How to Retire Effectively at 62 (Tips for a Secure Future)
Many of us consider retiring at 62 for many different reasons. Sometimes, it’s your health or maybe your spouse’s. You may have reached all your retirement savings goals and want to take advantage of the opportunity. You may just no longer enjoy working.
Whatever your reasons for considering retirement at 62, you should consider several different issues before taking any irrevocable steps. This guide will look at some of those issues and help you get to the point where you can retire at age 62 with a comfortable lifestyle. Remember, these are starting points, and it’s not a bad idea to consult with a financial professional before finalizing your plans.
In the end, the biggest problem you will face retiring at 62 is the gap between 62 and 65 when the most significant retirement benefits – like Medicare – kick in. Cover the gap and make sure you won’t run out of funds, and retirement can be fun!
Can You Retire at 62?
Of course, you can. The real question is should you retire at 62?
The answer to that question depends on the state of your savings, your health, and your other financial needs. It also depends on what you are hoping to do in retirement.
If you have significant health issues or want to travel the globe, you will need more money than if you are as healthy as can be or want to stay at home doing your hobbies. Consider these issues carefully before you make a retirement decision.
How Much Money Do I Need for Retiring at 62?
There is no one-size-fits-all answer to this question. The amount you need depends on your situation, and no two situations are alike. Financial experts recommend that you plan on replacing at least 70 percent of your pre-retirement income.
You may need more or less than that, based on several factors and your expectations from retirement. Issues like debt, your health, your savings, and your ability to cover the gap between 62 and 65 for expenses such as healthcare can all affect your ultimate decision.
It’s essential that you have a secure income stream, especially for those tricky years between 62 and 65. You will need income to pay for health insurance until Medicare kicks in, and if you have it, you may be able to delay claiming Social Security until you reach full retirement age (FRA). Waiting to claim Social Security until you reach your FRA can have a tremendous long-term impact on your retirement income
An annuity offering a guaranteed income stream can help you achieve both goals. Annuities are the only vehicle that pays a guaranteed stream of income which, with riders, you can get for life. Contact an independent financial professional to discuss the various annuities available to you and the riders, which can help you tailor your annuity purchase to your precise needs.
Remember, though, that annuity guarantees are based solely on the issuer’s claims-paying ability, so be sure you and your financial professional do your due diligence when making a purchase decision.
What Are Your Options for Retiring at 62?
One of the good things about being 62 is that you aren’t 59. In other words, you are past the penalty age for ‘early withdrawals’ from your various retirement accounts.
This freedom allows you to use these funds strategically to avoid claiming Social Security early. When considering retirement at 62, your options for that qualified plan money include leaving the money where it is, rolling it over to a traditional IRA, or converting it to a Roth IRA. While you could take a lump-sum distribution – or “cash it out” – that is most oftentimes a bad idea, as you pay taxes on the entire balance, and the chances of that money being depleted quickly are greater.
If you can avoid claiming Social Security early, you can avoid the lifetime penalty of up to 30 percent of your full benefit amount. Further, if you can wait beyond your FRA, you can increase your benefits by up to 8 percent per year for four years, leading to a benefit nearly one-third larger.
In any event, it’s worth doing some math to see where your break-even point is on claiming Social Security. While waiting can look very attractive, the break-even analysis you conduct with your financial professional may lead you to a different conclusion.
Ask your financial professional about other factors that might be worthwhile to explore in deciding what age is right for you in claiming your Social Security benefits.
What to Plan for When Retiring at 62
The biggest single issue is to make sure that, between your retirement accounts, your pension (if any), and your anticipated Social Security benefits, you have enough income to live the life you want in retirement.
Plan for Your Retirement Expenses
Your planning should include mandatory, nice-to, and dinosaur/asteroid expenses (unlikely but potentially catastrophic). Remember that inflation will also have a part to play, especially as it adds up over time. It’s prudent to plan for it as well. Some of these expenses include:
- Utility costs
- Food and clothing
- Insurance (health, home, auto, so on)
- Transportation costs
- Taxes (property, income, capital gains, so on)
- Charitable and political contributions
- A significant unanticipated loss – new roof, fire, catastrophic illness, etc. This potential is your asteroid, and you need to save something for it.
Your financial professional can help you calculate your potential expenses, create a plan of how to pay for them throughout retirement, and just as importantly, plan to cover them from 62 to 65.
What Withdrawing at 62 Does Long-Term
Importantly, you are over 59.5, so you won’t be hit with those pesky 10 percent penalties for early withdrawals. However, you are taking money out earlier than you originally planned.
Not only does this reduce your savings, but it also reduces your continued growth since the assets available to grow are less.
Work with your financial professional to develop a sustainable withdrawal plan to handle this problem. You will be able to take less from your accounts if you have a pension and an annuity already giving you a stream of income.
Discuss this option with your financial professional, who may be able to recommend an annuity that can help you with your withdrawal needs.
