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 before they had originally intended to.1 If you or your partner retire early, it’s important for couples to prepare for going from two incomes to living on one income. Here are key factors you should consider during early retirement, and tips to help you successfully navigate this next chapter.
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 healthcare services.2 As you age, you need to have solid health insurance to help cover medical expenses for any health issues that arise. If you’re unable to get coverage from your spouse or partner’s policy, you should 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 where you can buy health insurance. Some of these policies are more affordable and robust than others, so 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 that you can purchase directly. This is usually the costliest option, but it 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 help provide for your family members, pay off outstanding debts, cover mortgage payments, leave a legacy or pay for funeral and burial expenses.
Some employer-provided life insurance policies include a provision that will allow you to convert your policy to an individual policy. Alternatively, you can let your policy lapse and then purchase a new life insurance policy on your own. Either way, it’s important to know that life insurance is a critical need, especially if you retire early.
A solid policy can support your family after your passing and help them avoid financial hardships. For example, life insurance can help pay for:
- A memorial service, burial and other end-of-life expenses
- A mortgage so your family can stay in their home
- Outstanding debt, whether it’s credit card debt, an auto loan or a business loan
- The care of children, including college expenses
- A legacy for your family
- Expenses for aging parents or loved ones with disabilities and complex health issues
Even after you retire, it’s important to protect your family’s financial future. Life insurance can give you peace of mind knowing that you’re still providing for your family in the event you’re no longer there.
Prepare yourself financially
When retirement happens suddenly and unexpectedly, you may not be financially prepared to go from two incomes to one. Fortunately, there are steps you can take to help get your finances in order so you and your family can live comfortably throughout this chapter of your life.
Once you’ve secured insurance, it’s time to review your budget. Sit down with your spouse or partner and list out your key expenses. Usually this includes your mortgage or rent, utilities, groceries, medical expenses, and perhaps, dependent care. If needed, look for extraneous expenses that can be cut out. Finally, plan for travel expenses and hobbies you may pursue during early retirement. During this unique time in life, it’s important to find joy and pursue the activities you love.
You may want to 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 solely on one income, or if you still want to be in the workforce, a part-time job may be a good solution. Consider working in a freelance or consultative role, or take on a part-time trade. You can also seek an hourly, part-time position. This is a great time to pursue work that has always intrigued you. If you have a hobby or talent, consider how you could earn income from it. Not only can working part-time be enjoyable and a chance to earn additional income, but it can also keep 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 will get at 65 and 70 years old. Even so, if you’re eligible, Social Security benefits can help you reclaim some of your 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 advisor to see what options are best for you.
Collecting a pension
If your workplace offers a pension, it’s important to know how and when you’ll receive a payout. Most employers will allow you to access your pension at the typical retirement age (which may be 65), but some will let you receive funds as early as 55 years old. If you’re in your mid-50s, it’s worth asking if you can use your pension after leaving your job.8
If you can receive a payout, ask your employer if 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, you’ll need to carefully manage your spending going forward.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 any penalty. If you’re younger than 59½, however, you may have to pay a tax penalty if you withdraw money from the account.7 Speak with a financial advisor about your options for withdrawing funds and how to best proceed.
Using an annuity
A retirement annuity is another way to retire early and feel financially secure. If you open an annuity ahead of time and pay into it, you may be able to receive income on a monthly or yearly basis for the rest of your life. Usually, you pay into the annuity either in one lump sum or through regular payments.
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 are immediate and will pay out right away, or an annuity that has more flexibility concerning payment start date.
Annuities offer many benefits. Many people appreciate that annuities are 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 can help you live comfortably in retirement.9 Learn more about annuity options and talk to an Amica Life Annuity Specialist today.
Above all, with some careful financial planning and budgeting, it’s possible to live comfortably if you find yourself in early retirement and relying on one income. As you enter this next chapter, make sure to also focus on things that will bring you joy during retirement.
- Employee Benefit Research Institute. “2020 Retirement Confidence Survey Summary Report,” n.d.
- How Do Health Expenditures Vary Across the Population? Peterson Center on Healthcare Health System Tracker, 2019.
- A Departure Checklist for Your Unexpected Retirement, Forbes, 2020.
- When Does Medicare Coverage Start? Medicare.gov, n.d.
- What Happens To Your Life Insurance When You Leave A Job? Bankrate, 2021.
- 7 Reasons to Work Part-Time in Retirement, U.S. News and World Report, 2017.
- Navigating an Early and Unexpected Retirement During COVID-19, 2021.
- Ultimate Guide to Retirement, CNN Money, n.d.
- Retirement Annuities: Know the Pros and Cons, Investopedia, 2021.
- How to Save Money: 17 Proven Ways: NerdWallet, 2021.