealth Advisor, Inc. (RWA). The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While RWA believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and the RWA’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in equity securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.

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