Plan for Covering Healthcare and Long-Term Care
Remember, you don’t qualify for Medicare until you are 65. If you have been relying on employer-provided health insurance and don’t work for a company that provides retiree health benefits, you will need to cover the gap between retiring and Medicare.
Individual health insurance can be quite expensive at this stage. Look for options.
Are you eligible for COBRA on your former employer’s plan? That won’t be cheap either, but it’s a solid option if available. Do you belong to an affinity group that offers health insurance? Look at those plans as well.
Work with your financial professional to determine how much insurance you might need for your health needs (and that is the right fit for you) and how best to make it work for you. Remember that many annuities now offer benefits for long-term care and catastrophic illness, as do some life insurance policies. Consider whether these options might help you cover these costs.
Healthcare isn’t all about catastrophic illness, either. Remember that as you age, more seemingly minor health issues will arise. They will require tests, treatments, and prescriptions, all of which add up even if you’re in good health.
Once you are eligible for Medicare, a good Medigap policy will cover much of this for you, but you do have to consider how to handle the gap.
End of Life Expenses
It’s not pleasant to think about, but there are costs to passing away as well as for living. Your surviving spouse will have to cover the costs of your burial or cremation and your funeral.
Plan for these expenses and consider pre-paid plans for both of you. In addition to the expenses, most pensions, annuities, and Social Security will create some loss in income for your spouse at your death.
Work with your financial professional to find the best balance between benefits for both of you today and benefits for the surviving spouse.
Don’t Forget the Legacy
Although your focus is on living well in retirement, you don’t want to forget about those who still depend on you and your income. You probably don’t have minor children any longer, but if you do, they or your spouse will need to replace your retirement income.
Whoever dies first, the surviving spouse will experience a drop in household income. The household will now only receive one Social Security payout monthly instead of two. Even if your benefit was higher than your spouse’s and they will receive that, they will still lose the benefit they received.
Pensions and annuities allow you to structure how payments will get made after one of you dies. Some of the available options are:
- Death Benefit – the survivor can take the full death benefit and do something else with those funds.
- Fixed Amount/Systematic Withdrawal – set a monthly payment amount to last as long as your money does. You can outlive these payments.
- Fixed Period or Period Certain – set a payment period – 10 years, 20 years – and receive payments of the amount your assets will provide for that period. If you die before the period expires, your beneficiary will receive the remaining payments.
- Joint and Survivor Life – Payments continue as long as either of you is alive. Payment size is generally reduced because of the extended payment schedule.
- Life Only – Payments cease when you die. You may die too soon and not get as much as you can have or live a very long time and win your bet with the insurance company. In either case, your surviving spouse sees nothing more once you pass away.
- Life with Period Certain – This guaranteed term policy gives you an income stream for life with a minimum number of years, e.g., for life with at least ten years guaranteed. Benefits will be paid for the period certain if you die before it ends.
- Lump Sum Payment – This option is usually best avoided unless you roll over into another retirement vehicle.
You may also be concerned about leaving assets to others than your spouse. You can often use life insurance policies to produce benefits for these individuals and causes, especially if you begin purchasing permanent life insurance policies at an early age.
Final Thoughts on Retiring at 62
Retirement can be an extremely happy time in your life. Suddenly free from a full-time work schedule, you can do whatever you like.
Your time is yours, and with prudent prior planning, you can afford to do all the things on your retirement bucket list. Keep the following in mind as you work your way toward 62.
- Plan Your Time. Believe it or not, many people miss the structure and busyness of a job and its social aspects. You can only binge-watch so much television and read so many books before you will crave more activity. Think about volunteer opportunities or even consider a part-time job. In the latter case, however, make sure to monitor your income limits while under FRA
- Plan Your Income. Don’t just hope for the best and rely on Social Security. Retirement planning takes work and concentration on the long-term goal. Find a financial professional you like and trust, and work with that individual to plan for your income between 62 and 65 years – and after that – to be as sure as possible that you won’t outlive your assets.
- Plan for Social Security. Don’t just take Social Security because you can. Look at the benefits versus the costs of waiting, talk with your financial professional and find your break-even point. Keep in mind that your benefit will also be your surviving spouse’s benefit, so consider those needs as well.
- Plan for Healthcare. To recap, Medicare won’t cover everything. First, you can’t have it until you are 65, and then its coverage is limited. You will need a Medigap plan or other optional coverage and need to plan for those costs. Medicare also doesn’t cover long-term care; you need to cover that possibility.
- Plan for the Unplannable. We all know that life throws the unexpected at us – fires, hurricanes, catastrophic illnesses, any and all of these can throw the best-laid plans into chaos. Work with your financial professional to anticipate these significant crises to the extent you can. You can’t live your life focused only on catastrophe, but if you have planned for it and made the best financial contingency plans you can, you will live with more calm and confidence.
Remember, retiring early is – in most cases – a free choice that allows you to enjoy the fruits of a well-planned work life. Take the time to plan your retirement, and enjoy those years from 62 to 65.
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