Can I Retire Early - Everything You Need to Know

You’re tired of the daily grind, the commuting and your nitwit boss. Every day you ask yourself, can I retire early? Other than the vision of throwing your alarm clock out the window and sleeping in, some of the primary reasons for retiring early may include: you want to pursue your hobbies, your job interferes with what you really want to do with your life, or you want to spend more time with your family.

Find a Financial Advisor for Planning Your Retirement

One of the most critical decisions you need to make when asking can I retire early is to find a credentialed, fully licensed financial professional. A good advisor should review with you:

• Will your retirement portfolio last as long as you do?

• Consider the impact of inflation.

• How much diversification do you need?

• Should you consider immediate life annuities or Treasury Inflation Protected Securities (TIPS)?

• Think through the length of your pay out period.

• Ask can I retire early if I don’t have a pension and/or social security benefits?

• How much is the advisor charging?

Roth IRA Considerations

Another investment decision you need to consider when asking can I retire early is: are there any risks if I rollover my Roth? There is risk in everything. The biggest risk is the tax policy could change before you withdraw funds from your Roth IRA. What if Congress passes a consumption tax to replace the income tax as some politicians are advocating? Anyone who prepaid his or her income tax years ahead of time would look and feel foolish.

When deciding if you should do a Roth IRA rollover consider the following:

• If your tax bracket is higher when you retire and you start withdrawing money from your IRA, a Roth IRA is probably an advantage.

• If your tax bracket is lower when you retire and you start withdrawing money from your IRA, you’d be better off paying your taxes then, not now. A Roth IRA may not make sense for you.

• If your tax bracket remains the same when you retire and you start withdrawing money from your IRA, a Roth IRA and an ordinary IRA will have the identical effect on your finances. In that case it probably makes sense to keep the ordinary IRA since it usually isn’t wise to pay your taxes early without some incentive to do so.

Health Insurance for Young Retirees

You found a good financial advisor so what’s next? Healthcare coverage may prevent you from answering yes to can I retire early. Although healthcare is a hot topic in Congress, you need to find your own solutions for coverage.

One thing that’s almost guaranteed is that health insurance when you retire is going to cost more, often a lot more, than it did when you were employed because most employers subsidize the cost of health insurance.

For example, if the premiums for comprehensive health insurance costs around $200 per month for a single person, an employer might charge you $20 per month for the coverage, absorbing the balance of the cost. When you retire you’ll be responsible for the full amount.

A couple of your health insurance options are:

• Buy a high deductible health insurance policy; insuring a family of four for less than $100 per month with a $10,000 per year deductible. If you believe your family’s medical expenses will be minimal, this is an effective strategy.

• Move to a foreign country, there are many great places with socialized medicine. Comprehensive health insurance in these countries is a fraction of the cost of similar coverage in the U.S.

  While Congress is guaranteeing you can get insurance, it hasn’t mandated what you will pay for it. A pre-existing condition may throw a monkey wrench into your plans. Keep that in mind as you plan your medical coverage.

  Social Security for Early Retirees

  Will you receive your social security benefits if you are asking can I retire early? Obviously the less you work, the smaller your check will be. But even if you retire at age 40 or 50 and you don’t pay any FICA taxes prior to your first check, you will still receive a monthly benefit.

  Your social security benefit is based on the amount of your covered wages. In 1937 when social security began, only the first $3,000 in annual earnings was subject to FICA. The amount of covered earnings as well as the FICA tax applied to those earnings has risen steadily over the years. For 2011, the first $106,800 of earnings is subject to employment tax.

  There may be many reasons to keep working past the point where you’ve reached financial independence, but a larger social security check probably shouldn’t be one of them.

  For a high salary worker, paying FICA taxes for an additional 15 years from age 50 to 65 only increases your monthly benefit by 13% from $1,804 per month to $2,037 per month. For a mid-salary worker, the results are a bit better, a 21% increase from $1,183 per month to $1,433.

  Retiring on Certificates of Deposits and Money Market Funds

  Can I retire early if all I have is Certificates of Deposit (CDs) or a Money Market Funds (MMF)? With the NASDAQ up and down, many skittish investors are pulling their stocks and investing in CDs or MMFs. A financial advisor’s answer will be, “If you are very rich and can save enough to retire despite low investment returns CDs and MMFs are certainly an alternative.” Unfortunately, while everyone portrays CDs and MMFs as being the safest investments around, they have risks of their own, mainly inflation.

  

  Once you’ve reached the level of financial independence where you can comfortably live on a 4% annual inflation, you can likely safely retire. Manage your expenses and save, save, save so you can answer yes when you ask can I retire early.
  

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