Though few people are ready (or financially stable enough) to retire at 40, retiring earlier than the official retirement age of 65 is an admirable goal. Of course, retirement is a big decision. Here’s what you need to consider before you take your well-deserved break.
1. Your savings.
First and foremost, you’ll want to crunch some numbers and think about your savings. If you’ve already planned for retirement and have met your goals, this is a good sign. Didn’t plan specifically for early retirement? You’ll want to calculate how long you can expect your savings to last. Most financial experts recommend banking 25 times the value of your annual expense and withdrawing 4% each year. As long as your investments can achieve an annual return of 4%, that’ll be enough to cover your expenses indefinitely.
2. Your debts.
If you have a lot of debts, you might not be ready for retirement. But if your mortgage, large credit card balances, or other debts are paid off, you won’t have to plan for those monthly payments. This is a great sign for retirement readiness because your finances are free to use for other expenses. (Plus, you’ll have what you need in case of emergency.)
3. Whether you can access income.
Depending on when you retire, you may face some sizable penalties for early withdrawals. You can withdraw from a 401(k) plan without penalty after age 59 1/2. However, withdrawals before then may incur a penalty of 10%. There are some specific rules depending on your retirement plan and the age at which you retire. So, you’ll want to check with your financial advisor or your company to understand how your withdrawals will work.
Additionally, keep in mind your eligibility for programs like Social Security and Medicare. If you’re retiring before you reach the age of eligibility for Social Security and Medicare, you’ll need to budget for those expenses too.
4. How you’ll handle healthcare.
Another thing to consider is how you’ll take care of any health needs. Some employers offer health insurance coverage until you qualify for Medicare at age 65. Otherwise, the private marketplace will give you an idea of what types of plans are out there. If you’re able to get coverage through a spouse’s plan or you can maintain coverage through your employer, you’re one step closer to early retirement.
5. Your budget can support your lifestyle.
During this planning stage, it’s important to budget. Start by totaling up your expenses for the year, and by calculating what 4% of your savings looks like. If your budget equals more than that 4%, you’ll want to reconsider either your budget or your retirement plans. Even if the two numbers are equal, keep in mind that you’ll probably face unexpected expenses at some point.
Retirement often means living on a fixed income, which may be less than you’re used to. You can always take retirement for a “practice run” and live on your smaller retirement budget. If this is difficult or even impossible, it’s probably a sign you aren’t ready to retire quite yet.
Finally, figure out how flexible you are. Are you prepared for the possibility that an early retirement won’t work out for you? If that happens, are you prepared to reenter the workforce. Even with the best planning, you may find yourself bored. In that case, it’s helpful to have a backup plan—a part-time job or community activity you can do on a regular basis—to stave off boredom.