Wednesday, March 28, 2007

Risks of retiring early

What define early retirement? I think that anyone retiring before 62 is retiring early. At 62 people are able to collect social security, which will supplement their retirement income. Another important age is 65, when Medicare kicks in and provide medical coverage for free. However what are the risks of retiring sooner?

People think the biggest risk of retiring early is running out of money. Which I think is a valid concern. However I think this risk can minimized by proper planning, correctly analysing spending, and learning to live within your means early in life.

The single biggest risk I see of retiring early is not having medical insurance. What you say? Well think about it, if you retire at 55, you will be responsible to cover yourself and your spouse as individual's, not through a group plan from work you no longer will have access too. This needs to be your major form of insurance until Medicare kicks in. Also you probably will forced to buy a high deductible health plan (HDHP) to save money because a regular medical health plan at 55 will be too expensive. What that means is you will pretty much pay all medical bills out of pocket, except for catastrophic illnesses.

I priced the average HDHP for a couple that's 55, in great health with a $5k deductible. They will be paying about $500-600/month for their medical premium. That means about $6-7k/year just for catastrophic coverage. This does not include dental, nor does it cover prescriptions. Plus before any insurance options kick in a $5k deductible must be meet annually, and the plan only cover 50% of expenses. If you were to want a more comprehensive plan that cover say 80% it would cost $800-1000/month or $10k-12k/year, again with a $5k deductible.

Thus I think the biggest risk in retirement is affording your medical needs. You not only have to buy catastrophic health insurance, but you must be prepared to cover your own preventative care annually out of pocket. You must be ready to pay for prescription drugs once a $20 co-pay instead $100 or $200/month. You must pay for vision or dental services entirely out of pocket.

So when planning, you must account that though a mortgage payment may be gone, it's possible that it will be replaced by a more expensive medical premium.

Another risk in retirement is the cost of long term care insurance. Buying a policy to ensure your care in a nursing home facility can run a few thousand a year. Also paying the property taxes on your house, which probably has increased substantially in value could put your retirement savings at risk.

All these factors should be considered when retiring early. However, many retirees today were able to enjoy early retirement because they were covered by employed paid health insurance and pensions for life.


broknowrchlatr said...

Nice Post. It is important to keep this in mind as this can certainly be the biggest risk in retiring a few years earlier.

I think my carnival entry on investing in HSAs can mitigate this risk pretty well, assuming you can afford the main costs of retirign earlier.

Living Almost Large said...

You have to be in good health to make it worth while to use a Health Savings Account. If you get a high deductible health plan it's cheaper, but you might pay $5-10k/year out of pocket for routine stuff. And if you go to the doctor a lot, it'll addup fast. Plus I'm not even sure the HDHP will cover you unless it's catastrophic like MS, cancer, etc. Everything is your responsibility?