Early Retirement? 10 Planning Items to Consider
If you’re considering retirement before age 65, it is important to keep in mind the minimum age requirements that apply to:
- accessing funds or income sources
- securing quality health care coverage prior to Medicare eligibility
- planning for a longer-than-average retirement
Below are 10 financial planning items that anyone considering early retirement should review and discuss with their financial advisor and tax professional.
Easing into Retirement
More workers are transitioning into retirement by gradually reducing their hours, rather than stopping work completely. Those considering early retirement may be able to ease into part-time employment by gradually reducing their workload. If your current employer does not offer a phased retirement option, you may want to consider consulting work.
Part‑time income during early retirement can help ease the pressure on your investment portfolio and potentially extend the longevity of your retirement income. This part-time income can also help you delay taking pension, Social Security, or annuity payments. This approach can also support early retirement income strategies by helping to provide greater flexibility in how and when you draw from your investments. period. This part-time income could also help to delay any pension, Social Security, or annuity payments that could result in increased income payments the longer you delay collecting.
Avoiding a Big Tax Bill: 8 Ways to Plan Ahead
Bring your taxes in line with these 8 smart “above-the-line” and “below-the-line” deductions as part of your financial planning for early retirement.
Health Insurance
Medicare is available once you turn 65, but how will you fund health care expenses if you are retiring early before 65? Employer-sponsored insurance plans allow you (and possibly your dependents) to stay on your current employer’s insurance plan under COBRA for up to 18 months. Note that employers with less than 20 employees are not subject to the insurance continuation provisions of COBRA.
If you are married, you could secure coverage under a spouse’s employer-sponsored insurance plan. Private insurance is also available through the marketplace, though the cost may be prohibitive.
When considering health care planning for early retirement, it’s important to understand your coverage options and how costs may impact your long-term financial plan.
If you’re thinking of retiring early, funding a health savings account (HSA) now could help fund your future health care needs. These “triple tax advantaged” accounts can potentially lower your current tax bill, while helping to fund a reserve for future health care costs and premiums.
Social Security
Once you become eligible for Social Security, deciding when to start claiming benefits plays an important role in your overall financial picture. Claiming at the right time can help influence income planning, taxes, and how long your assets last. While you may retire early, starting benefits at age 62 may not always align with your long‑term goals. Factors such as your health, your ability to rely on portfolio assets, and the tax treatment of distributions can help inform the decision.
Keep in mind that the Social Security Administration bases benefit estimates on the assumption that you continue working through your full retirement age (FRA). If you retire earlier, lower lifetime earnings can reduce your benefit, in addition to the standard reduction that applies when you claim benefits before reaching FRA.
The Rule of 55 and Penalty-Free Retirement Plan Withdrawals
According to IRS guidelines, you can withdraw funds from your current employer’s 401(k) or 403(b) plan prior to age 59 ½ with no 10% tax penalty. This rule only applies to your current employer’s retirement plan. Any retirement plans with a former employer need to roll into your current plan to qualify for penalty-free early withdrawals.
If you leave the job on or after the year you turn 55. But if you return to the workforce, this penalty-free withdrawal option is no longer available.
There is an exception called the 72(t) option which allows withdrawals from your 401(k), 403(b), or IRA at any age without any penalty. This option is called SEPP (substantially equal periodic payments), and these payments are not subject to the 10 percent early withdrawal penalty. Once these distributions begin, they must continue for five years or until you reach age 59 ½, whichever comes later.
Just because you’re eligible to take a penalty-free early withdrawal, does not necessarily mean that it is in your best interest. You should carefully evaluate this strategy as part of your early retirement planning to help ensure it aligns with your long-term income and tax goals. Consult with your financial advisor to help you develop a tax-efficient cash flow plan that complements your early retirement goal and specific financial circumstances.
Pension Plans
Understand the details of any pension or defined benefit plan payments you’re eligible to receive, as age requirements may determine when you can begin distributions. Payout options can be complex and plans often offer several ways to structure payments. If you’re married, consider whether a joint payout that provides an annuity for a surviving spouse makes sense. Also evaluate whether the plan includes a guaranteed payment period. Reviewing the risks and benefits of each option can help you make a more informed decision.
Employer Retirement Plans
Take the right steps to prepare for early retirement with any employer-based 401(k) or 403(b) plans: Review the elections you need to make and decide whether rolling those assets into an individual IRA makes sense, especially if it expands your investment options. If you hold employer stock through a stock purchase or stock option plan, evaluate your choices carefully, as certain distribution strategies may allow you to manage taxes more efficiently.
Retirement Income
Prepare for retirement by gaining a clear understanding of where your monthly cash flow will come from and how it will help support your lifestyle. Understanding the tax implications of each income source can also play an important role in managing cash flow more effectively.
Income Taxes
How do you plan to pay your income taxes in retirement? Because they’re not withheld from a paycheck, you may need to estimate taxes or determine how much to withhold from pension payments, IRA withdrawals, and Social Security payments. In the early years of your retirement, you may want to consider a Roth conversion between your retirement date and age 75, when your required minimum distributions begin.
Professional Management
As you prepare for retirement, take time to decide whether you want to manage your investments and retirement plans on your own or work with a financial professional. A financial advisor can help coordinate your portfolio, manage risk in line with your goals, and connect decisions across taxes, income timing, and investment strategy. With the right guidance, you can address questions about how your tax situation may change, when to begin pension or Social Security income, which risk level fits your plans, and how charitable giving and tax planning may shape your retirement years.
Why Work with Savant Wealth Management for Early Retirement Planning
Planning for early retirement involves more than deciding when to stop working. It requires coordination across income strategies, taxes, health care, and long-term financial goals. At Savant, our team works closely with clients to help build personalized strategies that support early retirement. From evaluating income sources to optimizing tax decisions, we take a comprehensive approach to help you move forward. If you’re ready to take the next step, schedule an introductory call with our team to discuss your goals and explore your options.
Frequently Asked Questions About Early Retirement
What should you consider when retiring early before 65?
When retiring early before 65, it is important to consider how you will generate income, how long your retirement may last, and how you will cover health care costs before Medicare eligibility. Planning ahead for these factors can help support a more stable transition into retirement.
How do you create income in early retirement?
Creating income in early retirement often involves drawing from investment accounts, retirement plans, or part–time work. Understanding where your cash flow will come from and the tax implications of each source is key to maintaining long–term financial stability.
How do you plan for health care in early retirement?
Planning for health care in early retirement includes evaluating options such as COBRA coverage, private insurance, or a spouse’s employer plan. Funding accounts like an HSA in advance can also help cover future medical expenses and premiums.
When should you take Social Security if you retire early?
Taking Social Security early can reduce your overall benefit amount. Many individuals benefit from delaying payments depending on their health, financial situation, and ability to draw income from other sources. Evaluating these factors can help determine the right timing.
What are common mistakes in early retirement planning?
Common mistakes include withdrawing funds too quickly, failing to plan for taxes, underestimating health care costs, and lack of a clear income strategy. Taking a structured approach to planning can help you avoid these issues and help support long–term financial health.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Richard P. Ellenberger
Financial Advisor
CFP®, AIF®