Early retirement is the aim of many people because they envision themselves free to have fun with no work responsibilities while they’re still young enough to enjoy it.
While this may work for people who have major financial success in their investing and savings, there are both financial as well as Non Financial pitfalls that need to be considered.
Non Financial Considerations
Before cashing in retirement plans, it is important to take a realistic look at life after retirement. While the person may have visions of travel, seriously pursuing a hobby or just relaxing at the beach, the interest in these activities can wane over time. Illness may be one reason and diminished resources may be another.
The main activities people usually thing about doing after retirement such as renovating their house, spending time with children or grandchildren, community service or playing golf everyday don’t constitute a lifestyle.
The person needs to seriously examine their possible lifestyle after the highlights are accomplished. Research shows that in two years, many retirees run out of ideas for activities that give their life meaning and a sense of purpose.
Another consideration is how to maintain relationships. Retirees who have been focused on their jobs and given minimal time to their families and friends will be face to face with these people for days, months and years. For some, this could be uncomfortable or even boring.
They need to consider how to relate to people outside of a work situation as well as how to fill the hours of the day. Along with what the retiree has achieved in life, they also face challenges.
The good news is they have the chance to repair and reinvent the most important elements in their lives.
The enthusiasm and energy that help push a person through their working years will need another direction to maintain interest in life especially if the retirement years stretch to 30 or 40 years, which is entirely possible.
Considering the current life-span projections, it is likely a person who retires at 55 could live to 85 and beyond.
This is why many people who are considering retiring early from their jobs are looking for after-retirement work. It may not be full-time or in their normal field of expertise, but it will be something they enjoy doing.
For example, seasonal retail sales help, writing text for websites, or becoming a consultant in a particular field are all different types of work a retiree can do on a part-time basis that doesn’t interfere with their retirement activities.
The money they earn can help support them early in their retirement years, so they don’t need to start using their savings right away.
The big financial question is whether the retiree has enough income in their retirement plans, savings, assets and Social Security to support themselves for the 30 or 40 years of retirement. Most people do not.
They may think they can start an online business or other type of small business that will generate enough income for the future.
However, this is risky thinking because they are basically planning their future on air. They may start a business that succeeds beyond their wildest dreams, but again they may not.
If the retiree has a one million dollar investment portfolio, and they can live on 1.5 percent of that, they may be all right with $15,000 per year. However, if they need more than that to live, they will need a post retirement job.
There are also serious tax consequences for taking early distribution from a retirement plan. In order to discourage people from using their retirement funds for other purposes, there is a 10 percent additional tax on certain early distribution from certain retirement plans.
The term early applies to funds received from a deferred annuity contract or retirement plan that qualify before the person reaches the age of 59 ½ years. The tax is equal to 10 percent of the part of the distribution that is includable in income.
Qualified plans include:
• A 401(k)
• Employee annuity plan
• Tax-sheltered annuity plan for public school employees or tax-exempt organizations
• Individual retirement accounts (IRAs)
There are other distributions that are not taxable including to beneficiaries after the retiree’s death, the retiree becoming permanently disabled, unexpected medical expenses, being called to active military duty and other reasons.
It is recommended for someone considering early retirement to look at the Internal Revenue Service’s (IRS) website to learn about all the tax possibilities or to ask a financial adviser.
While early retirement looks good to some people from the middle of the daily slog, it’s to their benefit to take some time to think through all the ramifications involved.
Money is a big issue and should be considered carefully. It wouldn’t be wise to commit to living on less, and find it’s not possible after it is too late.
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