Yahoo Finance I’m a Financial Expert: Here’s What My Clients Always Get Wrong When Trying for Early Retirement
Here’s a somewhat morbid reality: The full retirement age (FRA) is 66 or older, depending on when you were born. The average life expectancy in the U.S. is about 77, as of 2022. So, if you retire at your FRA and are not blessed with above-average longevity, you will have a mere 11 years or so of retirement to enjoy. Needless to say, this isn’t a lot of time.
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But you don’t have to wait until your FRA to bid adieu to the working force. Some Americans opt for early retirement. According to retirement data from 2016 to 2022 gathered by The Motley Fool, 1% of people ages 40 to 44 are retired; 2% of people ages 45 to 49 are retired; 6% of people ages 50 to 54 are retired and 11% of people ages 55 to 59 are retired.
Though there are those who absolutely love working and may want to wait past their FRA to retire, most people want to retire before then. Early retirement can be achievable, but it will be difficult, or even risky, if you don’t plan it all out exactly right well ahead of time. What are some common mistakes those trying for early retirement get wrong? GOBankingRates spoke with financial experts to find out.
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Not Consolidating Accounts
One way in which Americans often fail to get their acts together when planning for early retirement, according to Chris Urban, CFP, RICP, founder at Discovery Wealth Planning, is by having too many retirement accounts.
“I recommend people consolidate their relationships with financial institutions as well as the number of retirement and investment accounts that they have,” Urban said. “Reducing unnecessary complexity should be a goal for everyone so that they can focus on doing what they actually enjoy in retirement with less time handling financial matters.”
Not Thinking About Taxes
You may have plenty saved for retirement, but do you have enough to cover any taxes you will owe?
“I think, generally, people spend a lot of time thinking about how much money they have saved for retirement but they don’t actually understand how much will be paid in taxes which, for most people, will probably be one of the largest expenses,” Urban said. “Withdrawals from certain types of investment and retirement accounts will be subject to taxes. It is important that you understand your personal tax situation and forecast out at least several years to get a feel for how much tax you will be paying.”
Not Putting Together a Comprehensive Plan for Healthcare Costs
If you’ve been a salaried worker for most of your adult life, you’ve probably been able to take advantage of health benefits offered by your employer. You may still be forking over a lot out of your own paycheck, but do you realize just how much more you’ll have to spend on healthcare if you carry the full brunt of it yourself, without a job?
“People need to consider the cost of buying a policy on their own, and if that cost is feasible for an extended retirement period,” said Jeremy Bohne, founder at Paceline Wealth Management, LLC.
Those planning for early retirement also may not have wrapped their heads around the costs associated with Medicare, for which they’re eligible at 65.
“Medicare costs are pretty easy to understand, but many people aren’t aware that people still buy additional coverage even when they are eligible for Medicare,” Bohne said. “Out-of-pocket medical costs are important to consider during the entire length of retirement.”
And then there is the elevated cost of healthcare that often occurs in your elderly years should you need assisted living or a nursing home.
“Even when people have looked at other healthcare costs, many overlook the cost of moving to an assisted living facility,” Bohne said. “People avoid consideration for late-life medical expenses because it relates to their own mortality, and because the costs are staggeringly high. It’s important to plan for late-life health-related expenses to save for them, or to buy insurance coverage while you’re young enough for that to be a viable option at all.”
Not Truly Understanding How Much You Can Spend
Urban finds that many people may be familiar with the 4% withdrawal rule, or some other general spending rule of thumb, but don’t know how this all translates into actual dollars and cents.
“It is important to understand the actual dollar amount you can spend rather than percentages,” Urban said. “Of course, this changes over time based on such factors as income, asset values, etc., so it is important to continuously monitor your plan.”
Overestimating Investment Returns
Another mistake people make when trying for an early retirement is overestimating the returns investments make in retirement.
“When it comes down to it, markets are unpredictable and high returns are not guaranteed, leading to insufficient savings,” said Puja Sohi, CEO and co-founder at Core Family Office. “You should use conservative return estimates and plan for various scenarios, including market downturns. Diversify your investments to manage risk effectively.”
Failing To Adapt To a Fixed Income Mentality
Unless you come into an astonishing windfall, you’re probably going to be living on a fixed income from the day you retire until the day you die. You have to be ready for this.
“The biggest mistake I have seen is big purchases during the first years of early retirement,” said Kelly Gilbert, owner at EFG Financial. “For example, instead of financing a new car, people deduct the whole amount and pay cash because they see that large nest egg and mistakenly assume they will recover over time. But the lost gains are very hard to overcome. It can be hard to accept, but retirement requires a fixed-income mentality. Small payments allow you to pay from your gains regardless of the interest charges.”
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This article originally appeared on GOBankingRates.com: I’m a Financial Expert: Here’s What My Clients Always Get Wrong When Trying for Early Retirement
