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Throughout our adult life, we are reminded to save for retirement. And, without doubt, most of us are looking to retire early so that we can enjoy those years while we are still in good health. But, how can you tell when you’ll be able to leave the work force? Below are six signs that you may be able to retire early.
- No more debt
When you retire, you don’t want to have to worry about making large payments towards a mortgage, credit lines, or other loans. You want to be able to fully enjoy your retirement savings and income. So, if all your debts are paid off, you may be one step closer to early retirement.
- Your savings are larger than your retirement goals
If your retirement savings meet or surpass the goals you have set, you’re on the right track to retiring early. However, you must make sure that—if you choose to retire early—your savings and retirement income can cover those extra years. So, recalculate to ensure your financial situation can remain stable throughout your retirement and cover your expenses until you’re eligible for Social Security or Medicare.
One way to calculate it is to see if your savings are 25 time the value of your yearly expenses.
- Do your retirement plans have an early withdrawal penalty?
Some retirement savings plans charge an early withdrawal penalty, so it’s a good idea to know if you will be penalized for withdrawing from your savings if you retire early.
If you have a 401(k) and continue to work for an employer until the year your turn 55 (or later), you incur no penalty on withdrawals from that employer’s 401(k) when you retire, as long as you leave your plan with that employer and don’t roll it into an IRA.
If you turned 59 at least six years ago, you can withdraw from any 401(k) plan penalty-free. This applies to other retirement plans as well—and there are some exceptions to these policies—so check with the IRS and your financial advisor.
Another option is to set up a series of substantially equal withdrawals over five years or more, or until you turn 59½—whichever period is longer. You’ll still have to pay income tax, but you avoid early withdrawal penalties.
- You have healthcare coverage
As an early retiree, you should have a strategy in place for covering healthcare expenses—healthcare can be incredibly expensive. Perhaps you’ll continue to be covered under your spouse’s plan, or you may be able to get coverage through your former employer. Make sure you have an idea of the healthcare costs you may encounter until you become eligible for Medicare at age 65.
Alternatively, you can opt for private health insurance. For instance, tax-free distributions from an HAS (Health Savings Account) can be used to cover qualifying medical expenses at any age. COBRA (Consolidated Omnibus Budget Reconciliation Act) may extend your healthcare coverage after early retirement, but you won’t benefit from your former employer’s contributions, leaving other options open.
- Does your retirement budget cover your current expenses?
If you can live on your retirement budget today, there’s a chance you are close to achieving your dream of early retirement. Try it out for several months—retirees typically have a fixed, lower monthly income so get an idea of how far your reduced retirement budget reaches.
- What will you do during retirement?
Retiring is a big step and leads to many changes in your life. From one day to the next, you go from having a full day of work responsibilities to having all the time in the world. If you don’t have a plan for what you would like to do during retirement, it could lead to unhappiness and even increased spending. Make sure you have activities and projects you can spend some of your time on. Perhaps you want to work part-time, or perhaps you have always dreamt of pursuing a hobby or other activity. Even having a daily routine will help you transition into retirement.
If you already have realistic plans in mind, you may be well-suited for early retirement. Like test-driving your budget, see if you can take off a week or two to try out your plan. If you’re not getting bored, you’re one step closer to enjoying a happy early retirement.