3 Questions To Ask Before Considering Early Retirement, According to Fidelity

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Deciding when to retire is a major decision that everyone faces at some point in their life. If you’re lucky, you may sit down to make this decision earlier than expected. Retiring early is a goal for many, but whether it’s ideal for your personal situation can be challenging to determine.

Fidelity, a financial services firm, recently came out with several important questions to ask yourself to figure out if early retirement is a good option for you. Here’s what you should consider. 

Will It Work Financially?

It’s no secret that retirement requires careful financial planning and saving for many years. For those who retire in their 60s, they’ll need to figure out how to stretch their money to let them live the life they want for 30 to 40 more years. Retiring early means you’ll need your money to go even further than that. 

To figure out how much you’ll need, you should first think about what kind of life you want to lead in retirement. If you’re hoping to live quietly in your home that’s paid off, that will cost much less than traveling around the world six months out of the year and staying in luxury hotels. The money you’ve got coming in each month needs to match the lifestyle you want to lead. Some of the most common ways that retirees make money include:

• Social security benefits
• Retirement fund withdrawals
• Rental property income
• Investments and dividends
• Part-time jobs or side hustles

Make a detailed budget for how you will sustain yourself through measures like this. If you don’t have the means to sustain yourself and be comfortable in retirement, you should continue working until you do.

What Will You Do Day-to-Day?

If you’re considering early retirement, you’ve likely got sound finances and can stop working years ahead of the retirement age of 62, when you can begin receiving Social Security benefits. However, a big mistake is not preparing yourself for the amount of free time you’ll now have. 

After years of devoting yourself to your career, you’ll now need to find a new purpose. Jumping into retirement without any sort of plan can lead to depression and a lack of self-esteem when you don’t have a clear identity, according to the American Psychological Association.

A second issue that most don’t consider is how this extra time will affect their relationships. For example, if you’re used to only spending time with your partner before and after work, you’ll now find that you’ll be around them throughout the entire day. When you’re not prepared for this change, it can add stress and frustration to a relationship. 

To avoid these pitfalls, it’s best to plan out what you will spend your days doing, find meaning and even consider semi-retirement to get used to the changes.  

How To Handle Taxes?

The amount you pay in taxes can have a significant impact on the money you have available during retirement. If you’ve put your savings into a Roth IRA, your contributions were already taxed, and you can make withdrawals freely. However, if most of your savings are in a 401(k) plan, you’ll need to pay ordinary income taxes on all of your withdrawals.

If you’ve got a combination of these retirement accounts and other income streams, it’s essential to come up with a withdrawal strategy to get the most out of what you’ve saved and are earning. Strategies can range from dividing your money up into a short-, intermediate- and long-term fund, withdrawing a specific percentage of your portfolio each year, or realigning your withdrawal amount each year to match with inflation. Speaking with a professional financial advisor or tax planner is an excellent way to determine the best way to deal with your taxes in retirement.

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