How to plan for early retirement: Don't do what I did
As I begin the day countdown for my early retirement, I realize that I have taken a life-changing decision. Things are lining up reasonably well, although making statements like this one can be reversed quickly by those sudden slaps in the face that life is always ready to give us. Let’s briefly discuss the reasons to retire early and the tasks that we might need to do it in good terms.
The reasons to retire early can vary depending on each person. In my case, the main reasons were to be able to do social change activism, cultural work, music work, reading, writing, and passing on knowledge accumulated during 40 years of labor. Taking into consideration my health situation, I have calculated that I hope to have at least 10 more years of useful life to get these things done. All the above I have been doing after work anyway, but with limited time and freedom. For other people, these activities that are our passion, that fill us with a desire to live, can be traveling, spending time with family and friends, or doing anything else.
For the Social Security administration, full retirement age fluctuates between ages 65 and 67. Early retirement is considered to be doing so at age 62. In this case, benefit reductions are about 25% what you would get at full age. This is an element to take into consideration no doubt. Another major consideration is that Medicare, the health plan for retired people, begins when a worker turns 65. Another important consideration.
How to reconcile the challenges and disadvantages of early retirement?
1. It is very important to plan early in your working life for retirement. I didn’t. When we are young our tendency is to believe that retirement is a remote date and not to worry about it. This is definitely the wrong attitude. Also, at young age we tend to believe that our contributions and our employer’s contributions would be plenty. Well, they are not.
2. Part of the plan should take into consideration one of the major expenses in our lives, housing. Again, don’t do what I did. You should think early in your life to secure owning a home. It is a difficult proposition when salaries are low and real estate prices are so unfairly high, and mortgage borrowing so demanding. Yet, you should try it to make it work. Otherwise, you will spend many years paying rent, which is paying somebody else’s mortgage, while you only have temporary use of a property. Take into consideration that mortgages are usually paid up in 30 years.
3. Favor companies that as part of their benefits include matching contributions to your private retirement funds, commonly 401K plans. Usually these plans are voluntary. Make sure that you participate in them as soon as possible and contribute as much as possible. If the company you are working for doesn’t offer a 401K, open your own individual retirement account (IRA) on your bank.
After a while of contributing to 401Ks or IRA, regardless of your life’s circumstances, don’t do what I did after eight years. Do not withdraw your accumulated funds. When you withdraw before age 59 ½ you will be charged 10% federal taxes, state taxes, and a penalty for early withdrawal. If you must make use of that money, carefully research how you can do it limiting your penalties.
4. Live within your means. The formula of consumerism + debt is not a good one, in particular if you tend to accumulate debt. Avoid just paying the minimum required by credit card companies because that means that the cost of what you purchase will be extremely high when all is said and done.
Regardless, unless you are filthy rich, your early retirement will mean reduced income than what you are used to. But if you start planning and acting early you will be in reasonable shape to retire earlier than what the state wants you to.
Hopefully these notes are useful to young workers who are just entering the workforce. As for me, in a few days I will celebrate my last at work. I am happy and grateful to have worked for the non-profit I did. They had a generous 50% 401K match contribution. They were also generous in training and educational opportunities. Above all, I felt valued and productive, and I learned so much in the process. Now, it is time for me to do the things I couldn’t do fully and recycle knowledge. I am also happy to leave my place in the labor market to a younger person.