Read This Before You Decide to Retire Early

While it's certainly possible to enjoy a new life on the beach, there are some serious questions that need to be answered before retiring early.

Last week, almost 150 million Americanadults left their houses to go to work. According to a Gallup poll, over 68% of these people -- or over 100 million -- were either "not engaged" in their work, or "actively disengaged." That's terrible, especially when you consider that over half of your waking hours are devoted to your job during a typical work-week.

That may help explain why the idea of retiring early appeals to so many people. Who doesn't love the thought of one day skipping the morning commute, sleeping in, and spending an afternoon exercising, talking with friends, and watching your favorite TV show?

But the life of an early retiree can have its own pitfalls and anxiety-producing states. Before you decide that the life of an early retiree is for you, there three big questions you need to answer. If you're not sure how you'd respond, you're probably better off waiting on early retirement.

1. Can you live on your retirement income?Use the 4% Rule to figure out how much you can withdraw from your nest egg. The rule essentially says that you can withdraw 4% of your money in year one of your retirement, and increase that amount to match inflation every year thereafter.

For example, if you have $625,000 in retirement savings, you could withdraw $25,000 for living expenses in your first year.

However, since you are retiring early, you might have to pay early withdrawal penalties, and you may have to pay taxes if you are pulling from a 401(k) or Traditional IRA.

Answering this question is best tackled over a two- or three-year timeframe.Before retiring, spend a year or two trying to live on the budget you'll have in retirement. If that works, consider getting a part-time job while adjusting to retirement. Check and make sure the extra free time doesn't result in extra spending.

2. Have you considered increased medical expenses?You might think you'll live forever, but if you don't account for healthcare costs, you could be in trouble.Remember, most can't benefit from Medicare until age 65.

And even then, Fidelity estimates the average retired couple will spend $220,000 on medical expenses between age 65 and their death.

The Centers for Medicare and Medicaid Services offers this visualization to jolt early retirees into reality, and all are in constant dollars.

Age-Specific Annual Per Capita Healthcare Expenditures | Create infographics

Not only does medical spending increase dramatically later in life, but costs for those 85 and older grew by over 4% per year, outpacing inflation.

Other than simply making sure you have enough money to cover these expenses, there are three other strategies that can help early retirees pay for healthcare:

  1. As simple as it sounds, live healthy. Eat a balanced diet, exercise, and get enough sleep.
  2. Consider using a Health Savings Account (HSA) as a way to save and invest for future healthcare-related expenses. Money put in, growth, and withdrawals are all tax-free as long as it's used on qualified expenses -- a rarity within our tax code.
  3. Find out how to live on less. If your income from retirement funds is low enough, you could qualify for assistance through the Affordable Care Act.

3. Do you have at least three core pursuits?While most pre-retirees say that their greatest concern entering retirement is a lack of regular income, those that have already crossed over to the other side say it's something different that keeps them up at night: a loss of social connections that were usually nurtured at work.

Wes Moss, author of "You Can Retire Earlier Than You Think,"has found a thread that's constant at predicting whether or not one is happy in retirement. It has to do with "core pursuits," or activities that give an individual purpose and meaning -- beyond our rigid definitions for what constitutes "work."

Moss found that those who have at least three core pursuits identified before entering retirementwere far more likely to enjoy themselves after leaving the mandatory workforce. So, the question becomes: Do you have three such pursuits? If not, "retirement" will likely be so boring you'll want to gouge your eyes out -- and nobody wants that.

In the end, being able to answer these three questions will go a long way toward helping you determine if you're ready to retire early or not. And for those in their "regular" retirement years right now who may need a little extra cash to make ends meet, I suggest checking out the section below.

The article Read This Before You Decide to Retire Early originally appeared on

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