Key Takeaways
- Early retirement is possible with smart financial planning
- Budgeting for taxes and making strategic investments can set you up for success
- There are a lot of myths about early retirement, like the idea that you can’t do it if you have kids
Many of us dream of early retirement, but it seems impossible for most people. It’s challenging to grasp the concept of leaving work in your 40s or 50s and having enough money to continue living your life, but those who create a plan and follow it are doing just that.
Early retirement planning is the process of creating objectives and a road map for leaving work before you reach your 60s. There isn’t a set early retirement age, as it comes down to the plan you create to save enough money to retire.
You’ll need to begin your retirement planning many years before the big day arrives because retiring requires significant assets. Investing your money in stocks and bonds that are likely to grow as you get closer to your chosen retirement age is an essential part of the process.
Various early retirement myths make this dream seem less attainable than it actually is. This guide examines some early retirement planning misconceptions and will inform you of mistakes to avoid to better reach your goals.
Early Retirement Mistakes to Avoid
Nothing will sink your retirement plan faster than making significant mistakes. Some blunders could involve investing your money in the wrong areas, which often comes down to bad luck, but there are some missteps you can proactively minimize. Here’s what they are:
Focusing on Bonds
Investing in bonds might be tempting because they’re safe and relatively predictable. The issue is that a bond eventually matures, and your passive income evaporates along with it. Mutual and index funds often provide dividends to their shareholders, however, so you’re likely to continue earning passive income after you retire.
Forgetting About Taxes
Your retirement income is taxable. You’ll have to pay income tax on any tax-deferred investments you withdraw from in retirement, such as a traditional IRA or 401(k), although you’ll already have paid the tax on your Roth IRA earnings. Remember that you can’t withdraw money from your IRA or Roth IRA until you’re 59.5 years old, and early withdrawals from your 401(k) are subject to a 10% early retirement penalty.
Not Setting Expectations
Early retirement could require sacrifices, especially when helping your family with expenses. You’ll need to set expectations and figure out how much assistance you can provide your heirs and other dependents while retiring at a younger age. Ensure your family is aware of your findings so they can alter their expectations.
Avoiding these mistakes can help smooth your transition into retirement. Creating a thorough plan and sticking to it is the best way to reduce any problems you encounter during this time.
Six Misconceptions You Might Have About Early Retirement
Myths surrounding early retirement are everywhere, and some could be enough to scare you away from the concept entirely. Identifying and working through these misconceptions will keep you on the right track. Some falsehoods you might encounter include the following:
1. You’ll Have to Live Frugally
It makes sense that you might have to cut some spending if you retire early, but you don’t have to give up everything you enjoy. Developing a retirement plan that incorporates your desired lifestyle ensures you’re giving yourself enough time to accumulate the necessary investments to make the retirement you want a reality. It’s probably worth working a few more years if you can’t live your desired lifestyle in retirement.
2. You Won’t Have Health Insurance
There’s a good chance you’ll lose your health insurance if you retire early unless your employer has a program allowing you to keep it. Not having early retirement benefits could hurt, but you might be eligible for coverage through the Affordable Care Act (ACA). Your income might be too high to take advantage of some ACA options, but premium tax credits are still available for many income levels via Marketplace health insurance plans.
3. You’ll Get Bored
You might feel like you’ll be bored once you retire or that your life won’t have the same purpose it did while you were working. There could also be the fear that your social life will evaporate when you’re no longer around the office. Most retirees have these concerns, but your retirement plan should ensure you have the money to do whatever you wish so you won’t be stuck at home.
4. You Can’t Retire with Kids
Children are expensive, as the U.S. Department of Agriculture estimates each child costs nearly $300,000 to raise when factoring in inflation. You don’t have to give up your early retirement goals after having kids, but it will require additional planning. You might also have to make some lifestyle changes, including sending your kids to public school or eating at home more often to make it work.
5. You’ll Run Out of Money
The most significant concern regarding early retirement is running out of money. You don’t want to find yourself in financial trouble as you reach regular retirement age and be forced to return to work. The good news is that creating an early retirement plan factors all variables into your income and budget, so running out of money becomes less of a worry.
6. You Can Do It Alone
Early retirement planning is a complex issue because there are so many unknowns, and you’ll need the money to last for decades. Getting professional planning assistance is the best way to reduce your risks, especially if you have kids and will lose your benefits. There’s no need to plan for early retirement alone because help is readily available.
You don’t want to ignore these early retirement misconceptions because some will require planning so they can be avoided. They don’t have to force you to put your retirement off, though, because there are ways around any issues that arise.
Get the Retirement Advice You Need
Overlooking anything when planning for retirement is consequential since returning to work isn’t something you ever want to do. Using a retirement planning expert as you prepare to leave work for good is highly advisable because they can help you account for any hiccups you could encounter along the way.
Bogart Wealth offers retirement and estate planning in Houston, Texas, and Northern Virginia. Our team can help you put an early retirement plan together, minimizing your risk as you take this massive step. Contact Bogart Wealth for more information on our wealth management services.
