Early Retirement: A Guide

A couple in early retirement enjoying the beach|

If you’re planning to take early retirement, a crucial first step is envisioning what you want your post-work years to look like. Will you become a globe trotter, traveling constantly? Will you buy a second home and split time between your current and new home? Will you spend more time with children and grandchildren? Will you throw yourself into philanthropic activities? 

Different visions have different price tags, which should guide your retirement planning process. 

“Early retirement is all about making sure that your money doesn’t run out before you do. That’s relevant, of course, for retirement at any time, but early retirement means there is a longer period of time in retirement—the longer the time, the greater the uncertainty,” says Sarah Lewis, CFP, CFE, managing director of Miracle Mile Advisors in Los Angeles. 

“The best way to think about what it takes to retire early is to develop an understanding of spending (must have and nice to have) as well as income sources,” Lewis says. ”This isn’t about budgeting, but about figuring out what it takes to live comfortably, allowing for potential cost increases (inflation) and contingencies.”   

Resources You’ll Need to Manage 

Although everyone’s resources are different, there are multiple core categories you’ll want to evaluate and plan for based on your age. That’s important since several retirement assets aren’t accessible until your late 50s or 60s.  

Before entering early retirement, make sure you’ve thought through the following issues: 

Health Insurance

“Most early retirees don’t fully consider the costs of replacing their health insurance,” says Chris Ward, managing member and chief compliance officer at EntryPoint Wealth Management. “One of the most common retirement dates is age 65, when Medicare will start coverage, giving retirees a built-in health insurance solution. So, if you plan to retire before age 65, investigate the cost of a health insurance policy for your medical needs before retiring,” he recommends. You’ll want to figure out how you’ll bridge that gap before you’re left without any coverage. 

Retirement Accounts 

Ward says, “If you plan on retiring before age 59.5, you won’t have easy access to your retirement accounts. You will need to take specific steps to either save in non-retirement accounts, which can provide flexible withdrawals, or be prepared to implement a particular IRS strategy to gain access to your retirement plans.” Lewis says you’ll also want to strategize “how to orchestrate the withdrawals from investment accounts to minimize taxes.  The less paid in tax means more money in the retiree’s pocket.” 

Social Security 

The earliest you can begin to collect Social Security payments is age 62, and more benefits become available the longer you wait. To get the most out of your benefit, you might want to delay taking it and live off your existing assets. “Taking [Social Security] early may plug the income/expense gap, but it may also permanently impair the income stream over time,” Lewis cautions.

Housing Expenses

One of the best strategies to employ pre-retirement is paying down debt. Ward says, “Pay down your mortgage or car loans to reduce your monthly expenses” so that you don’t have to make mortgage payments after your income level drops. You’ll also want to keep in mind that your home is also a financial asset you can potentially tap for a lump sum or monthly proceeds through a reverse mortgage

Managing Your Time  

After decades of being a full-time worker, downshifting to not working can be a shock to your daily routine, income, and relationships. To help extend your savings and investments, Ward recommends finding “inventive ways to improve your situation through part-time work.” The longer you keep income flowing into your household, the longer the life of your financial resources. 

The Realities of Early Retirement 

For many people approaching early retirement, what they’re most looking forward to is controlling their time—how they’ll spend their days, what they’ll do, and where and when they’ll do it. On the flip side, Lewis observes that “one of the big downsides of early retirement is when people find themselves out of the rhythm of work-life, [for example] contact with colleagues, learning something new, exchanging stories, etc.  Sometimes early retirees are so thrilled with the prospect of work being optional that they don’t think about how they will spend their days. Once the celebratory trip is made, they’ve caught up on sleep, various projects, etc., what’s next?” 

This is why thinking through how you’ll spend your days is important before taking the leap. According to Lewis, “The most successful early retirees have something they believe is important and compelling—volunteering, learning a new skill or taking a class, babysitting grandchildren, working part-time for fun, building something, etc.”   

Planning for your mental and financial well-being and recognizing the realities is essential to ensuring early retirement is the right decision for you.

Find out how to use your home equity to live your best life

Learn More
CTA Image