In this article, we discuss the 5 questions to ask before early retirement. If you want to check out our analysis of early-retirement dynamics, go directly to the 12 Questions to Ask Before Early Retirement.
5. How Will I Deal with Taxes After Retirement?
Taxes are there even if you’ve decided to retire earlier. Some of your post-retirement income from social security benefits or pension would be tax deductible, but the problem starts with the estimation of taxes rising over time.
With limited savings and no steady source of income, you’d probably want to avoid paying higher taxes over your savings.
Conversion of traditional Individual Retirement Account (IRA) to Roth IRA solves this problem. When you convert, you pay a significant tax bill upfront on your savings only once, but then your savings grow tax-free and there’s no tax deduction later whatsoever.
However, the tax you pay upfront is significant and taxes do not necessarily have to rise in the future. In fact, taxes may even reduce over time. So it boils down to your educated guess whether taxes would rise or fall in the future and make your decision accordingly.
4. Should I Get Home and Auto Insurance?
Two of the most valuable properties a typical individual ever has in their possession are their residence and vehicle, whether they’re retired or not. It’s less reasonable to not have these private properties insured if you decide to retire early.
You have to account for the worst case scenarios when it comes to natural disasters destroying houses, and/or carjacking, especially when you depend on your savings and social security alone. So it’s prudent to have these two properties insured.
3. Have I Adjusted for Inflation?
Inflation has an yearly average rate of 3%, as central banks actively target this rate. You should ensure that your retirement fund is inflation-proof.
For this purpose, you can employ the 4% rule. How it works is that in the first year of retirement, you’d withdraw only 4% of your retirement portfolio and then adjust the percentage of withdrawal based on the inflation rates for the subsequent years.
For example, say you have $1 million in your total retirement investments, you’d draw $40,000 for the first year of retirement, and then if inflation is 3% in the following year, you raise the amount you withdrew in the previous year by 3%, taking out $41,200 in the present year.
2. Is It Too Early to Retire?
It is one of the most important questions among the 12 questions to ask before early retirement. Would an early retirement be worth it, especially if you’re retiring in your 40s. You’d hopefully have a lot of time to yourself. You’d definitely need to consider any possible effects it might have on your mind and body and have proper strategies in place to spend your time. This can involve whatever you enjoy doing.
1. Can I afford to Retire Early?
Lastly, the most important question summarizes the questions to ask before early retirement. It is obviously whether you can afford to retire early in the first place. You’d need to think this through so you do not end up in a financial disaster. It is the main point of concern among people looking to retire earlier, because there are so many factors that come into play when determining the affordibility of retiring earlier.
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