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You may dream of retiring long before a traditional 60-something retirement age, but be careful about making that leap too soon.
If you’re not emotionally ready to quit working, you may not be ready to retire.
Remember, both the big picture and the fine details of your financial and emotional states are important to consider when assessing your readiness for early retirement.
Here’s what else to take into account when deciding to retire early.
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Expenses may drop in retirement, but not as much as you might think.
Try making a retirement budget and living off it for six months before you retire. If you can’t make it without raiding savings or using credit cards, you’re not ready yet.
To put your retirement budget together, you need to understand what your cash flow will be like after retirement. And be sure to factor inflation into your budget.
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Because Medicare doesn’t kick in until age 65 and health insurance costs are rising faster than inflation, it’s important to have a reliable, consistent source of health insurance.
Obamacare may be an option for you, but that coverage has an uncertain future. For many would-be early retirees, affordable coverage is most likely to come from a former employer.
A policy with low deductibles and copays that covers prescriptions, doctor visits, hospitalization, dental and vision will help keep out-of-pocket expenses as low as possible.
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Kids, especially in their college years, are expensive. To retire with children who are still financially dependent, there needs to be enough savings to cover college expenses, says Don Cummings, founder of fee-only investment management company Blue Haven Capital in Geneva, Illinois.
"Are there children with special needs who may be living in the household or perhaps on their own who will continue to be an expense?" he asks. "What about parents with similar needs?"
Paying debt in retirement cuts into what you can spend on doing the fun things you’ve waited years to do, not to mention paying for necessary items such as utilities, taxes, food and home maintenance.
"My guidelines for early retirement include asking clients first whether their home is paid off," says Curtis Chambers, a financial adviser with Chambers Financial Group in Clearwater, Florida. "If it is not, then retirement is not on the radar screen. Second, do they have debt? If they have debt, they are probably not ready to retire."
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Because everyone’s standard of living is different, there’s no magic amount that automatically qualifies you for early retirement.
But a portfolio that is large and diversified by asset class can protect you in bad markets. A portfolio that’s composed of different types of tax-deferred and tax-free assets is more likely to generate enough income to sustain a long retirement than one that isn’t.
One gauge of whether you are ready to retire is the amount you have saved as a multiple of your income. According to Fidelity Investments, you should save at least 10 times your pre-retirement income by age 67 to ensure a secure retirement. If you want to retire earlier than that, you should probably aim for more.
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