Quitting Time: How to Become Financially Prepared for Early Retirement
Citi Personal Wealth Management
You might be planning to retire early—or you might be forced into it, either by ill-health or because you're laid off.
Whatever the circumstances, you will likely find retirement's financial conundrum is suddenly much tougher. After all, if you retire at a younger age, you will have less time to get financially prepared and you face a potentially longer retirement, possibly with the need to buy your own health insurance until you become eligible for Medicare at age 65.
With that in mind, here are some steps you might take if it looks like you'll be entering an early retirement.
Whether you're opting for early retirement or forced into it, start by estimating your likely retirement income, including:
- - Totaling up your savings and considering how much income they could generate. Financial experts often suggest a 4 percent withdrawal rate. That means that, for every $100,000 you have saved, you can spend $4,000 in the first year of retirement.
- - Finding out how much you can expect from Social Security. Use the Social Security Administration's Retirement Estimator to get an accurate projection of your Social Security Income. Keep in mind that retiring and claiming Social Security are two separate decisions—and there can be good arguments for delaying benefits even if you're no longer working. For instance, you might delay Social Security to get a larger monthly check because you're in good health and expect to receive that larger check for many years. Delaying might also make sense if you were the family's main breadwinner and your spouse will likely receive your benefit as a survivor's benefit.
- - Asking about monthly payments from any defined-benefit pension plan. If you aren't yet age 65, you may have to wait a few years for payments to start.
- - Exploring part-time work. Let's say you could earn $12,000 a year. That might be comparable to having a nest egg that's $300,000 larger, based on the 4 percent withdrawal rate mentioned earlier...
Prepping your finances
As your last day on the job approaches, three issues will likely loom large: How much you spend each month, where the retirement income will come from to cover those expenses and how you will handle health-care costs.
To reduce monthly expenses, you might:
- - Take a close look at housing costs, which could be your largest monthly expense. You may be able to cut costs, and simultaneously free up home equity that can then be spent, by either trading down to a smaller place or moving to a part of the country where home prices are cheaper.
- - Aim to get any car loans, credit-card balances and other debts paid off before you quit the workforce. See if you may benefit from refinancing your mortgage at a lower rate. Apply for the new loan while you still have a paycheck coming in, so it will be easier to qualify. As part of the refinancing, you might borrow a little extra to pay off other debts that you have.
If you're in your 50s, getting cash from your portfolio may mean paying a 10 percent tax penalty that's often assessed on retirement-account withdrawals before age 59½. To sidestep the penalty, consider:
- - Building up your regular taxable account, even as you continue to sock away money in retirement accounts.
- - Take annual withdrawals based on your life expectancy. For five years or until you turn 59½, whichever is longer, you can take annual withdrawals based on your life expectancy. The calculation for what's called "substantially equal periodic payments" can be complicated, so consider consulting a tax advisor.
If you have a Roth IRA, you could also withdraw your original annual contributions. That can be done at any time, with no taxes or penalties owed. Another possibility: If your retirement age is 55 or older and have left your job, you may be able to take at least one distribution from your 401(k) without penalty, assuming the plan allows it.
What about health care? You may be able to continue your employer's health coverage under the Consolidated Omnibus Budget Reconciliation Act, or COBRA. If you are eligible, your employer will give you 60 days to decide whether you want the coverage. This insurance isn't cheap: The cost is generally 102% of your employer's premium. You can keep the coverage for up to 18 months for you and your family, including coverage for pre-existing conditions.
After COBRA runs out, you will need to buy coverage on your own. Your state's health department may have information on how to purchase individual insurance coverage.
- This Communication is prepared by Citi Private Bank (CPB), a business of Citigroup,
Citi). Not all products and services are provided by all affiliates or are available at all locations. CPB personnel are not research analysts, and the information in this Communication is not intended to constitute
research,as that term is defined by applicable regulations. to footnote reference 1
, which provides its clients access to a broad array of products and services available throughout Citigroup, its bank and non-bank affiliates worldwide (collectively,
The information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.
Citigroupand its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
The information set forth was obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Past performance is no guarantee of future results.
Please note that by visiting the URL or hyperlink referenced in this piece you will leave Citigroup and enter another website created, operated and maintained by a different entity.
CGMI), member SIPC
Insurance products are offered through Citigroup Life Agency LLC (
CLA). In California, CLA does business as Citigroup Life Insurance Agency, LLC (license number 0G56746). CGMI, CLA and Citibank, are affiliated companies under the common control of Citigroup Citi, Citi and Arc Design and other marks used herein are service marks of Citigroup Inc. or its affiliates, used and registered throughout the world.