Early Retirement: 4 Common Mistakes

Early retirement is often romanticized but comes with specific challenges like healthcare and income gaps.

In today’s video, we are going to talk about 4 common mistakes that people make when retiring early.

Early Retirement: 4 Common Mistakes


Full transcript:


Anthony Saffer 0:00
Early Retirement is often romanticized but comes with specific challenges like health care and income gaps.

In today’s video, we’re going to talk about four common mistakes that people make when retiring early.

By the end of this video, you’ll know how to sidestep these common mistakes by planning ahead, so you can make confident retirement decisions that work best for you.

Number one, the healthcare gap. Healthcare is such a giant cost which tends to increase with age. Medicare starts at age 65 for most Americans, and so a gap in coverage if you’re retiring early exists. Where people get this wrong is number one, they don’t realize the high cost of insurance premiums, especially if your employer is subsidizing premiums, and how much it will increase until you’re eligible for Medicare.

Two, they often look at the best-case scenario for their healthcare costs.

And three, if they do factor in health insurance, they may estimate the cost of a low-cost provider, but failed to look at their network of doctors. Now, if you’re self-employed or otherwise, paying the full premium, this may not be much change for you. But make sure to consider the early retirement gap means higher insurance premiums. And as you get older, the probabilities of out-of-pocket health care costs do increase. Take the time to shop for health insurance ahead of when you may actually need it and input this into your financial plan.

And if we’ve not met I’m Anthony with One Degree Advisors. Please subscribe if you’re interested in topics like this to help you gain confidence in your retirement.

Alright, number two income gaps. Similar to health insurance gaps can occur with income. When those paychecks stop income needs to be replaced. Good planning can create an optimized retirement income plan. But when retiring early common sources of income just may not be ready yet.

Social Security that can start as early as 62. But even that comes at a reduced rate. A pension from your employer could work in a similar fashion that is likely as a standard starting age with a reduction if you start early.

When an income gap is present. This usually means having to draw more from your investments. And so there are two primary obstacles you’ll need to watch for.

Number one is taking out too much too soon. Just because the money is there doesn’t mean you should take it out that money needs to last your lifetime.

Two, when withdrawing money from investments in early retirement. You’ll need to watch for early withdrawal penalties from retirement plans. Age 59 1/2 withdrawals before those include penalties even if you’re already retired. So non-retirement investments can also help here, Roth IRAs give some flexibility, and even 401(k)’s have an age 55 withdrawal rule. But you’ll need to pay attention to the special details of that part-time work is another great option to help bridge that income gap.

All right, number three is inflation the silent killer. We’ve all been in fact affected by inflation over the last two years. Inflation really is that silent killer because it compounds over time. Using averages you could assume that your costs will double every 20 to 25 years and not all income sources tend to keep up with the cost of living.

In fact, the Senior Citizens League annual study shows that Social Security benefits have lost 36% of their buying power since the year 2000.

Some pensions have no cost of living adjustment at all. And so when withdrawing from your investments you need to account for the increases you will need to take over time when you retire early. The inflation risk is magnified simply because of the amount of time you could spend in retirement.

Many retirees also make the mistake of misplacing their risk. For example, if you’re looking at CD rates now at an attractive 5%, which they’ve increased. That might look pretty good until you start running the numbers and realize that returns on cash savings tend not to keep up with inflation over time. Therefore an allocation to stocks and or real estate are usually needed to outpace inflation for long-term money.

Alright, number four losing purpose. retiring early may mean You’re escaping the high-pressure working world. But that honeymoon phase of retirement may last six months, but is often replaced with boredom, especially those who retire early are surprised at how they may miss the social interaction at work or the fulfillment of just being productive. Routines or brand new not always in a good way when you’re home often that can even mess with marriage.

So it’s important to ask yourself, What are you retiring to? What’s important to you? We talked about this time component more in our previous video that we recorded when can you retire a three-question checklist? Go ahead and check that out below.

As a bonus to other mistakes that we often see our longevity risk is where people often underestimate just the sheer amount of time from an early retirement to the end of life and not satisfying debt obligations. When you’re working. Paying that car loan or even a high mortgage may not be an issue. But retiring early with debt can cause problems, especially when economic adversity hits.

If you want to dig in further on retirement mistakes to avoid, we created a free guide called Five Retirement Mistakes to Avoid. The link is provided in the show notes. You can go ahead and download that for free. Again, I’m Anthony Saffer. Thanks for watching.

Transcribed by https://otter.ai

The One Degree Blog

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