How to Prepare Yourself for the Financial Challenges of Early Retirement Sponsored By:Leslie “Kathy” Hollingsworth

Retiring early isn’t as easy as it sounds. While it gives you time to do the things you enjoy doing instead of being limited by a 9-to-5 schedule, it also exposes you to more financial risks as your savings may not last as long. This doesn’t mean that early retirement isn’t doable – which it is. But it comes with special challenges which may knock you off your perch. Explained below are a few early retirement challenges and how you can prepare yourself.

Penalties On Withdrawals From Your Retirement Account

If you retire before age 59½, you may find it difficult to access your nest egg. That’s because the IRS has imposed a 10% penalty on withdrawals before 59½. Since you probably don’t want to give out thousands of dollars unnecessarily, there’s a need to plan about it.

If you have saved in a Roth IRA, you can try withdrawing only your contributions first. Contributions to Roth IRA are taxed, and as such, the money can be withdrawn tax-free at any age without any penalty. You just need to ensure you don’t withdraw Roth IRA conversions or earnings; otherwise, you could incur taxes and penalties.

Alternatively, you can make substantially equal periodic payments (SEPPs). This involves making equal and regular withdrawals from your retirement account for five years until you reach age 59½. SEPPs allow you to access your retirement funds without paying any penalties. However, once you commit to the option, you have to stick to it. So it’s essential to ensure it’s the right option for you. The IRS has some formulas you can use to determine how much you must withdraw all through the years.

A third option to help you avoid penalties is to save money in a taxable brokerage account. They don’t classify as retirement accounts; hence you can access your funds anytime. You can also save as much as you want; however, if you hold your account for over a year, it becomes subject to long-term capital gains.

Access to Social Security

Social security eligibility begins at age 62. So if you decide to retire before 62, you’ll have to fund yourself up until that age. The solution to this is to ensure you have sufficient funds in your retirement account to cover your expenses until you reach the eligibility age. Even if you decide not to sign up for Social Security immediately, you can delay until you reach age 71 to increase the size of your checks.

Access to Medicare

With only a few exemptions for individuals with a disability or end-stage renal disease, Medicare is only available to those aged 65 and older. So if you decide to retire earlier, you must plan for health insurance some other way until you reach that age. You may be able to remain in your former employer’s COBRA coverage for a while, or if your spouse is still working, you may rely on their health coverage up until then. 

However, it’s unwise to forego health insurance and hope you’ll be eligible for Medicare. There could be an unfortunate incident that may end up wiping out a substantial portion of your savings. It’s best not to take the chance.

In addition to this, you should consider putting money in a health savings account (HSA). The money in your HSA account can also be used for non-medical expenses once you hit 65. While you can do this before age 65, it comes with a 20% penalty.

To open an HSA account, you need to have a high deductible health insurance plan. It has a $1,400 deductible for individuals and a $2,800 deductible or more for families. Provided you are enrolled in it, you’ll be able to contribute up to $3,600 as an individual or $7,200 as a family in 2021.

In conclusion, it’s essential to anticipate the financial curveballs that come with early retirement and be prepared for it. This list is an excellent place to start. Make altercations to your retirement plans, if necessary, so you will be in complete control of your finances.