In this article, we discuss the questions to ask before early retirement. For more on this, go to 5 Questions to Ask Before Early Retirement.

Early retirement is a big decision to make. When done right, you get to live your dream life and when done wrong, it can come back to haunt you. While early retirement is a normal phenomenon for various reasons, the pandemic has skewed the retirement numbers. 

According to the National Institute on Retirement Security, more than a quarter working Americans moved up their retirement dates because of the pandemic in 2021, with 3 million Americans retiring earlier. 

However, there’s more to the increasing number of early retirements than just the effects of the pandemic. The number of retiring Americans aged 55 years or older grew by 1 million every year, on average, between 2008 and 2019, as reported by a Pew survey.

Many factors have played a role in this phenomenon, including rising household wealth, safety and health concerns in the workplace, as well as burnout, with the latter impacting slightly more than half of the Americans, as noted in an Indeed survey in 2021. 

The Financial Independence, Retire Early (FIRE) Movement

Among other reasons for early retirement include the influence of the Financial Independence, Retire Early (FIRE) movement, whose proponents aim to retire earlier by saving up to 70% in their annual income, and then withdrawing 3% to 4% from their retirement fund to cover their post-retirement expenses.

The movement’s subreddit, by the same name, has close to 2 million members as of 2023. Other movements influencing early retirements include the Anti-Work movement, whose subreddit has 2.5 million members. 

Early retirement takes a lot of planning and you have to make a lot of preparations in order to make sure you don’t go broke after retirement. 

A 2021 update of the 2019 National Retirement Risk Index showed that 50% of households were at risk of not being able to maintain their standard of living after retirement. In 2021, only 50% of Americans calculated how much they would need in retirement savings, according to the US Labor Department.

There are several factors to account for, in case you decide to retire early, like healthcare, benefits, investment and spending. Most people take care of their expenses through social security, where some of their taxed income is marked for retirement benefits, which can be applied for, to obtain financial benefits from the state once they retire. 

Then there are retirement investment services by companies like Bank of America Corporation (NYSE:BAC). Other options include The Charles Schwab Corporation (NYSE:SCHW) and Interactive Brokers Group, Inc. (NASDAQ:IBKR), which retirees can avail to help them increase their financial resources.

Both The Charles Schwab Corporation (NYSE:SCHW) and Interactive Brokers Group, Inc. (NASDAQ:IBKR) offers Individual Retirement Accounts.

A note on social security, if you retire early and tap into your social security, your benefits would be reduced. The Social Security Administration (SSA) uses a formula to determine your benefit amount based on your highest 35 years of earnings. 

If you retire before your full retirement age, which is currently 66 or 67 depending on your birth year, your benefits will be reduced by a certain percentage for each month you receive benefits before reaching full retirement age.

If you retire early but continue working in some capacity, your social security benefits may be further reduced if you earn more than the earnings limit set by the Social Security Administration. In 2023, the earnings limit is $21,240 per year, and for every $2 earned above that limit, $1 of your benefits will be withheld.

You should speak with a financial advisor or Social Security representative to better understand how your specific retirement plans and timeline may impact your Social Security benefits. 

Below, we outline 12 questions to ask before early retirement. These would allow you to make a better decision and also prepare you with the knowledge-base to allow you to keep maintaining your living standard post-retirement.

With that said, we move to the 12 questions to ask before early retirement.

Methodology

For the list of 12 questions to ask before early retirement, we’ve observed what people are talking about, what their major concerns are and how they’re preparing for early retirement on subreddits like r/FIRE (Financial Independence & Retiring Early). If a matter/question appeared frequently and repeatedly during our research, we assigned it more importance. We’ve then picked up the consensus points of concern and listed them here in ascending order of importance. 

We’ve also gathered data from various credible and authoritative sources like AARP, Forbes, Investopedia, US Department of Health and Human Services, just to name a few, which will help quantify the substance we discuss for the questions.

Here are the 12 questions you need to ask yourself before deciding to retire earlier:

12. What Effects Will Early Retirement Have on my Social Security?

This is one of the most important questions out of the 12 questions to ask before early retirement. As mentioned earlier, social security is a retirement security system in place in the US. Some of your taxed income during your lifespan is reserved to be paid to you episodically in benefits once you retire.

According to the Social Security Administration, the retirement age, if you were born in 1960 or later, is 67. Medium income earners get 42% of their pre-retirement income in social security if they avail it at the retirement age. However, applying for social security due to early retirement reduces the percentage you’d be getting episodically.

