If you’re a school employee and dream of retiring early, planning now can help you reach your goal. Here are some tips to help you successfully navigate your exit strategy.
Calculate Your Future Cost of Living
Most experts agree you’ll spend approximately 80% as much in retirement as you do while you’re still working. Compare your current living expenses with those you expect to have in the future. Housing costs, such as mortgage payments or rent, may be a big part of your budget. If you think these costs will be too high, consider downsizing or relocating to a more affordable area. Also, think about how your travel and leisure activities might change and what these will cost.
Healthcare Costs
Healthcare is another expense you’ll have to plan for. If you retire before age 65, you won’t be eligible for Medicare, so you’ll need to find another solution. California school employees can typically apply for Cal-COBRA, which extends your healthcare benefits up to 36 months. Many school districts also offer retiree supplemental health coverage, but plans vary, so review the details of yours. You can also buy private insurance, obtain coverage from the Health Insurance Marketplace or get coverage through a spouse’s employer.
Consider out-of-pocket medical expenses and purchasing long-term care insurance. If you plan to get long-term care coverage, purchasing it in your mid-50s is best; it may be difficult to qualify if you are older or have pre-existing medical conditions.
Factoring in Your Pension
Your school district’s pension plan is a vital component of your retirement strategy, but a pension won’t cover all the income you’ll need to live comfortably once you stop working. That’s because your pension replaces 50%–60% of the income you’ll need. That means you’ll potentially need to save 40% on your own in a tax-advantaged retirement solution to enjoy the same standard of living. These include 403(b) and 457(b) Plans, Traditional or Roth IRAs.
If you do have a defined benefit plan, you’ll get a fixed monthly benefit based on your years of service and salary. Learn now how your pension is calculated, including any penalties or reduced benefits that might apply if you retire early. For instance, retiring before a certain age or before being fully vested (which occurs in five years for CalPERS and CalSTRS), could affect your monthly benefit.
Build a Financial Plan
Before you decide when you’ll retire, assess your current savings and investments. A detailed financial plan can help you address these challenges. This includes having a detailed budget, including other potential income sources, such as part-time work, rental income or side businesses. Additionally, inflation could potentially erode the value of your money over time. Living longer means your savings need to last longer too.
Other Costs to Consider
Early retirement can also affect your tax situation. Understand how your income sources will be taxed and whether you might move into a different tax bracket. Address any outstanding debts, such as student loans, credit card balances or car payments, to ensure they won’t be a financial burden. Also, having a robust emergency fund is crucial to cover unexpected expenses and keep you from going into debt.
Lifestyle and Well-Being
Retirement is more than just financial security. Reflect on what you’ll do with your time in early retirement and how it aligns with your goals. Maintaining social connections and community involvement can enhance your quality of life. Find ways to improve your mental and physical health. Staying physically active and socially engaged can help you enjoy a fulfilling retirement.
Steps to Take Now
- Consult a Financial Advisor: A financial advisor can help you create a personalized retirement plan that considers all aspects of your financial situation. Many credit unions offer professional financial guidance as a benefit of your membership.
- Review Your Benefits: Thoroughly review your retirement benefits and any early retirement options available through your district.
- Simulate Early Retirement: Try living on your projected early retirement budget for a few months to see if it’s feasible and identify any adjustments you need to make.
- Stay Informed: Keep up to date with changes in retirement laws and regulations that might affect your plans.
Early retirement can be a rewarding and fulfilling experience, but it requires careful planning and consideration. By understanding your pension, financial needs, cost of living, healthcare costs and other expenses, you can make an informed decision.