Retiring early is easy to talk about, hard to plan for and even harder to do — but with a little sacrificing and strategizing right now, you just might be able to pull it off. By retiring at 62, you ask your nest egg to sustain you for longer than it should have to despite denying it roughly half a decade of growing time.
Settle on a Social Security Strategy
For most Americans, full retirement age is either 66 or 67, depending on when they were born. But you can claim your Social Security benefits four or five years early at 62.
But just because you can file for benefits doesn’t mean you should.
Depending on your birthday, you’ll receive only 70%-75% of your full benefits if you claim at 62, which, as an example, would leave you with somewhere between $700-$750 per month out of what should have been a $1,000 check. Surviving spouses would have their benefits reduced by 30%-35%.
If you can wait, on the other hand, the SSA will boost your check by 8% for every year you delay taking Social Security past your full retirement age until you turn 70.
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Lock In a Healthy Blend of Income Sources
Social Security is just one type of retirement income, and it was never meant to provide full support for retirees. If you’re going to retire early, you’ll have fewer years to grow your nest egg and you’ll have to make it last longer. That’s why a target age of 62 requires solid income streams that each serve a different function. According to Wells Fargo, there are three types of retirement income:
Dividend: Great for providing the type of growth that can outpace inflation, this category includes equity mutual funds and dividend stocks.
Interest: This type of income — which includes cash, bonds, bond funds, CDs and fixed-income instruments — provides a hedge against market volatility.
Lifetime: Lifetime income is the type of income you can count on receiving no matter what happens, like Social Security and annuities.
Plan To Fill the Pre-Medicare Healthcare Void
You become eligible for Medicare at age 65, and unlike Social Security, there’s no option for early entry. If you retire at 62, that leaves three years between the time you retire and lose your employer’s insurance and the year you become eligible for Medicare.
Your healthcare costs only increase as you age, so those crucial three years can become a drain on the decades that follow.
If you had an employer-based plan, you might be eligible for 36 months of COBRA, but COBRA isn’t cheap. The more sensible option might be to bridge the gap with a marketplace plan, but they can be expensive, too, and all but the priciest options come with high deductibles.
Have a Tax Strategy
If you have a 401(k) or IRA, you owe the IRS a lot of money on all that pretax savings. The agency will start taking its cut when you start making withdrawals in retirement, which you’ll have to do whether you want to or not when your required minimum distributions (RMD) kick in at age 72. The IRS treats withdrawals as regular income, so depending on the size of your RMDs, your tax implications could be significant. Plan now to avoid unpleasant surprises.
Get Professional Advice
A professional retirement planner might recommend converting some of your 401(k) or other pretax savings to Roth accounts to defuse a potential tax bomb before it explodes with your first RMD. Your advisor might also caution that if you decide to take Social Security early, you can’t undo it once it’s done and you lock in your reduced benefits for life.
Those are just two examples of the many complex and consequential decisions that come with retiring early. Mistakes can cost you thousands of dollars and years of lower living standards. The advice of a professional just might be the best retirement investment you can make.
Plan For the Worst
The last three years laid waste to even the most foolproof financial plans, which is exactly why it’s imperative to factor chaos into your retirement strategy. Calamities like a pandemic can cripple the economy, stocks can crater, alternative investment markets like crypto can evaporate and inflation can soar.
The long bull market that preceded COVID-19 made average investors feel like growing a nest egg was easy, but the last few months proved that even less effort is required to lose it all. So when you meet with a professional, make sure you work toward a strategy that predicts rough roads ahead, because a retirement plan based on the best-case scenario is no plan at all.
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