According to AARP, If you apply for social security earlier than the retirement age, it reduces the benefits by 5/9 of 1% for each month until you reach the full retirement age up to 36 months, and 5/12 of 1% for each individual month. 

So before you make a decision on early retirement, you need to have plans to apply for social security at an appropriate time so that it doesn’t affect your or your family’s standard of living.

11. Should I Relocate After Early Retirement?

Once you take early retirement, there may not be a stable source of income for you and you want to make sure your savings are not exhausted. For this purpose, you might want to consider moving to another place, where cost of living is relatively affordable, without any effects to the standard of living.

You can consider various places within the United States. California and New York top the charts in being the most expensive states in cost of living and taxes. So, if you happen to live in either California or New York, you could consider moving to another state like Indiana or Texas, where cost of living isn’t as high and does not impact the standard of living either.

10. Do I Have My Future Covered?

This is another very important question out of the 12 questions to ask before early retirement. One of the best ways not to get caught off-guard by circumstances after early retirement is to plan ahead. Investopedia reports the average savings for people who are in their 40s and 50s as $63,000 and $117,000, respectively. 

If you fall somewhere in these age groups, chances are that your savings approximately reflect the average.  So you want to be careful how you spend your savings if you have decided to retire earlier. 

And if retiring earlier, but not anytime soon, you can consider saving a proportion of money that can help you catch up with Fidelity’s rule of thumb of saving 15% of your pre-tax income each year.

Plan for every reasonably likely contingency you might come across financially and set aside your savings for them separately. Then, you need to calculate average monthly expenses for utilities you will have to incur in your retirement days and set that income aside. Thirdly, you’d want to separate some part of your financial resources for luxurious amenities like holidays and dining.

9. How Should I Invest?

Investment after early retirement can pay off and secure your financial resources’ against future economic uncertainties. Then there’s the factor of inflation. Even if you spend very carefully, your savings, adjusted for inflation, could fall short of your spending estimates for your post-retirement life. Therefore, it is a sound decision to spend on investments that are reasonably likely to give good returns.

There are various very lucrative investment opportunities out there, but good returns, even likely in many instances, are never guaranteed. Most experts recommend the 60/40 rule, where 60% of your investments should be in stocks, while the remaining 40% should be in bonds and money markets. This diversification achieves a balance of growth and risk.

There are various mediums for investment you can choose from, with platforms like Merrill Edge, owned by Bank of America Corporation (NYSE:BAC). Apart from Bank of America Corporation (NYSE:BAC), The Charles Schwab Corporation (NYSE:SCHW) and Interactive Brokers Group, Inc. (NASDAQ:IBKR) are also popular among retirees for IRAs. 

8. Should I Delay My Decision to Retire?

If you’re doing fine in your working life and there’s no critical reason you want to early-retire other than to enjoy or check your bucket-list wishes if you will, then you might want to reconsider your decision and entertain the thought of delaying retirement for some more years.

The reasoning behind this is the benefit of compound interest on your saving deposits, which you’d likely be cashing in on, in case you retire. If you worked for 15 years and have sufficient amounts in your savings deposits, working seven to eight more years can multiply it even more, assuming of course that you do not have a critical reason to retire.

7. Should I Go for Private Health Insurance?

This is actually one of the most important questions out of 12 questions to ask before early retirement. On average, an American individual spent close to $13,000 in healthcare in 2021, according to Centers for Medicare and Medicaid Services. 

Unlike social security, you cannot just apply for the federal Medicare program at any time in your life, unless you have been physically disabled. So unless you have been disabled, you can only avail Medicare when you’re at-least the age of 65, according to the US department of Health and Human Services.

So if you plan to retire earlier, you have two options: to either cover your health safety through your savings, or get private health insurance. In the former case, you’d be risking your finances, if by some misfortune, you fell into a serious health crisis before you’re eligible for Medicare. Therefore, it’s prudent to get private health insurance and cover your health until you’re eligible for Medicare.

6. If I Receive a Pension Upon Early Retirement, How Would It Turn Out If My Former Employer Went Bankrupt?

If your employer has pension plans for employees, then it adds another source of income post-retirement, but you have to entertain the possibility, regardless of likelihood, of your employer going bankrupt. 

If that happens, your pension is covered and guaranteed by the Pension Benefit Guarantee Corporation of the US Government, albeit, at a reduced amount. So you have to make adjustments to how you spend your savings based on these possibilities.

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Disclosure: none. 12 Questions to Ask Before Early Retirement is originally published on Insider Monkey.