3 Common Early Retirement Mistakes

Getting to early retirement is a common goal among many individuals. While it is something to strive for, you will want to make sure that you consider all of the factors that are involved. Here are a few common early retirement mistakes that you will want to avoid.

1. Ignoring Social Security Benefits Impact

Many people that retire early do not consider how Social Security benefits are calculated. When you retire early, this is going to significantly impact a much money you are able to collect for the rest of your life on Social Security. Social Security benefits depend greatly on how long you work. If you retire early, you are not going to be able to get as large of a check as if you waited longer. For example, if you decide to wait until you are 65 to retire, you are going to get a much bigger check than if you retire at 62. If you can afford to live with the funds from your retirement plan alone, then this should not be a big issue for you. However, if you are going to be relying on Social Security greatly, then you might want to take some time to calculate how big your Social Security check is going to be.

2. Inflation

Many individuals that retire early fail to consider how inflation can impact their lives during retirement. If you plan on getting enough money just to live for a certain amount of time in today's dollars, you are not going to have enough money. Most experts agree that you should plan on approximately 3% inflation every single year. In some cases, we have seen as much as 10% inflation in one year. This can have a dramatic impact on how far your retirement dollars can go. For example, if you can live on $40,000 a year now, you might have to have $65,000 a year in 20 years just to have the same standard of living. Many people do not take this into consideration and it can seriously hurt them. Sit down with your financial adviser and go over how much money you will need to retire even if inflation keeps moving up at three percent per year. 

3. Tax Planning

Many individuals also make mistakes when it comes to tax planning during early retirement. You need to take into consideration how taxes are going to affect your retirement dollars before calling it quits on your career. For example, if you decide to retire before the age of 59 1/2, you need to have some other type of income besides taking it from your retirement account. If you take an early distribution, you are going to have to pay 10% to the IRS as well as paying income taxes on the money that you take out. You also need to take a look at how much money you can take out every year without going into a larger tax bracket. Many people take large withdrawals from a retirement account and end up paying more money in taxes in the long run.

blog comments powered by Disqus