The Challenges of Early Retirement
Early retirement is an appealing objective, but how do we overcome the many financial challenges in its way?
Early retirement is not about doing nothing, but about doing more of the things that truly matter to us - spend more time with loved ones, deepen our relationships, deepen our faith, start a new business, travel, build the flower garden we always dreamed of, devote more time to our hobbies, go through our ever growing list of books to read. The appeal is clear but how do we get there? There are so many obvious challenges, and some not so obvious. While overcoming these challenges is not easy, we believe that early retirement is indeed achievable by thoughtful planning.
Challenge #1: Social Security
The earliest we can claim our Social Security retirement benefits is age 62, which often becomes the cut off age for how early we can retire. For most of us, Social Security is a significant portion of our retirement income.
At the same time, many people don't draw their Social Security benefits until age 70, regardless of when they retire, in order to optimize their late retirement subsidy. In either case, we need to start planning and saving for retirement well in advance in order to prepare for those few years without Social Security.
Our free retirement calculator evaluates all possible retirement ages automatically, but lets you select your (and your partner's) Social Security commencement age. This way, you can see what it would take to retire before Social Security kicks in and, if you have a choice, when is the best age to start your Social Security. As you will see, there are pros and cons of each Social Security commencement age, which is why we don't calculate any "optimal" ages.
Challenge #2: Unpaid mortgages
Many of us who have recently refinanced our homes may have to retire with an unpaid mortgage. With the record low interest rates during the 2008 financial crisis and the 2020 pandemic, refinancing was too attractive of an option to pass up. While refinancing at a lower rate is generally a financial gain, it can also make our retirement math a notch more complicated. At a minimum, we've added another aspect to our finances in retirement, which we simply can't ignore.
For this reason, MoneyBee allows you to add your mortgage to your model and automatically works out when it will be paid off, your deductible interest each year and your outstanding balance if you sell your home. And again, since it automatically evaluates all possible retirement ages, you'll be able to see what retirement ages are still realistic.
Challenge #3: Kids in college
Conventional wisdom tells us that the earliest we can retire is when our kids are out of college. However, with careful planning, even this is possible.
MoneyBee allows you to model college expenses by adding an event, where you can specify when the expense starts and ends and what inflation rate you want to apply to it. You can also model monthly savings towards college, beyond your savings towards retirement.
Since MoneyBee automatically evaluates all possible retirement ages, you will be able to see what it will take to retire before your kids finish school. Perhaps the sacrifices it would require are too much, in terms of how aggressively you will need to save for retirement and/or how low your personal budget will be in retirement to make up for retiring early. Or perhaps it is something well within your reach. You'll never know until you run the numbers.
Challenge #4: Health care costs
The main point of retiring early is to enjoy life while still healthy. So why are we talking about health care? Healthy or not, it is probably a good idea to have health insurance. At the same time, buying health insurance on our own can be very expensive, especially in our late 50s and early 60s before Medicare kicks in at age 65. You can see our main health care article for sample health premium prices, but for a 61-year-old couple you are probably looking at over $20,000 per year on premiums alone, in current prices.
Solution #1: The safest solution may be to simply save up enough to be able to cover the high pre-65 health premiums. MoneyBee automatically looks up current benchmark premiums in your area and uses them as default (you can override them as needed). It then increases these current amounts with data-driven health care price and age inflation assumptions when calculating your retirement options. In the big scheme of things, the results may not be as bad as it seems. Perhaps you need to retire a year later than planned or save 8% of pay instead of 6%. In any case, these seem safer solutions than some of the alternatives below.
Solution #2: You can try to optimize your premium tax credit, which may pay for most or all of your health premiums before age 65. You can do that by minimizing your taxable income during this period to qualify for a higher credit. If you have enough after-tax savings (Roth IRAs, brokerage accounts) to live on and don't tap into your taxable income sources (Social Security, 401(k), traditional IRAs) until age 65, your taxable income may be zero and the premium tax credit may cover all of your health premiums up to the benchmark premium. MoneyBee automatically calculates and factors your premium tax credit in each year after retirement, so you can try out a few scenarios and see what makes most sense.
Solution #3: Move to a country with relatively inexpensive, high-quality health care until age 65. There are a number of countries, such as Panama, which have built a private healthcare system designed specifically to attract American retirees. While this can be a wonderful opportunity to travel, it's not for everyone and it has to be planned out carefully. MoneyBee allows you to model different real estate strategies such as renting out your house for a period of time or living a few months of the year away from home. After you map it all out, how much do you really save and is it worth it?
Solution #4: While this is not advisable for the vast majority of people, you can also use a pay as you go approach without purchasing health insurance. We know of people who pay out of pocket for frequent doctor visits and checkups. If any issues are found, they travel abroad (usually to their old country) to take care of them. Perhaps that could work if you are very familiar with the healthcare system of that country and have real confidence in it. But then what do you do if an emergency strikes and you can't travel?
Challenge #5: Longevity
One of our duties as actuaries is to select appropriate mortality tables for different categories of people. One thing we know for sure is that mortality rates are higher for a retiree than for a same-aged person who is still employed full-time. The obvious explanation (we may never know for sure) is that staying active is important for our physical health as well as for our well-being. At the same time, maintaining our pre-retirement level of activity may be a tall order as people generally tend to slow down a notch after retirement. The best we can do is stay as active and healthy as we can and accept that early retirement comes with its own risks too.
Conclusion
After all we said, you may be wondering if the enormous premium for retiring early is worth it. Can some of these things we want to do in retirement wait a few years? Can some of them be done while still having a day job? These are questions only you can answer. However, if curious to know what it would take to achieve a secure early retirement, our retirement calculator should be able to help you think though, model and prepare for all major financial challenges that lie ahead.