6 Mistakes People Who Retired Too Early Made
Retiring early, especially for those who are deliberate about their saving, spending and investing decisions, allows retirees to view retirement as a financial state. This opens the door to a new, fulfilling chapter and lifestyle.
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There are, however, certain mistakes which are easy to make if you plan to retire early. Here are some common mistakes to avoid when planning for an early retirement.
Not Knowing or Understanding the Numbers
One of the most difficult transitions when entering retirement is shifting from a salary or sustainable income to living on a fixed income. Success in making this shift, said Stacy Livingstone-Hoyte, AFC and financial guide at Your Money Line, requires thoroughly examining your income, expenses and any other financial resources.
Rather than assume they will be okay in retirement, Livingstone-Hoyte said retirees should examine their replacement income sources and the duration of these sources. Additionally, take into consideration whether these income sources are adjusted for inflation and to account for economic shifts.
When possible, Livingstone-Hoyte recommends retirees simulate their retirement lifestyle, especially those who want to retire early.
"Early retirees must simulate the retirement lifestyle they envision with the sources of income they will have. This should be an active and ongoing experiment for a few months at least to determine real retirement readiness," said Livingstone-Hoyte.
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Overlooking Health Insurance Costs
For most retirees, it is not uncommon to underestimate the amount of money necessary for retirement. Early retirees, especially those who retire before age 65, often overlook budgeting for health and medical insurance.
Retirees are eligible for Medicare at age 65. Until then, Matt Calme, wealth advisor and CFP at HCM Wealth Advisors, said those who retire before age 65 must rely on the Healthcare Exchange.
"Premiums on the Healthcare Exchange can be quite the sticker shock to a retiree," said Calme. "Retirees are expected to pick up the full tab for the monthly premium as opposed to only a smaller portion of this premium when they were participating in their employer health plan. The difference in premiums between the Exchange and Employer Health Plans can be thousands of dollars a year."
Can an early retiree combat these costs? There are two possible solutions. The first, Calme said, is to explore whether an early retiree can cover themselves under a spouse's employer health plan. Providing the early retiree has a partner, this helps reduce the cost for insurance until age 65 and allows the retiree to benefit from reduced premiums. The second solution is to try and negotiate a retirement package with your employer with health insurance coverage on their plan until you reach age 65. While usually less common, Calme said this can help cut down on costs for those able to negotiate it.
Claiming Social Security Benefits Too Early
While an early retiree can start receiving Social Security benefits as soon as age 62, you may want to reconsider how soon you collect these benefits.
Martha Shedden -- president and co-founder of the National Association of Registered Social Security Analysts -- said retiring from work and collecting Social Security does not need to happen simultaneously. Some retirees may find it beneficial to delay collecting Social Security, which can be delayed as late as age 70 to receive the full payout.
"Deciding when to claim Social Security is a more complicated and complex decision than most people realize and choosing the optimal strategy for one's situation can result in tens to hundreds of thousands of dollars more of potential income over a lifetime," said Shedden.
The good news for anyone who feels they made a mistake in drawing Social Security too soon? They have time to reverse this decision. Shedden said retirees have 12 months to redo their Social Security election from the time they originally filed.
It is not uncommon to hear about early retirees, or retirees in general, overspending during their retirement years.
This is where utilizing a retirement simulation can be extremely helpful. Livingstone-Hoyte said this simulation helps uncover spending leaks and identifies where budget plugs will be needed.
It also enables retirees to better determine what items to prioritize in their retirement budgets. "Overspending can take the form of gifts retirees give to their families. Retirees should prepare for conversations on how their gift-giving can change so as to establish better boundaries with family, friends and even organizations," said Livingstone-Hoyte.
Not Planning For Longevity
As life expectancies continue to increase, so must the size of one's retirement fund. Individuals who decide to retire early must take their ages into consideration and increase their retirement savings.
Consider where you expect to be 10 years from now and make sure your retirement savings align accordingly. This will help ensure you do not deplete any retirement savings or struggle to maintain a low standard of living later in life.
Planning For Retirement Alone
One financial decision retirees, young and old alike, rarely regret is working with a trusted and qualified financial professional for their retirement needs.
Even if you think you have everything all planned out, working with a financial professional can still be incredibly reassuring for retirees. Financial advisors and planners can help you build, monitor and manage your financial plans and look out for your best interests. They understand your goals and will be there each step of the way for the transition into retirement. Having this kind of guidance gives retirees peace of mind. Their finances are in good hands, and they get the chance to enjoy the next chapter of their retirement lifestyle.
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This article originally appeared on GOBankingRates.com: 6 Mistakes People Who Retired Too Early Made