A lot of people dream of being able to retire early. And you might assume that if you have a large amount of savings, you’re in a great place to take that leap.
But accumulating a large balance in your IRA or 401(k) is only part of the battle. You also need to make sure you’ve done a thorough assessment of your situation. And if these three signs apply to you, it means you may be in a great position to move forward with an early retirement.
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1. You know what your annual spending needs look like
A lot of people think they know what their annual spending will cost in retirement but forget about non-recurring costs. You’re probably not going to have to spend money maintaining your car or fixing your home every month. But those costs could pop up from time to time, and your annual budget needs to build in room for those possibilities.
Similarly, you might have some positive reasons why your spending is higher. There may be a family wedding to attend across the country, or you may want to take your child on an overseas trip as a college graduation present.
If you’re accounting for these one-off expenses, it means you have a solid handle on your finances.
2. You’ve factored in the cost of pre-Medicare health coverage
If you retire before turning 65, you’ll need to bridge the gap until you’re eligible to enroll in Medicare. And the cost of health insurance could be significant, especially if you’re going a good number of years between leaving your job and your 65th birthday.
If you have a plan to cover the cost of pre-Medicare health coverage, it means you should feel more confident retiring early. You may, for example, be aiming to use a health savings account balance for things like deductibles and copays to ease the burden.
3. You’ve stress-tested your retirement plan
You might think you’re all set to retire early if your nest egg is large. But don’t forget that a couple of key factors could threaten your savings.
Inflation could drive your costs up over time, causing you to lose out on buying power. And market downturns could force you to lock in losses if you don’t have a backup plan.
Before you resign, it’s important to stress-test your plan against these scenarios and figure out how you’ll cope with a period of higher-than-average inflation or a prolonged market slump. For the former, the right investment mix might come to your rescue. For the latter, a solid cash cushion and bond allocation could protect against sequence-of-returns risk. If you’ve taken these steps and feel confident your plan can survive, you’re in a good spot.
