Are You Really Ready for Retirement? Questions to Ask Yourself Before You Retire Early

Retirement is a life-altering event that means more than sleeping in a few extra hours and forgoing the day-to-day routine you’ve become so accustomed to. While early retirement may seem like an attractive prospect for many, it’s important to assess your financial situation before making a decision that you might later regret. Fortunately, there are a few questions that you can ask yourself in order to determine whether you and your wallet are fully ready to enjoy life as a retiree.

8 Questions to ask yourself when planning for retirement

1. Can I retire early?

   If you choose to retire early, you could be missing out on significant earnings that might make your retirement experience all the more enjoyable. However, depending on your lifestyle and financial position, early retirement may be your next best life choice. Before turning in your resignation letter, be sure to consider these important questions about early retirement:

2. Have I paid off all of my debt?

   Existing loans can have a significant impact on your ability to comfortably retire. Once you’ve paid off student debt, car loans, and your home mortgage, you’ll have more freedom in choosing how you want to budget your retirement lifestyle. This will likely allow you to feel more confident when taking the first steps toward early retirement. For some, accumulating the funds to fully pay off debt means more years of work. Yet, this might actually put your mind at ease when you do decide to retire several years down the road since you won’t have to attend to so many monthly bills.

3. Do I have the savings to retire early?

   Everyone’s expected retired lifestyle, spending habits, and monetary needs look different when it comes to retirement. Experts will typically advise that you aim to replace 80%-90% of your annual pre-retirement income through savings and social security. However, you may find that you’ll need to save either more or less depending on your current income and your retirement needs. Try out this retirement calculator to determine whether you have the savings to forego your current nine to five routine.

4. How long do I need my retirement savings to last?

   Investment returns, inflation, and expenses can all impact how long your retirement savings will last. Weighing your total savings plus investment returns overtime against your annual expenses can help you determine whether now is the right time for you to retire. If you want to ensure that your savings will last, these three steps might help:

   1. Reduce your fixed expenses. Think of your fixed expenses as your necessities: food, shelter, car, etc. By cutting back on your weekly grocery runs, downsizing your home, or selling your car, you could be saving a lot of money that could be used throughout retirement.
   2. Have a retirement spending plan. Evaluating what your retirement life will look like is a huge step in determining how much you will need to save and how much you’ll be spending during this next phase of life. Will you be traveling? Will you be working on home projects? What does your spending budget need to look like in order to pay for your retirement needs?
   3. Get good tax advice. Retirement is likely to bring complicated tax situations for many especially when you’re a big saver. Retirement withdrawals can put you in a higher marginal tax bracket. Higher-income can also cause more of your Social Security to be taxable. Contact your accountant today for tax planning 

5. Is my health care covered?

   Most employees received their healthcare from their employers, meaning that when the time comes to retire, health insurance coverage is usually disrupted. While some employers do offer healthcare to their retired employees, this is rare. Private non-group coverage can be expensive so what other options are there?

   1. Your spouse’s insurance. If your spouse’s employer-sponsored plan covers families, there is always the option of signing up as a dependent. This is the most cost-efficient option in early retirement.
   2. Retirement Marketplace. The Affordable Care Act established Health Insurance Marketplaces to allow easier access to healthcare. You can purchase coverage through a state or federal marketplace which offers a variety of plans.
   3. Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA is a federal law that states that once you leave your job, your employer must continue providing health care coverage for up to 18 months. This law typically applies to companies with at least 20 employees.

6. Do my children rely on me financially?

   A significant number of parents are paying for at least some of their adult children’s expenses. According to NerdWallet, this could be costing them up to $227,000. While it’s important to help your kids as they enter into adulthood, paying for too much can leave a dent in your retirement savings. If you have young children and are considering retiring early, you will be facing financial setbacks in the near future. From extracurriculars to graduations to weddings, it’s not typically recommended that you retire with so many expenses still on the horizon.

7. What if I need to go back to work after retirement?

   Around 40% of all workers who are nearing retirement in the next five years plan on returning to work at some point. This trend has been given the term “unretirement.” Many choose to return to work in order to feel a sense of purpose by giving back to their community and to keep them occupied. But does this jeopardize your Social Security benefits? It all depends on age. If you’re younger than 65 – which is considered to be full retirement age – benefits could be withheld. However, if you are 65 years old or above, choosing to return to work will not impact your benefits.

8. How much social security will I get?

   A huge downside to retiring early is that you will likely lose Social Security Benefit. If you choose to retire before committing 35+ years of work experience, your Social Security benefit will be reduced 5/9 of one percent each month, up to 36 months before full retirement age. If the number is higher than 36 months, benefits are further reduced by 5/12.

If you’re planning for retirement but aren’t sure whether you’re financially ready, Granite Mountain Accounting can help. Contact us today or schedule a consultation with one of our professional tax consultants.