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Early Retirement’s Unexpected (and Unwelcome) Surprises

Early Retirement

At age 55 (or younger), people are typically seen as having retired early. On a median-range wage, it is feasible to save enough for an early retirement with careful planning and money management. There are, however, some financial hazards that do not surface until after you have left your working life. Finding them and avoiding them could make or break your early retirement plan. The good news is that you can prepare for these hazards if you are aware of them. And if you can prepare for them, you can at least somewhat lessen them. In light of this, let’s go through a few of the unpleasant financial shocks that might strike early retirees.

Cost-Prohibitive Medicare premiums

The Medicare program was created to guarantee that senior citizens had access to reasonably priced healthcare. Many retirees use it to help manage their healthcare expenses and sign up as soon as they are qualified.

You should be aware of the Income Related Monthly Adjustment Amount (IRMAA)1 if this fits with your goals. Medicare beneficiaries with higher incomes will pay extra for their coverage. Sometimes retirees barely make it to the next tier of income. This results in an unanticipated rise in Medicare rates, which might destabilize a tight budget.

How To Prevent It

You can take a few steps to protect yourself from the IRMAA sting. See if your spouse can add you to their employee-sponsored health plan if you’re married and they still have a job. But first, examine if that plan mandates that the beneficiary sign up for Medicare once they turn 65. If so, devise a strategy for handling that day when it arrives.

You can manage your reported income with the aid of a qualified financial planner. Most IRMAA fees are classified as “Part B expenses”. 

Look around, assess your position, and consider what you can change to keep from moving up to the next bracket.

Private Health Insurance Can Be Costly

Medicare eligibility typically begins at age 65. Early retirees are therefore most likely ineligible since they are simply too young. If your spouse’s insurance cannot be extended to you, you will need to acquire your own.

Finding a cheap plan (for which you are eligible) is a challenge. If you are not qualified to receive the premium tax credits provided by the Affordable Care Act,2 things become even more difficult. Costs can easily increase and throw your budget off balance.

How To Prevent It

First, check to see if you can continue your health insurance through the COBRA program of the government. You will be able to bridge the gap until you are eligible for Medicare for three years with the help of this.

If that doesn’t work, look for part-time employment with health insurance as a perk. Use the AARP resource to get some suggestions on where to look.

The Taxman Will Come

In retirement, the customary “two sure things in life”—especially taxes—loom big. When you retire, the government will start claiming a portion of the tax-deferred savings accounts you’ve been accumulating for years.

In addition, taxes may apply to other sources of retirement income that you may not have anticipated. As an illustration, some Social Security payouts are taxed. Your income bracket can change if you start receiving a pension or deferred income after you retire. Some retirees may find themselves in a higher tax bracket than they did when they were working.

How To Prevent It

At least for us law-abiding citizens, it is very hard to avoid paying taxes. Protecting yourself as much as you can is the best course of action. Early preparation should be the first step. Again, your best source of advice will be a personal financial advisor or tax advisor. Choose the best retirement plan for you from a 401(k), Traditional IRA, or Roth IRA.

Consider charitable giving if you can’t prepare ahead since it’s already too late. You may be able to return to a lower tax bracket by giving part of the funds in your IRA accounts to recognized organizations. Tax pain will be lessened by doing this, but be aware that the government recently strengthened the regulations governing this tactic.

Risk Sequence of Returns

Risk associated with the sequence of returns is a challenging idea in the financial markets. It basically works like this: during the early years of your retirement, the stock market may experience a decline. Your portfolio can appear to be disappearing into thin air once you take withdrawals from your savings into account.

If you incorporate an anticipated rate of return on your investments into your retirement financial plans, this risk is increased. Your risk will increase as your reliance on the predicted return grows.

How To Prevent It

You have no control over the overall state of the financial markets. Your best option is to take targeted action in the event of a downturn in the economy to lessen the harm.

Limiting your variable spending is one tactic you might use if the markets decline. Bonds and certificates of deposit are additional strategic (or safer) assets that you can deploy. These asset classes efficiently cap your losses by protecting your money from market volatility. Once the markets have recovered, you can start investing again. If everything works out, your gains from a bull market will aid in your recovery.

The Disappearing Egg

Even if the financial markets perform as expected, early retirees will face several unforeseen costs. Unexpected home or auto repairs, out-of-pocket medical costs, and growing living expenses are all common.

Your savings may have to be used more frequently than you would prefer as a result of this. The bottom of your nest egg is suddenly visible to you before you know it. That scares me.

How To Prevent It

In this sense, good planning and self-education are your best allies. When creating your budget, take into account future costs rather than current prices for the items you need to buy.

In advance, you should educate yourself on financial self-discipline and budgeting. You don’t want to pick up these abilities on the fly after you’ve given up working for good (and collecting a regular paycheck).

Costs of Long-Term Care

Early retirees frequently have decent health. As a result, individuals occasionally neglect to make plans for a period when they will be much older and require ongoing care.

Most insurance policies only cover a portion of these expenses. Even worse, families frequently wait until a senior family member is in dire need of care before coming up with a solution. Trying to find a quick fix always ends up costing more. Additionally, you might end yourself having to use a caregiver who would not normally be your first choice.

How To Avoid It

If you have children, enlist their assistance. Come up with a strategy to pay for whatever care you might require by sitting down with their years in advance. Families with several working relatives can be advantageous. Nobody will have to carry an expensive burden if everyone can pitch in a little.

Insurance is still another option. Some insurance providers let customers purchase life insurance policies with special riders for parental care.

The Final Conclusion

The idea of early retirement is highly alluring. Nothing but time will be available for you to accomplish all of your life’s goals while you are still young and healthy. However, it is possible for nasty financial surprises to occur, and that is not at all a pleasant notion.

The secret is thoughtful long-term planning. Additionally necessary is seeking counsel from tax experts and personal financial consultants. These experts can examine the specifics of your finances and develop solutions specific to your needs and circumstances.


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