I admit, there is a part of me that would love to retire at 50. I have big plans for retirement and would love to spend more time on my hobbies. But even though I’m prioritizing retirement savings now, I don’t know if I’ll actually retire that soon. The advantages of early retirement are obvious, but it also has serious drawbacks. Here are three to consider if you’re thinking about retiring at age 50.
1. Your savings have to last much longer
If you retire at age 50, you can probably expect to spend about 30 years in retirement, and some people might even make it into their 40s. You’ll need a lot of money to cover your expenses during that time, so you should feel comfortable giving up certain purchases today so you can save more for retirement.
A very long retirement also increases the risk of running out of money prematurely. It’s hard to know exactly how much you’ll need for retirement under the best of circumstances, and with a 30-plus-year timeline, there’s plenty of opportunity for unplanned expenses to crowd out your budget. Even if it’s just a few thousand dollars here and there, that can add up over time and you may not have enough money to cover all the planned costs in your later years.
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If you want to avoid this, you must build a lot of cushion in your retirement budget and review your plan often to make sure you stay on track toward your goals. You should also have a backup plan in case you run out of savings too quickly. This could mean cutting back on travel and discretionary purchases or possibly going back to work for a while.
2. You will have difficulty accessing the money in your retirement accounts
Most retirement accounts impose an early withdrawal penalty if you try to withdraw money before you turn 59½. It is usually equal to approximately 10% of the amount you withdraw. So if you take out $10,000 at 58, you’ll have to pay $1,000 back to the government.
There are ways to avoid this early withdrawal penalty. The government allows exceptions for things like large medical expenses or educational expenses. Certain account types also have exceptions. For example, him rule of 55 allows 401(k) owners who quit or lose their jobs in the year they turn 55 or later to withdraw money from their 401(k) without penalty. However, you can only take money from your 401(k) associated with that job, not from any other retirement accounts you have.
Another way to avoid this is Substantially Equal Periodic Payments (SEPP). This withdrawal strategy allows you to avoid penalties as long as you agree to withdraw equal payments from your retirement account for five years or until you reach age 59½. But if you don’t take all of your SEPPs, you’ll be slapped with all the penalties you would have paid in previous years.
You can also put away some retirement savings in a taxable brokerage account. They don’t give you the same tax advantages as retirement accounts, but they also don’t have limitations on when you can withdraw your money. You can save the money you plan to spend before 59 1/2 here and then switch to your retirement accounts once you’re free of early withdrawal penalties.
3. You won’t qualify for Medicare
You can’t sign up for Medicare until you’re 65, so if you retire at 50, you’ll have to pay for your own health insurance in the meantime.
If your spouse is still employed, you may be able to get their health insurance for a while. Or you can stay under your previous employer’s coverage after you quit, but this is often an expensive option. You can also buy your own health insurance plan.
The one thing you don’t want to do is skip health insurance and hope for the best. All it takes is one emergency to wipe out a good chunk of your savings, and then your retirement plan is out the window.
You better plan for health care expenses. Premiums are the main cost you’ll have to deal with, but you should also set aside some money for deductibles and copays just in case they come up. TO health savings account (HSA) is a good place for these funds if you qualify for one.
it’s possible retire comfortably in your 50s, but you have even more to think about your retirement plan than someone who retires later. Review your budget carefully and make sure you have enough wiggle room to handle any costs that come up. And if you’re worried about running out of money too soon, put off retirement a little longer. The extra year or two in the workforce is worth it if it means you won’t have to worry about your bills later.
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