Insurance is a must if you’re retiring early

The average Medicare recipient spent $480 on medications in 2000, according to a study by the American Association of Retired Persons, and that's only an average. Medicare reforms recently approved by Congress will offer some help in time. But still, as you get older, you're going to spend more.

Life insurance

If you have enough money to retire early, chances are you've got enough to pay for your own funeral and leave a little something for your kids, who are probably out on their own and self-sufficient by now, anyway.

Life insurance is generally meant to replace your income when you die, but if you're retired, you're not going to have any income to replace. Still, it may be good to have enough insurance to pay off any outstanding debts. It also gives you the freedom to spend your assets as you choose while you're alive, knowing your heirs will at least get the insurance when you die.

"If you keep paying the premium, it will be an inheritance, so it takes some burden off of trying to preserve assets," Johnson says. "For some people that's really important. It is their legacy to be able to do something with their money now and still leave something."

If you're going to hold on to your life insurance, consider getting it out of your estate, says Robert Doyle, a CPA with Spoor, Doyle & Associates in St. Petersburg, Fla.

"If you've got a $2 million estate and a $1 million life insurance policy, when you die you're taxed for a $3 million estate," Doyle says. Better by far, he says, to have the life insurance policy go directly to a trust, so you're only paying taxes on a $2 million estate.

Long-term care insurance

Long-term care in a nursing home can cost tens of thousands of dollars a year. Long-term care insurance to cover that cost runs about $1,100 a year if you buy your policy when you're in your late 50s or early 60s, according to the Health Insurance Association of America.

The ugly truth is that while you may be fit as a fiddle now, in 30 years you may not be quite as healthy. Will you have the assets to cover that kind of cost then?

"For your own peace of mind, knowing big chunks of your estate will be gobbled up by potential nursing home costs 40 years from now, you may feel better if you just buy the stuff," says Reginald Tilley, a certified financial planner with Appropriate Balance Financial Services in Bellevue, Wash.

Feelings aside, if you've got an estate worth a million dollars, you realistically could pull 6% or 7%, or $60,000 to $70,000 a year, off of that to live on, says Johnson. That would be enough to cover the costs of long-term care, even if you and your spouse both ended up in a nursing home. If you have less than $1 million and you want to leave something to your heirs, though, it might be a good idea to look into the insurance.

"People who have $200,000 are understandably proud of that nest egg," Johnson says, "and they might want to consider long-term care insurance because they don't want to see it disappear in the final few months of life."

Home and auto insurance

People who retire also can get about a 10% cut in the cost of homeowner's insurance, because they tend to maintain their homes well, spot fires sooner and deter burglars, all of which drive down insurance costs.

According to John Spagnuolo, spokesman for the Insurance Information Institute, drivers over the age of 55 who take a refresher course are eligible for a 10% to 20% discount on most auto insurance.

After age 75, however, you face the prospect of higher premiums.

"You're a very high risk as a teenager," Spagnuolo says. "You improve over time to become less of a risk between the ages of 45 and 65. Yet by the time you are in your mid- to late 70s, you're once again a high risk."

That's because the rate of automobile fatalities starts to rise for drivers age 75 and above. Plus, elderly drivers are more fragile, and therefore more likely to be severely -- and expensively -- injured in an accident, which drives premiums back up.

Still, that gives you a decade of good rates. And whatever you save can be spent on something more fun. Like greens fees.

Updated July 29, 2008

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