5 Things That Could Wreck an Early Retirement

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The Financial Independence/Retire Early (FIRE) movement is hot right now. People working toward FIRE are hoping to retire in their 40s and, in some cases, even their 30s. And while the focus of FIRE is to produce financial freedom and not ascribe to a strict definition of the term "retired," it is a tantalizing goal many find worth chasing.

However, if not properly planned, early retirement can be more of a burden than freedom. The earlier you retire, the longer your money has to last. Your life mitigation plan also has to be more solid and thorough than those who retire at the standard age. Below are some things that could derail your finances if you retire early. (See also: 8 Things Millennials Can Do Right Now for an Early Retirement)

1. Health crisis

Proper diet, adequate amounts of exercise, and regular doctor visits are the trifecta of good health. However, genetics and fate are the dynamic duo that can override your diligent efforts of maintaining good health. Failing to properly plan for a health crisis leaves the door gaping open for financial hardship during early retirement.

According to a Fidelity analysis, the average couple retiring at traditional retirement age (65) can expect to spend $275,000 on health care during their retirement years. If you retire at 45, you have an additional 20 years' worth of potential expenses for which to plan. You have to factor this additional cost into your overall retirement number.

Financial experts strongly advise that you keep health insurance coverage during retirement to help offset the cost of a serious illness or injury. There are coverage options available through private companies — which can be pricey. You should also explore Affordable Care Act (ACA) special coverage options. The ACA provides income-based premium subsidies which are based on your modified adjusted gross income during retirement. In addition to keeping health insurance, you must also ensure that you've adequately accounted for out of pocket health costs when determining how much you need during retirement.

2. Failing to live on a budget

One of the biggest myths many retirees fall prey to is the notion that you'll spend less money during retirement. The truth is it is rare that your cost of living will decrease as dramatically as you think it might. This is why living by a strict budget is financial life or death for the early retiree. (See also: 9 Unexpected Expenses for Retirees — And How to Manage Them)

Getting older also comes with hidden expenses. You spend more time engaging in leisurely activities — which usually comes with a cost. You outsource chores as you age. And of course, health care expenses increase with age. Budgeting and tracking expenses isn't just for working folks. Living frugally, budgeting, and strategic spending are habits that should follow you to your grave.

If you find that you are burning through your retirement funds quicker than expected, make sure you readjust immediately. This means you may have to scale back or even cancel some of the leisure activities and find ways to cut day-to-day spending. If an unexpected expense arises which consumes a large chunk of your funds, you may have to consider getting a side gig, working part-time, or rejoining the work force for a few years to replace the loss. You must proactively budget and track your funds to ensure they last. (See also: How Much Can You Afford to Spend in Retirement?)

3. Inflation

Piggybacking on point two is failure to properly plan for and adjust for inflation. As you age, your dollar loses its elasticity. Your fixed cost of living expenses are slowly going to creep up over time. Retiring early means you have to deal with that creep a lot longer.

Your retirement budget and planning should include a yearly (or at least every two years) cost of living increase. Think about the things you do regularly and plan to spend more on those things as time goes on. Your medication, transportation, food, and clothing are going to cost more and failing to adjust your budget to accommodate the increase can prove to be a costly mistake long-term. (See also: 4 Ways to Protect Your Retirement From Inflation)

4. Becoming a caregiver

Boomerang children, caring for the grands, and providing for aging parents are some of the unexpected ways you can find yourself burning through your retirement funds. One of the primary purposes for chasing financial freedom — at least for me — is to be in a position to help others. Helping becomes a problem when a person's need exceeds your capacity.

This is even more true for those retiring early. You really have to be careful to ensure that your money lasts past your life span. If you have children and grandchildren, try to plan for things you know you want to assist with. Do you want to give your children a down payment on their first home? Pay for the grandkids to attend private school or even college? Provide long term-care for aging parents? Whatever you think you may want to do, set money aside for that purpose and don't touch it.

It is strongly advisable that you establish a "friends and family fund." This is money that you set aside specifically to help a loved one out of a financial jam. It can pay for health care, funeral expenses, the added cost of caring for your kids, grandkids, parents, or all of them. Most importantly, it can help offset the heightened cost of living that occurs when loved ones come to live with you for an extended period of time. It's better to live on less in order to set money aside for "just in case" in lieu of trying to adjust when life happens. (See also: How to Save for Retirement While Caring for Kids and Parents)

5. Incurring debt after retiring

One of the biggest mistakes you can make is to carry debt into retirement. Retiring with no debt can be a bit tougher when you retire early, but it should be your goal. You don't want to waste your precious resources making years of interest payments. You should aggressively work to eliminate all debt before retiring. You could even opt for a partial retirement and work part-time or get a side gig just to pay off your debt. (See also: 6 Great Retirement Jobs)

It's also ill-advised to incur new debt while retired. If you need to make home improvements, buy another car, or make another major purchase, try to do it with cash — and even then, proceed with caution. If you must use credit for any reason, make a deal with yourself to find some other means to finance the purchase. That may mean going back to work temporarily until the debt is paid.

You also should avoid taking on debt to help friends and family. Steer clear of co-signing — always — but especially during retirement when funds are limited. Helping friends and family members is one thing, but using debt to do it is a bad idea. If you can't afford to give it, you can't afford to lend it. In other words, if you need to be paid back, you really can't afford to loan the money. Consider gifting a portion of the money to the asker in lieu of lending them the whole amount. That way, they are not indebted to you, you haven't financially endangered yourself, and you provide assistance while simultaneously preserving the relationship. (See also: What to Do If You're Retiring With Debt)

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