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If retirement is coming sooner than anticipated, there are changes you can make to your financial plan now to help you prepare. They include overhauling your budget, focusing on increasing savings and choosing how you'll pay for health insurance.
Early retirement can happen for many reasons. The coronavirus pandemic, for example, ushered in a wave of early retirements due to older workers' lost jobs, health concerns and increased financial flexibility due to investment gains and housing price growth. As of March 2023, there were 2.2 million more retirees than expected, according to a report from the Board of Governors of the Federal Reserve System.
Many of those retirements are among people ages 65 and older, but retiring even a few years earlier than expected can be a major change that requires planning. Here's how to do it.
1. Adjust Your Budget
Start by taking a look at your current income and spending, and consider ways you can find more money for savings. Limiting the nice-to-haves by downgrading your gym membership or cellphone's data plan, for example, is one approach.
But you're likely to find more space in your budget—and make it more sustainable—by keeping in place small expenses that improve your quality of life and reducing larger expenses, like housing, transportation and debt payments.
You could refinance your car loan, shop online for cheaper car insurance or refinance student loans you took out for your children or yourself. You could even downsize to a smaller home to save on housing costs. One big change can free up hundreds per month that you can devote to saving for retirement.
2. Max Out Your Retirement Savings While You Can
While you're still working, take advantage of retirement saving options like a 401(k) or 403(b), including an employer match, and contribute the maximum allowed if possible. In 2023, that's $22,500 for the year in a 401(k), plus $7,500 in catch-up contributions for those aged 50 and over.
To make the most of your savings and your potential tax benefits, contribute the maximum to an individual retirement account (IRA) too. The maximum contribution is $6,500 per year in 2023, plus $1,000 in catch-up contributions for those aged 50 and over.
If you're opening an IRA for the first time, however, keep in mind certain rules that could affect your withdrawal plans. A Roth IRA, for example, allows you to make withdrawals tax- and penalty-free after age 59½—but only after you've had the account open for at least five years. You'll pay income tax on earnings withdrawn less than five years after opening the account.
3. Work Out an Exit Package With Your Employer
Some employees coming up on retirement age are offered voluntary early retirement packages, which may include severance pay, access to your annual bonus and the option to stay on your company's health insurance plan. If your employer offers an exit package, check how long it will keep you afloat financially after leaving your job and consider negotiating for more severance pay. Or ask for additional perks, such as the ability to extend your employer-based life or disability insurance coverage.
Even if you're not offered an early retirement package, you can ask for severance benefits. If your health or other circumstances require you to retire early and you've been a strong performer, you can request severance pay or for unused sick or vacation time to be added to your employer-sponsored pension or annuity, if you have one. You can also offer to help hire and train your replacement, if that's possible for you, as part of the negotiations.
4. Strategize Your Health Insurance Coverage
You'll get access to Medicare when you're 65—or younger if you have a disability, end-stage renal disease or amyotrophic lateral sclerosis (ALS), also called Lou Gehrig's Disease. Until you can sign up for Medicare, health insurance may become a major expense.
As part of your exit package, ask your employer to cover COBRA payments. Or sign up for the company's retiree health insurance, if it's available. Even if you have access to a retiree health plan, in most cases it's still best to also sign up for Medicare once you're eligible to ensure full coverage.
Other options include joining your spouse's employer-sponsored health plan or signing up for private health insurance, marketplace insurance through Healthcare.gov or Medicaid if you're eligible in your state.
5. Hire a Professional
Working with a certified financial planner, even if you've never done so and it seems expensive, is likely a good use of time and money when retiring earlier than expected. A financial planner can help you develop an investment strategy that reflects the fact your savings will have to last longer than anticipated. You can also discuss when it makes the most sense for you to start drawing on Social Security, since delaying will ensure you get more per month.
While it's not a wise move to shift a large portion of cash savings into risky investments now, you may want to keep some money invested, perhaps in an index fund with low fees, so that it continues to grow while you're retired. That way, you can draw on it later after giving it time to increase in value.
Making Early Retirement Possible
Retiring earlier than expected can be challenging or a cause for celebration (or both) depending on your circumstances. But no matter why retirement is happening sooner than you planned, you have options for building a fitting budget and savings strategy. When you prioritize financial security and long-term growth for the years you'll spend retired, you can do your best to enjoy the freedom and flexibility you've earned.