As we approach the
New Year, maybe the dream of an early retirement starts to take shape in your
mind. Maybe you’re researching when you might first qualify for Social Security
retirement benefits (hint: for Social Security income, the youngest age when
you can apply is 61 years and nine months old – you would then receive
your first Social Security check four months later – one month after your 62nd
birthday).
But as attractive
as monthly checks may be, seriously consider your financial position to be sure
you can afford to walk away from the nine-to-five routine.
When reviewing your
retirement income, incorporate accurate Social Security figures into your
financial equation. Keep in mind that Social Security benefits paid at an early
retirement age will be less than the benefits paid at full retirement age
(65–67, depending on your date of birth). To estimate your Social Security
benefit amount, you can go to the Social Security Administration’s website at
www.ssa.gov to use the agency’s online calculator.
Think Beyond Social
Security
Beyond your Social
Security benefits, however, are other major factors, such as your overall
financial situation, prospects for future income, and satisfaction with your
job. If early retirement seems a reasonable goal, determine how much income you
can count on from savings to supplement your Social Security benefits. Remember
to include income from employer-sponsored retirement plans, such as 401(k) s,
Individual Retirement Accounts (IRAs), or annuities.
Once you have
determined your retirement resources, add up your current living expenses and
calculate a rough estimate of how much income you may need during retirement.
It is possible to live on less than your pre-retirement income, depending on
your lifestyle. If you find that your retirement funds will be insufficient,
explore the possibilities of selling your home, and moving to an area with a
lower cost of living, or finding part-time employment where compensation is
within allowable Social Security limits to avoid benefit reduction.
Other Considerations
Another critical
point to consider is whether retiring from your job would leave you without
life and health insurance or other necessary benefits. You may want to
investigate the cost of private health coverage until you reach the age that
you will be eligible for Medicare. It is also important to prepare for medical
costs in retirement, including potential long-term care needs.
Typically, many
people underestimate the cost of long-term care and overestimate the funding
that will be available through public programs and private health insurance. In
reality, Medicare only covers short-term care. It may also cover some nursing
home or assisted living costs, but only for skilled care that is deemed
medically necessary for the duration of an illness, usually limited to 100 days
following a three-day hospital stay.
Consequently, Medicaid
has become the primary source of public funding for long-term care. But,
because it is a government program designed to help those in financial need,
individuals must “spend down” their personal assets and meet the Federal
poverty guidelines before qualifying for assistance.
However, long-term
care insurance is an alternative that can help cover extended care expenses
before you or a loved one become eligible for Medicaid. Policies vary, but in
general, they provide a daily, set amount of coverage that can be used in a
number of ways. This type of insurance may help cover the expenses of nursing
homes, assisted living facilities, adult day health programs, and/or at-home
care. The cost of coverage is typically based on your age, current health status,
and specific policy features, such as scope of coverage, levels of care, and
duration of benefits.
Your Pre-Retirement
Checklist
To begin
preparation for an early retirement, read the following statements. If you have
given careful consideration to the task, check it off.
- I have completed an assessment of my current financial situation,
including income, expenses, assets, and liabilities.
- I have determined which of my expenses may be lower after I retire
and which may be higher.
- I have determined how much I can expect from Social Security,
veterans benefits, and pension plans.
- I have estimated how much I expect to receive from interest on my
savings, real estate rentals, etc.
- I have reviewed my insurance policies to ensure that they meet my
present and future needs.
- I have organized a strategy to pay off my large bills and debt
before retirement.
Final Assessment
If you have any
doubts about being able to make ends meet, working for a while longer may help
improve your financial situation. If, however, income from savings, rents,
royalties, or other non-employment sources, combined with Social Security
benefits, is enough to meet your projected retirement expenses, you may want to
focus on making your dream of an early retirement a reality.
