What does early retirement mean to you? A chance to escape the daily pressure and routine? To get started on the activities you’ve delayed? The chance to work on your own schedule and at your own pace? Travel, spending time with family or involvement with community work?

The Same But Different

Many aspects of planning for early retirement cover the same territory as planning for retirement at a more traditional age. There is one significant difference, however! You need to plan for a longer period of time in retirement and are likely to need greater resources.

What retirement plans offer is the opportunity to grow your money within the plan tax deferred. If possible, set aside the maximum amounts allowable in your company 401(k) or other similar retirement plan. The same holds true for your IRA, Roth IRA or Keogh plan. If you are at least age 50, take advantage of the “catch-up” contributions to which you are entitled.

In 2006 the maximum participant contribution to a 401(k) is $15,000; with catch-up contributions added in, $20,000. Starting in 2007, these amounts will be adjusted for inflation. (Alert: These limits are not permanent and could drop dramatically in 2011, unless extended. Congress has been considering legislation this year to do so.)

If you are going to receive a lump sum payout from a retirement plan, leave yourself enough time to consider all your options. You will need to make a decision whether to: (1) take the money, pay tax on it and reinvest the balance; or (2) arrange a “direct rollover” of part or all of your payout directly from the retirement plan to an IRA.

If your company provides a traditional defined benefit (pension) plan, you need to know the impact of early retirement on your benefits. A preset formula will determine what you receive. In most of these plans, the latter years of earnings are the most important for arriving at your benefit calculation.

Make sure you know how this “average annual base pay” is determined and if your benefit is reduced by early retirement. Leaving early may have a significant impact on your pension payments, often 5% a year for every year that you retire below the

normal retirement age.

Factor in Social Security

Although Social Security benefits serve as a limited source of retirement income, you still need to understand your options. A study conducted by the Employee Benefits Research Institute revealed a somewhat startling statistic: 56% of workers surveyed were confident full benefits will be available to them at age 65, even though a majority of today’s workers won’t receive full benefits until age 67.

A key issue you’ll want to explore is if early retirement has an impact on your choice as to when to begin receiving benefits (at age 62; at normal retirement age; or when the maximum benefit is available at age 70). For example, if you plan to begin receiving benefits at age 62, and will be working part-time, find out by how much your benefits will be reduced. (In 2006, if you are under full retirement age, $1 in benefits will be deducted for each $2 of your earnings that exceed $12,480.)

Find out if your employer provides retiree health care coverage. If so, you are one of the lucky few! Before you do any other exploration of the coverage you need, request an explanation of the benefits offered. It’s especially important to find out the circumstances under which you may be required to pay a greater share of premium costs and if coverage might be reduced or discontinued.

If you retire before age 65 without health insurance benefits, it will be important to shop for coverage. Check with several insurance companies before buying. Determine if group coverage is available because of your profession or through your church or a trade association.

When you reach age 65, Medicare will pay certain of your medical expenses. Although the retirement age is rising, age 65 remains the starting date for Medicare eligibility. However, if you decide to delay receiving benefits, the Social Security Administration strongly urges you to sign up for Medicare about three months before you reach age 65. Although Medicare coverage is fairly comprehensive, there are bound to be holes you will want to fill with a “Medigap” policy.

To find out more, please contact us.