6 Signs You're Ready to Retire Early

They're questions nearly all young and middle-aged workers have asked themselves: Should I leave my job and retire early? What would I need? How do I know I'm ready?

If you're considering retiring early, you'll forego not only the headaches of working, but also the additional money earned that could have made your retirement even more comfortable. To help you decide, here are six signs you may be able to retire early instead of continuing to work.

If your mortgage is paid off and you don't have any loans, credit lines, large credit card balances or other debt, you won't have to worry about making large payments during retirement. This leaves your savings and retirement income available to enjoy life after work, and free to use in the event of an emergency, rather than having it tied up in paying off large bills.

You planned, set a goal for retirement savings and now your investments meet or exceed the amount you were hoping to save. This is another good sign you could take early retirement. However, keep in mind that if you do leave work several years before you planned to, your savings must be enough to cover these additional retirement years. If you didn't set up your retirement savings plan for an early retirement, you will need to recalculate the length of your savings, including these additional years. Also, depending on your age, you may not yet be eligible for Social Security or Medicare. Your savings will need to cover your expenses until you reach the eligible age.

"Think 'Rule 25.' Prepare to have 25 times the value of your annual expenses," says Max Osbon, partner at Osbon Capital Management in Boston, Mass. "Why 25? It's the inverse of 4%. At that point, you only need to achieve a 4% return per year to cover your annual expenses in perpetuity.”

No one likes to pay unnecessary penalties, and early retirees going to a fixed income are no different. If your retirement savings include a 457 plan, which doesn't have an early withdrawal penalty, retiring early and withdrawing from the plan won't cost you extra in penalties; but take note – you'll still pay income tax on your withdrawals.

There's also good news for wannabe early retirees with 401(k)s. If you continue working for your employer until the year that you turn 55 (or after), the IRS allows you to withdraw from only that employer's 401(k) without penalty when you retire or leave, as long as you leave it at that company and don't roll it into an IRA. However, if your 59th birthday was at least six months ago, you're eligible to take penalty-free withdrawals from any of your 401(k) plans. These policies generally apply to other qualified retirement plans besides a 401(k), but check with the IRS to be sure yours is included.

"There is a caution, however: if an employee retires before age 55 [except as noted above], the early retirement provision is lost, and the 10% penalty will be incurred for withdrawals before age 59-1/2," says James B. Twining, CFP, founder and CEO of Financial Plan, Inc., in Bellingham, Wash.

A third option for penalty-free retirement plan withdrawals is to set up a series of substantially equal withdrawals over at least five years, or until you turn 59-1/2, whichever is longer. Like withdrawals from a 457 plan, you'll still have to pay the taxes on your withdrawals.

If your retirement plans include any of the above penalty-free withdrawal options, it's another point in favor of leaving work early.

Healthcare can be incredibly costly, and early retirees should have a plan in place to cover health costs during the years after retiring and before becoming eligible for Medicare at age 65. If you have coverage through your spouse's plan, or if you can continue to get coverage through your former employer, this is another sign that early retirement could be a possibility for you. Take a look at the cost of an ambulance ride, blood test or monthly, non-generic prescription to get an idea of how quickly your health costs can skyrocket. 

Another option for early retirees is to purchase private health insurance. If you have a Health Savings Account (HSA), you can use tax-free distributions to pay for your out-of-pocket qualified medical expenses no matter what age you are (though if you leave your job, you won't be able to continue making contributions to the HSA). It is too early to say how health insurance and its costs will change and how affordable private healthcare will soon be, given President Trump’s and the Republican Congress's goal of repealing the Affordable Care Act. Keep in mind that COBRA may extend your healthcare coverage after leaving your job, though without your former employer's contributions to your insurance coverage, your costs with COBRA may be higher than other options. To learn more, see What You Need to Know About COBRA Health Insurance.

Retirees living on fixed incomes including pensions and/or retirement plan withdrawals usually have lower monthly incomes than they did when they were working. If you have already practiced sticking to your retirement income budget for at least several months, then you may be one step closer to an early retirement. If you haven't tried this yet, you may be in for a shock. Test out your reduced retirement budget to get an immediate sense of how difficult living on a fixed income can be.

"Humans do not like change, and it is hard to break old habits once we have become accustomed to them. By 'road-testing' your retirement budget, you are essentially teaching yourself to develop daily habits around what you can afford in retirement," says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of "Index Funds: The 12-Step Recovery Program for Active Investors."

Leaving work early to spend long days with nothing to do will lead to an unhappy early retirement, and can also lead to increased spending (shopping and dining out are sometimes used to fill the time). Having a defined travel, hobby or part-time employment plan or even the outline of a daily routine can help you ease into early retirement. Perhaps you'll replace sales meetings with a weekly golf outing or volunteering, and add daily walks or trips to the gym. Plan a long-overdue trip, or take classes to learn a new activity.

If you can easily think of realistic, non-work-related ways to enjoyably pass your days, early retirement could be for you. In the same way that you test-drive your retirement budget, try taking a week or more off work to spend your days as you would in retirement. If you become bored with long walks, daytime TV and hobbies within a week, you'll certainly get antsy in retirement.

When it comes to deciding if you should retire early, there are several signs to watch for. Being debt-free, with a healthy retirement account that will support your extra years not working is critical. In addition, if you can withdraw from retirement accounts without penalty, get access to affordable healthcare coverage until Medicare kicks in and have a plan to enjoy your time not working while living on a retirement budget, you just may be ready to retire early. The best way to be sure you can successfully make the transition is speaking with your financial professional.