early retirement

The New Rules for Early Retirement

Beach chairs on sand
Anders Carlsson ACP—Alamy

Early retirement is again in reach, but the game has changed.

Do you dream of leaving full-time work behind at 60 or even sooner? Plenty of Americans do, of course. But the real question is whether you can afford to clock out early. It may require tradeoffs, such as moving to a smaller home or picking and choosing your hobbies. Yet it may not be as big a stretch as you think. Here’s what you need to know.

You need not fear losing health insurance

Until recently, health insurance was one of the biggest obstacles to early retirement. Few employers offer coverage. And buying a policy on the private market before you qualify for Medicare has been a challenge: A condition like diabetes or heart disease can leave you uninsurable, while even healthy 50- and 60-year-olds pay far more than young people for the same coverage.

Health reform changed that. Regardless of your health, you can buy a comprehensive insurance policy through the state online exchanges. Your age will still push up your premium, but a 60-year-old can’t be charged more than three times what a 20-year-old pays, as was once the case.

What to do: Start at healthcare.gov to find options in your state. Keep in mind that the premium is just the sticker price. About half of those who buy insurance on their own today will qualify for a subsidy, estimates the Kaiser Family Foundation. And since that help is based on how much of your income must go toward insurance, an early retiree with a high premium has a good chance of qualifying for a break, especially if retirement means living on less.

Obamacare means you can’t be turned down or charged more for health reasons, but it may not be cheaper than what’s available on the private market. Price out both options before you buy.

Early retirement means tradeoffs, now and later

Finding relatively safe sources of retirement income, never a breeze, has become tougher in this economy. Interest rates are hovering near historic lows, and some experts think relatively low rates may persist for decades. What you can earn on low-risk cash and bonds will remain paltry.

What to do: The most straightforward solution is saving more or living on less. You can catch up with bursts of savings—often easier once big expenses like college or a mortgage fall away. According to retirement research firm Hearts & Wallets, saving 15% or more of your income for eight to 10 years—early or late in your career—can ensure that you save enough to retire comfortably at 65. Such power saving is common among early retirees too, says Hearts & Wallets co-founder Laura Varas, but the rate is 25% or more.

To get away with saving less, commit to living on less. Planners typically suggest you aim to replace 70% to 80% of your pre-retirement income, which doesn’t amount to a dramatic lifestyle change once you eliminate the money you were saving, Social Security taxes, and commuting costs. If you can make it on 50%, you need to save about 12 times your income by age 60, vs. 17 times if you hope to live on 70%, says Charles Farrell, CEO of Northstar Investment Advisors.

Moving can make all the difference

The housing market’s recent recovery may be one of the things giving you the confidence—and the wherewithal—to retire ahead of schedule. Alas, you can’t count on a housing boom to keep padding your net worth. You need to set realistic expectations for what your home can do for you, and plan prudently with what you have. That might mean leaving your old digs behind.

What to do: Lose two bedrooms. By selling into a strong market now and buying a smaller house, you can lock in your good fortune, letting you add to your savings or wipe out any lingering debts. Plus, if retiring early means learning to live on less, there’s no better way to do that than to cut your housing costs, which typically eat up a big chunk of retirees’ budgets.

Better yet, consider moving to a town with lower property taxes and lower living costs, as well as cheaper homes. Caveat: Whether you downsize locally or across the country, it’s crucial that you don’t simply trade maintenance costs for steep association fees. “I see a lot of people who move into a new home for retirement, and their cost of living goes up, not down,” says Colorado Springs financial planner Linda Leitz, national chair of the National Association of Personal Financial Advisors.

Don’t blow it in the first decade

Early on in retirement, you tend to spend more freely, as you can finally do all the things you were too busy to do when you worked: travel, eat out more, or indulge a costly hobby. After you hit your mid-70s, your outlays start to drop, even when you take health care spending into account. People 65 to 74 spend 37% more than those 75 and older do, according to the Consumer Expenditure Survey. Retire young, and you’re starting those free-spending years early.

At the same time, crafting an income is trickier. Not only can’t you take Social Security until age 62, you’ll lock in a higher payment if you wait until full retirement age to claim (67 for those born in 1960 or later). If you’re eligible for a pension and collect before 65, you’ll have to settle for as much as 30% less. So you’re especially dependent on your investments for income.

What to do: Be prudent about withdrawals. With bond yields low, a portfolio withdrawal rate that starts at 3% and adjusts for inflation is considered safer than the traditional 4% rule, says Wade Pfau, professor of Retirement Income at The American College. And that’s for 30 years, not the 35- or 40-year time horizon of an early retiree. For that, a safer rate dips to a measly 2.6%.

When you’re living entirely on withdrawals, 2% to 3% won’t cut it (unless you’ve saved a lot of dough). Simply boost your withdrawal rate, though, and you run a high risk of running out of money. To improve your prospects, get by on less.

Crucially, if you allow yourself a higher withdrawal rate early on, you must cut back when Social Security kicks in. And since your spending patterns and market returns will undoubtedly vary, reassess your plan at least annually.

A second paycheck does come in handy

No question, picking up a part-time gig after you walk away from 9-to-5 work will ease the pressure on your finances. And that’s the plan for many. Trouble is, many would-be retirees are often unrealistic about landing meaningful part-time work, says Colorado planner Leitz. Lining up a 15- to 20-hour-a-week job sounds great, but there aren’t too many stimulating and well-paying jobs in professional fields that allow that. “Flexibility is great for you, but not really for employers,” says Leitz.

What to do: Go for projects, not a job. Even when firms don’t want a 20-hour-a-week senior staffer, they still may have high-level work that needs to get done. Set yourself up to be the consultant they hire, says Dick Dawson of CareerCurve, a coaching firm for 55-plus workers. Start where you’re known: your old workplace and your network. Keep going to industry events and seek out contractors who do similar work and may hear of jobs they can’t take. Visit elance.com and peopleperhour.com, which match employers with freelancers in fields such as marketing, writing, and design.

Even if you don’t work out of the gate, keep yourself employable. That means maintaining professional credentials, following changes in your industry, and staying in touch with former colleagues.

Answer this question to get more financial advice tailored to your place on the Road to Wealth:

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