Currently, the average American predicts that they’ll be retiring at the age of 66 and approximately 35% of them believe that they will need at least $1.26 million to retire early and live comfortably.
Ok, fair enough. But here’s the thing. It’s not always about the amount of money that you have when you retire. There is no perfect “retirement calculator”. Your comfort level through retirement depends on how well you plan for it.
Early retirement planning ensures financial freedom by balancing out your retirement expenses with your retirement income, based on your specific wants and needs. But there are pitfalls to look out for. Here are three mistakes you should avoid while early retirement planning:
Mistake #1: Committing To Early Retirement Without Understanding the Costs
It’s important to consider costs that won’t be covered by retiring early. Like healthcare, for example. You won’t be eligible for Medicare until you reach 65 years old. And if you’re accustomed to health insurance through an employer or a company plan as a business owner, the expense of an individual or family policy on the healthcare exchange can come as a significant sticker shock. That’s why it’s crucial to factor in the cost of healthcare when considering how early to retire or the decision to sell a business.
Think about how your spending may change as you move into retirement. Some expenses may be reduced, like commuting and other work-related costs. Other expenses may increase when you have more free time like travel, new hobbies, or enrichment activities. Often, total expenses before retirement and during retirement may be very similar, but in different areas.
Mistake #2: Having Too Many Illiquid Investments or Age-restricted Retirement Accounts
When you’re building your wealth, you may commit to illiquid investments like Private Equity Funds, non-traded REITs, and other alternative investments that are intended to diversify exposure beyond stocks and bonds. However, these investments can come with major restrictions to accessing your capital– often for periods of five years or more.
Be careful about what you commit to… creating cash for retirement isn’t as easy as requesting your share be liquidated.
Similarly, be careful about which assets you plan to tap into in the early years of retirement if you’re younger than 60.
- Tax-deferred retirement accounts can’t be accessed without a penalty until age 59 ½ unless you meet certain exceptions, often associated with financial hardships or life events such as home purchases or paying for education.
- You may be able to tap into your work-sponsored retirement account before 59 ½ if you work until 55.
Here at Monument, we believe in the elegance of simplicity when it comes to asset allocations–we wouldn’t recommend introducing illiquid investments unless they were appropriate for your unique circumstances.
Mistake #3: Not Considering the Entirety of the Big Picture
Legacy goals and desires may change over time. If you spent your career building a profitable business or working in a high-demand executive role, you may not have exactly been focused on your estate and what’s important to you, personally.
Before you start tapping into your assets to sustain a long retirement, be sure that you’ve thought long and hard about your personal priorities and ensured that there are sufficient assets to support your broader legacy goals (passing down wealth to the next generation, philanthropic goals, etc.).
We are a decision partner for successful individuals navigating a new level of financial complexity. Our clients don’t just want better performance—they want to make better decisions and lead more fulfilling lives. We’re here to help them act with intention when each pivotal moment, like considering early retirement, arrives.
