Many dream of retiring early, long before 65 years of age rolls around. They dream of escaping the daily grind years (sometimes even decades!) before the traditional retirement age. Retiring early has become a bit of a trendy goal for younger crowds, too, because who doesn’t want to ditch the corporate job and have more fun?
Visions of endless travel, pursuing long-neglected hobbies, and spending quality time with family are powerful motivators. However, successfully navigating the financial complexities of early retirement requires careful planning and understanding of potential pitfalls.
Here are 14 common financial mistakes to avoid for a more secure and fulfilling early retirement:
1. The Critical Importance of a ‘Big Picture’ Financial Plan
Early retirement without a comprehensive financial roadmap is like setting out on a cross-country trip without a GPS. You’re far more likely to get lost or run out of fuel before reaching your destination.
Partner with a qualified financial advisor who specializes in early retirement. Ideally, seek out a fiduciary advisor, as they are legally bound to act in your best interests. Your plan should meticulously cover income sources, withdrawal strategies (optimized for tax efficiency), healthcare costs, inflation, market ups and downs, and potential long-term care scenarios.
2. Underestimating Healthcare Costs
Healthcare is a major budget buster for early retirees. It’s easy to forget you may face years of paying for health insurance and out-of-pocket costs before Medicare eligibility kicks in. Additionally, unanticipated medical expenses or long-term care needs can derail even well-laid plans.
A 2023 Fidelity Investments study estimated a 65-year-old couple retiring that year needs $315,000 earmarked for healthcare costs throughout retirement. Don’t just guess – investigate health insurance options thoroughly. Consider pairing a high-deductible plan with a Health Savings Account (HSA) for potential tax benefits. Explore long-term care insurance if it suits your situation. Finally, prioritizing your health through preventive care and healthy habits can go a long way in mitigating future healthcare expenses.
3. The Impact of an Extended Retirement Horizon
Early retirement means your savings potentially need to stretch 30 years or more – that’s a much longer runway than traditional retirement planning. The risk of outliving your money grows exponentially.
Utilize online retirement calculators specifically designed for early retirees. They paint a more realistic picture than generic versions. Maintain a diversified investment portfolio that balances growth potential with income-producing assets. Be open to part-time work or ‘encore careers,’ providing added income and potentially valuable structure and purpose.
4. Not Accounting for Inflation
Inflation is an insidious force, chipping away at the purchasing power of your nest egg. An income that seems comfortable today will buy less in a decade or two.
Historical data shows inflation averages approximately 3% annually. Build an inflation cushion into your financial plan. Consider inflation-hedging investments such as real estate or Treasury Inflation-Protected Securities (TIPS) to help shield your portfolio.
5. The Dangers of Excessive Early Withdrawals
Being overly aggressive with withdrawals, especially in the early retirement years, can prematurely deplete your savings. This is particularly dangerous during market downturns when your portfolio value is already shrinking.
The traditional ‘4% Rule‘ may not be sufficient for early retirees. Start with a lower withdrawal rate and work closely with your advisor to determine a sustainable amount. Flexibility is key – in lean market years, adjust spending downwards rather than selling depressed investments.
6. Underestimating Taxes
Taxes don’t disappear in retirement! Income from pensions, withdrawals from 401(k)s or traditional IRAs, and even Social Security benefits can be taxable. Neglecting to plan for taxes can disrupt your cash flow.
Partner with your advisor to develop tax-savvy withdrawal strategies that minimize your tax burden. Consider Roth conversions if your current tax bracket is lower than you anticipate in later retirement. If flexibility allows, investigate relocating to a state with lower or no income tax.
7. Miscalculating Social Security Benefits
Claiming Social Security benefits as soon as you hit 62 might be tempting, but it permanently reduces your monthly payout. This has a massive impact over a long retirement.
Each year you postpone claiming past age 62 increases your benefits by roughly 8%, up until age 70. Use the Social Security Administration’s online calculators to compare projected payouts at different ages. If married, coordinate claiming strategies with your spouse to maximize overall benefits.
8. Not Factoring in Home-related Expenses
Homeownership costs continue even after you’ve paid off your mortgage. Early retirees often underestimate the steadily rising expenses like property taxes, repairs, and maintenance.
Establish a separate budget specifically for home-related expenses, remembering these costs tend to increase over time. If it makes financial sense, consider downsizing. This can unlock equity and significantly reduce ongoing costs. In very specific circumstances, carefully research reverse mortgages as a potential (but often cautionary) source of income.
9. The Hidden Costs of Travel
The allure of travel can lead to overspending for early retirees, particularly during those initial, excitement-filled years. It’s easy to underestimate how rapidly transportation, lodging, activities, and dining out can deplete your budget.
Integrate a realistic travel budget into your overall financial plan. Be smart about stretching your travel dollar—explore off-season trips, budget airlines, house-swapping opportunities, or extended stays in destinations with lower costs of living.
10. Overextending on Helping Adult Children
While it’s a parent’s instinct to help children, prioritizing their financial needs above your own can jeopardize retirement security.
Your retirement well-being comes first. Set clear boundaries on the financial assistance you can realistically provide. Encourage financial independence in your children by offering guidance, tools, and support rather than perpetual monetary bailouts.
11. Failing to Prepare for Unexpected Life Events
Life doesn’t always go according to plan. Job loss, disability, or becoming a family member’s caregiver can wreak havoc on your finances if you’re unprepared.
Maintain a robust emergency fund covering at least six months of essential living expenses. Thoroughly review your health, disability, long-term care, and life insurance coverage to ensure you and your loved ones are protected financially against the unexpected.
12. Not Staying Informed About Market Conditions
It’s dangerous to assume your investments will take care of themselves after retirement. Market fluctuations are inevitable, especially over a long time horizon.
Schedule regular check-ins with your financial advisor to assess your portfolio and make adjustments as needed. Stay informed about market trends and rebalance your asset allocation based on your risk tolerance, time horizon, and changing conditions.
13. Neglecting Estate Planning
Early retirees sometimes think they have plenty of time to update wills and trusts. Procrastinating creates the potential for complications. With proper legal documentation, your assets may be distributed according to your wishes, leaving your heirs with extra costs and headaches.
Consult with an estate planning attorney to create or update your will, establish relevant trusts, and designate powers of attorney for healthcare and financial decisions. Communicate your wishes with your family to minimize future confusion or conflict.
14. Ignoring the Benefits of Part-time Work
Don’t think of retirement as a total cessation of work. Continuing to earn some income, even part-time, offers multiple advantages.
Part-time work, freelancing, or a passion-fuelled “encore career” can supplement your retirement income, easing the pressure on your investments. Additionally, it can provide a sense of purpose, structure, and social interaction that might be lacking in a fully detached retirement.
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JayDee Vykoukal is a writer, author, mom, and Doctor of Physical Therapy. She has been writing about everything motherhood and health-related since 2018 when her first daughter was born, and she wanted to stay home. She loves to research new topics and fun facts with her kids to teach them about the world.
