Retiring early—before the traditional ages of 59½ or 65—can be an exciting goal. The allure of more free time, travel, and pursuing personal passions can be strong. However, early retirement introduces unique challenges that require careful planning. This guide explores key factors to consider when contemplating early retirement.
Retirement Income Planning
Can Your Portfolio Sustain a Longer Retirement? It is crucial to assess whether your investment portfolio can support this extended retirement period. Factors such as market volatility, inflation, and unexpected expenses can erode savings over time. Regularly reviewing your plan and investment strategy can help mitigate risks and help with long-term sustainability.
The first step is to estimate realistic retirement expenses; accurately projecting retirement expenses is vital. Consider:
- Inflation: Even modest inflation can significantly impact purchasing power over decades.
- Lifestyle Changes: Early retirees often engage in activities like travel or hobbies, which can increase expenses.
- Healthcare Costs: Without employer-sponsored insurance, healthcare can become a significant expense.
Creating a detailed budget that accounts for these factors can provide a clearer picture of your financial needs.
Withdrawal Strategies
Now that you understand what your retirement budget could look like, the next piece to consider is how you will obtain that income in retirement.
Understanding the 4% Rule and Its Limitations
The 4% rule is a guideline that suggests withdrawing 4% of your retirement portfolio annually, adjusted for inflation, to sustain your savings over 30 years. While a helpful guideline, it is not foolproof. Market downturns, unexpected expenses, higher inflation, or longer lifespans can deplete funds faster than anticipated.
Accessing Funds Before Age 59½
Withdrawing from retirement accounts before 59½ typically incurs a 10% penalty. However, exceptions exist:
- Rule 72(t): Allows for penalty-free withdrawals through substantially equal periodic payments. Here is some additional information from the IRS on Rule 72(t).
- Roth Contributions and Conversion Ladders: Direct contributions to a Roth IRA can be withdrawn at any time, tax- and penalty-free, which can be a flexible resource for retirement income for early retirees. A Roth conversion ladder strategy can allow you to convert funds incrementally over time from a Traditional IRA or 401(k) to a Roth IRA. However, each converted amount must remain in the Roth IRA for at least 5 years to avoid the 10% early withdrawal penalty.
- Brokerage Accounts: Taxable investment accounts can provide flexibility without early withdrawal penalties.
These are just a few of the options available to individuals when planning for income in early retirement. Consulting a financial advisor and a CPA can help navigate the options effectively and strategize a savings plan with retirement income withdrawals in mind.
Healthcare Before Age 65
Retiring before 65 means you will need to secure health insurance to bridge the gap until Medicare eligibility. Options include:
- COBRA: Continues employer coverage temporarily but can be expensive.
- ACA Marketplace Plans: May offer subsidies based on income, making them more affordable.
- Spousal Coverage: Joining a working spouse’s plan, if available.
Evaluating these options early helps provide continuous coverage and reduce unexpected medical expenses. Ensuring that the cost of health insurance is built into your retirement income needs.
Social Security Timing
Timing when to claim Social Security, early, at full retirement age (FRA), or delaying, can have implications for your retirement income plan. Claiming Social Security before your FRA can permanently reduce your monthly benefit. Conversely, delaying benefits past FRA allows for an 8% increase for each year that you delay. For example, if your FRA is age 67, and you begin your benefit at 62, it can decrease your benefits by up to 29.17%. Weighing immediate financial needs against long-term benefits and longevity is essential when deciding when to claim is right for you. If you have concerns about planning for Social Security in retirement, working with a financial advisor who can help plan for different filing strategies can help.
Emotional & Lifestyle Readiness
Envisioning Early Retirement Life
Beyond finances, consider how you will want to spend your time. What are some of your favorite memories that bring you joy? One of my favorite childhood memories was picking peaches with my Granddaddy in Georgia when he retired. Consider:
- Purpose: Engage in activities that provide fulfillment, such as volunteering or pursuing hobbies.
- Social Connections: Maintain relationships to prevent isolation.
- Structure: Establish routines to provide a sense of purpose and direction.
Retirement is a significant life transition that also requires emotional preparation in addition to financial preparation.
Final Thoughts
Early retirement is achievable with thoughtful planning and adaptability. Collaborating with a financial advisor can help you understand the challenges and develop a plan to navigate an early retirement.
Sierra Steele
Associate Financial Advisor
Need help planning your early retirement? Contact our team of advisors to create a personalized plan that keeps your retirement on track, no matter what your goals are.
Alaska Wealth Advisors, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, both of which are available upon request.
The opinions expressed are those of Alaska Wealth Advisors, LLC., as of the date of publication and subject to change without notice.
