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Unwelcome Surprises That Come With Retiring Early

early retirement

People who retire at 55 (or younger) are considered to have retired early. It is possible to save enough for early retirement on a median income with careful planning and financial discipline. However, some hidden financial pitfalls don’t appear until after you’ve left the workforce. Identifying and avoiding them may be critical to the success of your early retirement plan. The good news is that if you know these dangers, you can prepare for them. And if you can plan for them, you can at least partially mitigate them. With that in mind, let’s look at some of the less-than-pleasant financial surprises that can befall early retirees.

Medicare Premiums Are Expensive

Medicare was created to ensure that older adults have access to affordable healthcare. Many retirees rely on it to help control their healthcare costs, enrolling as soon as they are eligible.

If this fits your plans, you should know about the Income Related Monthly Adjustment Amount (IRMAA). Medicare recipients with higher incomes will pay more for their coverage. Sometimes retirees only make it into the next income bracket. This results in an unexpected increase in Medicare premiums, which can skew a tight budget.

How to Prevent It

You can avoid the IRMAA sting by doing a few things. If you’re married and your spouse still works, ask if you can be added to their employee health plan. But first, check to see if the beneficiary is required to enroll in Medicare when they reach the age of 65. If so, devise a strategy for dealing with that day when it arrives.

A professional financial planner can also assist you in managing your reported earnings. The majority of IRMAA charges are classified as Part B expenses. Take a look, figure out where you are, and then figure out what you can do to avoid moving up to the next bracket.



Private Health Insurance Can Be Expensive

Medicare eligibility typically begins at the age of 65. As a result, early retirees are likely ineligible — they’re too young. You must obtain your own if you cannot be added to your spouse’s coverage.

The issue is that it is difficult to find an affordable plan (for which you qualify). It becomes even more difficult if you are not eligible for the premium tax credits provided by the Affordable Care Act. Costs can quickly rise and throw your budget off balance.

How to Prevent It

First, see if you can keep your health insurance through the government’s COBRA plan. This will cover you for three years, bridging the gap until Medicare eligibility kicks in.

If that fails, you can look for a part-time job that includes health insurance as a perk. This AARP resource can point you in the right direction.

The Taxman Has Arrived

The proverbial “two sure things in life” loom large in retirement, particularly taxes. Retirement is when the government comes after your tax-deferred savings accounts that you’ve been building for decades.

Furthermore, other types of retirement income are subject to taxes you may not have anticipated. Certain Social Security benefits, for example, are taxable. If you receive a pension or begin receiving deferred income after retiring, your income bracket may also rise. Some retirees end up in a higher tax bracket than when working.

How to Prevent It

Tax evasion is nearly impossible, at least for law-abiding citizens. Protecting yourself as much as possible is your best bet. This should start with careful planning. Again, your best source of advice will be a personal financial advisor or a tax advisor. Determine whether a 401(k), Traditional IRA, or Roth IRA is your best investment option.

If you can’t plan ahead of time because it’s already too late, think about charitable giving. Donating some of your IRA funds to qualified charities may allow you to return to a lower tax bracket. This will help to alleviate the tax burden, but be aware that the government has recently tightened the rules governing this strategy.

The Sequence of Returns Risk

The risk associated with the sequence of returns is a complicated concept in the financial markets. It works like this: the stock market may fall during the early stages of your retirement. When you consider withdrawals from your savings, your portfolio may appear to evaporate.

If you include an expected rate of return on your investments in your financial retirement plans, this risk increases. The greater your reliance on that projected return, the greater your risk.

How to Prevent It

You have no control over the overall state of the financial markets. If an economic downturn occurs, your best bet is to mitigate the damage by taking targeted action.

If the markets fall, one strategy is to limit your variable spending. Bonds and certificates of deposit are examples of strategic (or safer) assets. These asset classes help to protect your funds from market volatility, effectively limiting your losses. Once the markets have recovered, you can reinvest. If everything goes well, your bull market gains will aid your recovery.

The Disappearance of the Nest Egg

Even if the financial markets work out, unexpected expenses abound for early retirees. Out-of-pocket medical expenses, unexpected home or auto repairs, and rising living expenses occur.

This may force you to use your savings more frequently than you would like. You’ll be able to see your way to the bottom of your nest egg before you know it. That’s terrifying.

How to Prevent It

In this regard, good planning and self-education are your best allies. When creating your budget, consider what things will cost when you need to buy them rather than what they cost today.

You should also educate yourself ahead of time on budgeting and financial self-discipline. These aren’t skills you want to pick up on the fly after you’ve officially retired (and collecting a regular paycheck).



Long-Term Care Costs

Early retirees are frequently in good health. As a result, they often fail to plan for the day when they will be much older and require regular care.

Most insurance policies only cover a portion of such expenses. Worse, families may fail to find a solution until an elderly member desperately needs assistance. Trying to find a quick solution always ends up costing more. It may also force you to work with a care provider who would not be your first choice.

How to Prevent It 

If you have children, ask for their assistance. Sit down with them years in advance and devise a plan to pay for any care you may require. Extended families with a large number of working members can be advantageous. Nobody will bear a costly burden if everyone contributes a little bit.

Another option is to buy insurance. Customers can purchase life insurance policies with special riders for parental care from some insurance companies. If your children have a policy with such a rider, you will have access to the necessary financial assistance.


Early retirement is an enticing prospect. You’ll have plenty of time to do everything you’ve always wanted to do while you’re still young and healthy. However, unpleasant financial surprises can occur, which is not appealing.

Long-term planning is essential. It is also necessary to seek advice from personal financial advisors and tax specialists. These experts can delve into your financial details and devise solutions specific to your goals and situation.

Featured Image: Pixabay @ besnopile

About the author: Stéphanie Bédard-Châteauneuf has over four years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on consumer stocks, cannabis stocks, tech stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.

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