A Helpful Guide to Living on One Income During Early Retirement
Today, more people are retiring early and unexpectedly. According to the Employee Benefit Research Institute, in 2020, 48% of workers retired earlier than they originally intended.1 If you or your partner retire early, plan and prepare to start living on one income in advance. Here are factors to consider in early retirement and tips to navigate this next chapter successfully.
Make sure you have health and life insurance covered as you retire
Health insurance coverage
If you have employer-sponsored health insurance now, you’ll want to secure a new policy to cover you in retirement. This is especially important as you age. People who are 55 and older make up only 29% of the population, but they account for 56% of spending on health care services.2 As you age, you need solid health insurance to cover medical expenses as urgent health issues come up. If you’re unable to get coverage from your spouse’s policy, consider the following:3
Extend your COBRA insurance.
If you recently left your job, you may qualify to extend your COBRA coverage, as well as your payments. Check with your employer and health insurer to see if this is an option.
Buy a policy from the health insurance marketplace.
All states offer exchanges to buy health insurance. Some of these policies are more affordable and robust than others – it’s important to shop around before deciding on coverage.
Go on Medicare if you’re eligible.
In general, you can obtain Medicare coverage at age 65. If you just turned 65, you’re in luck, and it should be relatively simple to get this government-sponsored insurance. You can purchase private Medicare supplement insurance, too.4
Purchase private health coverage.
Health insurance companies also offer individual and family policies to purchase directly. This is usually the priciest option, but may give you the best coverage. Call a health insurance professional to learn more about private health coverage – and to find out what policies are available to you.
Life insurance coverage
When your employment ends, you’ll likely lose your employer-provided life insurance coverage. These benefits typically expire at the end of the month, after your last day of work.5 But, if you’re like many Americans who are retiring early, you may still need coverage to provide for your family members, pay off debts, cover mortgage payments, leave a legacy or pay for funeral expenses.
Some employer-provided life insurance policies include a provision that allows you to convert your policy to an individual policy. Alternatively, you can purchase new life insurance on your own. Either way, it’s important to know that life insurance is a critical need, especially in early retirement.
After your passing, a solid policy supports your family and helps them avoid financial hardships. For example, life insurance can pay for:
- A memorial service, burial and other end-of-life expenses
- A mortgage for your family to stay in their home
- Outstanding debt (credit card, auto loan or business loan)
- Child care, including college expenses
- A legacy for your family
- Expenses for aging parents or loved ones with disabilities/complex health issues
Even after you retire, it’s important to protect your family’s financial future. Life insurance gives you peace of mind knowing you’re still providing for your family after you’re gone.
Prepare yourself financially
When retirement happens suddenly and unexpectedly, you may not be financially prepared to go from two incomes to one. Fortunately, you can get your finances in order so you and your family live comfortably in your new chapter of life.
Once you’ve secured insurance, it’s time to review your budget. Work with your spouse or partner to list out key expenses. Usually, this includes your mortgage or rent, utilities, groceries, medical expenses and perhaps dependent care. If needed, look for extraneous expenses to cut out. Finally, plan for travel expenses and hobbies you may pursue during early retirement. During this unique time in life, find joy in the activities you love.
Consider speaking to a financial professional about the following ideas:
- Refinancing your home
- Canceling unnecessary subscriptions
- Monitoring utility bills and investing in energy-efficient solutions
- Bundling cable, internet and phone bills
- Asking your insurer about auto and home discounts
If you’re not ready to rely on one income or if you still want to be in the workforce, a part-time job is a good alternative. Consider working a freelance/consultative role or a part-time trade. You can also seek an hourly, part-time position. This is a great time to pursue your passions. If you have a hobby or talent, think of how to earn income from it. Working part time is enjoyable, gives you the chance to earn additional income, and keeps you physically and mentally fit.6
Claiming Social Security
If you’re at least 62 years old, you can claim Social Security retirement benefits. Keep in mind, the amount you’ll receive will be less than what you’ll get at 65 and 70 years old. Even so, if you’re eligible, Social Security benefits help you reclaim some lost income. And you could combine this benefit with other solutions, like working part time or accessing your retirement account.7 Speak with a financial adviser to learn which options are best for you.
Collecting a pension
If your workplace offers a pension, figure out how and when you’ll receive a payout. Most employers allow you to access your pension at the typical retirement age of 65 years old, but some let you receive it as early as 55 years old. If you’re in your mid-50s, it’s worth asking to use your pension after leaving your job.8
If you can receive a payout, ask your employer whether you’ll receive monthly funds or a lump-sum payout. There are pros and cons to both. A monthly fund restricts how much you receive but is a steady and reliable source of income. Meanwhile, a lump-sum payout gives you access to all of the money. Just remember to carefully manage your spending if you go with the latter.7
Withdrawing from 401(k)s and IRAs
If you’ve been contributing to a 401(k) or Individual Retirement Account (IRA) and you’re at least 59½ years old, you may be able to access the funds without a tax penalty. However, if you’re younger than 59½, there are ways to withdraw without a tax penalty. 7 In all cases, however, the funds are subject to income tax. Speak with a financial adviser about best practices.
Using an annuity
A retirement annuity is another way to retire early and feel financially secure. If you open and pay into an annuity ahead of time, you may receive income on a monthly or yearly basis for life. Usually, you pay into the annuity either in one lump sum or through regular payments. You can also purchase an annuity with the lump sum from your 401(k) plan.
In general, there are two types of annuities to consider:9
The amount earned is based on a set interest rate. Your actual payment will depend on the amount invested and when you start receiving amounts.
In general, the amount you receive is based on how the investments in the annuity (including mutual funds or stocks) perform and when you decide to start receiving payments.
Finally, you can also choose between annuities that immediately pay out or an annuity with more flexibility concerning payment start date.
Annuities offer many benefits. Many people appreciate that they’re tax-deferred (meaning you don’t owe taxes on them until it’s time to withdraw the funds). And all annuities have a lifetime income option that helps you live comfortably in retirement.9 Learn more about annuity options and talk to an Amica Life Annuity Specialist today.
It’s possible to live comfortably in early retirement while relying on one income. It takes careful financial planning and budgeting. As you enter this next chapter, don’t forget to focus on what brings you joy.
1 Employee Benefit Research Institute, "2020 Retirement Confidence Survey Summary Report," 2021.
2 How Do Health Expenditures Vary Across the Population?, Peterson Center on Healthcare Health System Tracker, 2021.
3 A Departure Checklist for Your Unexpected Retirement, Forbes, 2020.
4 When Does Medicare Coverage Start?, Medicare.gov, 2022.
5 What Happens To Your Life Insurance When You Leave A Job?, Bankrate, 2021.
6 7 Reasons to Work Part-Time in Retirement, Debt, 2021.
7 Navigating an Early and Unexpected Retirement During COVID-19, Consumer Financial Protection Bureau, 2021.
8 Ultimate Guide to Retirement, CNN Money, 2022.
9 Retirement Annuities: Know the Pros and Cons, Investopedia, 2021.