Thinking about retiring early? You’re not alone—many people are now considering leaving their jobs sooner than expected. While it may sound exciting, early retirement comes with some big decisions. Whether you’re fed up with the 9-to-5 grind or just ready for a change, it’s important to plan.
Before you pack up your desk, let’s take a look at a few key things you should think about if can you afford early retirement.
Quick Overview of 5 Things for Early Retirement Planning
| Key Point | Details |
| Understand Your Benefits | Know your pension and health benefits, and when they begin. |
| Know Your Cash Flow | Track your expenses and plan where your income will come from. |
| Withdrawal Options | Understand the rules for accessing your retirement funds. |
| Investment Withdrawals | Use a strategy for pulling money from investments wisely. |
| The Mental Transition | Adjusting from saving to spending may require professional help. |
1. Understand Your Benefits
Even if you haven’t been with your job for decades, you might still have some benefits you can take with you into retirement. If you’ve worked for at least five years, you’re likely to have earned a pension. Depending on your age, you might be able to start using that pension right away, or you may have to wait until you’re 60 or 62.
Aside from your pension, make sure you know about your health benefits. If your pension starts right away, your health insurance might still be covered, which is a huge plus. But, if you’re not quite ready to start your pension, you might lose health coverage until you hit that age. Health insurance can be expensive, so it’s crucial to know if it’ll be part of your retirement plan.
2. Know Your Cash Flow
Retirement isn’t just about saving money; it’s about knowing how much you can spend and where that money will come from. Start by taking a good look at your expenses and how much you spend each month.
When you retire, you’ll need a reliable income to cover those costs. You might have a pension, but if that’s not enough, you could also have Social Security or savings to fill in the gaps.
Take time to figure out how much income you’ll need each month and whether your current savings, pension, or investments can cover it. Planning this out now will help you feel more confident as you head toward retirement.
3. Know Your Withdrawal Options
Once you know how much money you’ll need, the next step is figuring out how to access that money. Do you have a 401(k), IRA, or other investments? Each account has different rules for when you can take money out without facing penalties.
For example, if you have a 401(k) or similar plan, you may have to wait until you’re 59.5 years old to withdraw without penalties. However, some plans let you withdraw at age 55 without extra fees if you separate from your job.
Think carefully about how and when you’ll take money out of your accounts. If you’re relying on your 401(k) or IRA, make sure you understand the rules to avoid penalties that could set you back financially.
4. Withdrawals from Investment Accounts
If you’ve invested money over the years, you may want to start pulling from your investment accounts. But be careful: not all investments are the same. You might have some high-risk investments aimed at long-term growth and others that are more stable.
It’s important not to just take money out of each account equally. If the market is down, you don’t want to sell your riskier investments, as they could bounce back. Instead, use a strategy that allows you to pull from safer, more stable investments, while keeping the riskier ones in place for the long-term.
The Bucket Strategy can help with this. It’s a plan where you separate your investments into “buckets” based on when you’ll need the money. That way, you can pull from the safe investments first while letting your growth investments have time to recover.
5. The Mental Transition
One of the biggest hurdles in retirement is the shift from saving to spending. For years, you’ve been told to save and grow your retirement fund. But now, you’re thinking about using that money.
This can be a stressful change. You might worry if you’re taking out too much or if your money will last. Many people feel anxious about making the right choices with their savings.
If you’re feeling nervous, you might want to talk to a financial planner. They can help you plan your withdrawals, ensure your investments are working for you, and help reduce your stress about making the right decisions.
FAQs on Afford Early Retirement
When can I start withdrawing my pension?
You can start receiving your pension at age 60 or 62, depending on your years of service.
What if I need to access my savings before 59.5?
If you’re 55 or older when leaving your job, you may be able to withdraw from your retirement plan without a penalty.
How can I ensure my investments last through retirement?
Consider using strategies like the Bucket Strategy, which helps you manage your investments by separating them into different “buckets” based on when you’ll need the money.