Planning for early retirement needs a lot of thought. There are some common mistakes you need to avoid in order to have a successful early retirement. One of the first things you need to understand is the relation between Social Security and the calculation of your retirement benefits. The Social Security Administration (SSA) calculates the monthly benefits on average of salary during thirty five most prominent years of your work. If you retire before thirty-five years of work then the non-working years will be considered as zeros.
It is necessary to understand exactly when you should start receiving the benefits of Social Security. You can start collecting Social Security benefits when you are at the age of 62. But the age of 62 is not counted as “full retirement age”. If someone was born before the year 1937 then the full retirement age would be 65. If someone was born after 1960 then the full retirement age would be 67. That means if you reach the age of 65 or 67 then only you are eligible to receive full retirement benefits. Whereas if you start collecting benefits from the age of 62 then you would be getting benefits only partially. On an average you would be getting twenty five percent less benefits as compared to availing it at full retirement age.
While planning for early retirement most people don’t consider the effect of inflation on their savings amount. Annually the average rate of inflation is about three percent. If this is to be applied to the savings a person makes he will end up with a substantial amount less thirty or forty years down the line. With that rate of inflation a million dollars in the year 2008 will be worth less than half after a period of thirty years. If suppose the rate of return on your investment is five percent then over the years it will be rendered to only two percent. That’s why it is very important to keep the factor of inflation also in mind when you are planning to retire early.
Some other important pointers you need to keep in mind when retiring early would be regarding your taxes. When you are investing in 401(k) and the IRAs, you should be careful of the penalties when you withdraw your money early. The lowest age when you can withdraw from the 401(k) s and the IRAs is 59.5. The penalty to withdraw early would be ten percent which is very high. But of course there are certain exceptions to this. You can withdraw early before the age of 59.5 in cases such as disability or if you are buying your first home or medical exceptions.
If in some case you want to come out of retirement and start working again, then you would be liable to pay income tax on your social security benefits. If you are filing for yourself and you are earning anywhere between $25,000 to $34,000, then you must pay fifty percent income tax on your Social Security benefits. If you are earning more than $34,000 per annum then the amount is even higher that is eight five percent.