Preparing for Early Retirement
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Those who plan an early retirement need to take steps to preserve their assets in the face of shrinking resources and ever-increasing costs. Our North Carolina estate planning lawyers reviewed the consequences of drawing too soon on IRAs, but now changes in our nation’s health care system will affect health care costs.
The Affordable Care Act, also known as Obamacare, will change the lives of many Americans—and affect the amount of money retirees spend on healthcare. Although the Affordable Care Act is a federal program, there will be state-by-state differences in available programs. Expanding Medicaid coverage is part of the plan, however the Triangle Business Journal recently reported that North Carolina will not expand Medicaid.
How can early retirees prepare?
Delay Retirement Distributions. Instead of pursuing early withdrawals from retirement accounts, try to postpone them until Required Minimum Distributions (RMDs) start (after age 70 ½). Be careful when tapping into a converted Roth IRA. You may be obligated to pay a 10% penalty if you don’t wait five years after your conversion. The tax requirements are not the only consequence, the additional income could make you ineligible for benefit programs. For example, during retirement years seniors may need to take advantage of federal benefits for housing or health needs. If distributions are taken early from retirement accounts, income levels may disqualify individuals from these programs. Delay Social Security benefits as well until necessary as this added income could also affect your eligibility for other benefits. Check with your financial planner to learn about investment strategies that will allow you to benefit from your savings now in order to save retirement accounts and Social Security for later in retirement.
Medicaid Trusts. Medicaid trusts protect investments and real property for individuals who plan for a potential future in a nursing home. These are used by individuals who have assets greater than Medicaid limits, and would otherwise be ineligible for benefits without this special trust.
Long-term care insurance. Learn what Medicare covers in nursing homes and what expenses you will be required to cover. Choosing the right long-term care policy for your needs will add more possibilities to your budget for an early retirement.
Purchase the right retirement home. When choosing a second home that you intend to make your retirement home, find a property that is well within your budget so that you will have little to no mortgage when you retire. Before buying, learn the state’s income tax requirements. If you have earned a pension or retirement benefits in another state, both your original state and your retirement state may impose an income tax. Be prepared for this added expense or work with a CPA or tax attorney to choose a retirement state with favorable tax laws.
Plan early. The sooner you start to plan for an early retirement, the better prepared you will be, as your retirement and investment accounts will have longer to compound and grow.