Deciding to retire ahead of time can give you more time to enjoy life as a retiree, but it can also cause major drawbacks if you’re not careful. If you opt to retire earlier than the average retirement age, you need to make extra sure that you are completely ready for the golden years. Here are five factors you need to consider.
1. Financial Strength
One gauge of your retirement readiness is how much you were able to save. Experts say that as a rule of thumb, you should have at least eight times of your pre-retirement income by age 67. If you want to retire earlier, you will need to save way more than that. Also remember to consider inflation. Inflation rates can be unpredictable. It can be low now, but it can shoot up in the coming years. If you’re not careful, this can cause a huge dent on your retirement savings.
Take a look at your portfolio too. Is it large and diversified enough? The right mix of tax-deferred and tax-free assets will likely generate more income for retirement.
Creating a retirement budget is also a crucial step in determining if you’re ready to retire. You need to understand your cash flow after retirement, how much your income would be, and how much you need monthly, quarterly, and yearly. Also, remember to create wiggle room for unexpected expenses.
To know if your budget will work, give it a test drive and try living on it for six months. If you find yourself tapping your savings or swiping your credit cards just to get by during this trial run, you’re not ready to retire yet.
Experts advise against retiring while debt is still in the picture. Carrying debts over into retirement can dramatically reduce the amount you can spend for retirement expenses and pursuing activities that you’ve always wanted to do. If you’re retiring early, your nest egg has more years to cover, so make sure that it will not be depleted just because of debts.
3. Necessary Insurance Policies
Medicare will not pay benefits until you reach 65, so if you’re opting to retire at a younger age, you need to have sufficient coverage through health insurance. Life insurance and long-term care insurance are also essential to have.
4. Emotional Readiness
Aside from being financially ready, you also need to be prepared emotionally before you enter retirement. Are you ready to leave your job? If you can picture yourself living comfortably away from your current workplace, you’re well on your way.
Meanwhile, if you feel like you’ll lose your sense of purpose when you leave job, you should rethink your decision to retire early.
In retirement, you can expect everyday to be like a weekend. At this stage, you will have more hours to fill, and you need to determine what you’re going to do with them.
Before you retire, figure out what you want to do when you leave your job. Are you going to pursue a hobby, travel or work part-time? Be clear on how you want to spend your golden years and factor that in your budget too.
Retiring early can be exciting, but it requires a higher level of preparedness. Look at the five factors above and if you determine that you’re on track, congratulations! On the other hand, if you’re lagging on some areas, postpone your retirement at a later date. It’s better to endure a few more years of preparation than to spend retirement with a half-baked plan.
Image credit: Flickr