The idea of retiring early is appealing, as it offers more time for travel, family or simply living life on your own terms. However, early retirement also means a longer retirement, which creates unique planning challenges. If you’re thinking about stepping away from work before the traditional age of 65, here are five things to keep in mind:
- Be mindful about guaranteed income decisions.
When you retire early, it can be tempting to start income streams, such as pensions or Social Security, right away. But turning them on too soon may reduce your lifetime benefit.
Your strategy should plan for those “gap years,” which are the years between when you stop earning a paycheck and when guaranteed income sources begin. Coordinating these start dates thoughtfully can make a major difference in your long-term plan.
- Health insurance – covering the gap before Medicare
One of the biggest challenges for early retirees is health insurance. Once you leave your employer’s group plan, you’ll need coverage until you qualify for Medicare at age 65.
Many early retirees explore plans available through the Affordable Care Act (ACA). ACA premiums are based on income, not assets, which means strategic planning around income sources can make coverage more affordable. If you have Roth accounts or after-tax savings, you can draw on those dollars to manage taxable income and potentially qualify for ACA subsidies during those gap years.
- The Rule of 55
If you leave your job in or after the year you turn 55, the Rule of 55 allows you to withdraw funds from your 401(k) from your most recent employer without paying the usual 10% early withdrawal penalty.
This can be a helpful bridge for early retirees, but remember, it only applies to your current employer’s plan and not old 401(k)s that have been rolled over into IRAs.
- Building up brokerage dollars
If you want more flexibility before age 59½, it helps to build up taxable brokerage accounts. These accounts don’t have early withdrawal penalties and can serve as another bridge to access funds while letting your retirement accounts continue to grow tax-deferred.
For many early retirees, a combination of brokerage assets, Roth funds and the Rule of 55 provides an effective income strategy during the pre-Medicare and pre-Social Security years.
- You’ll need more because you’re planning for more
Early retirement sounds like “more freedom,” but financially, it means more years without income. That requires a bigger nest egg.
If you retire at 55 instead of 65, your portfolio needs to last a decade longer. That means saving more aggressively while you’re working and planning for market volatility. If the market declines early in your retirement, it can affect your long-term sustainability. That’s known as sequence of returns risk.
Building in flexibility, perhaps part-time income, a phased retirement or holding extra cash reserves, can help smooth out those years.
The bottom line
Retiring early can be a dream realized, but it requires careful preparation. From bridging health coverage to balancing income sources and timing your guaranteed benefits, there’s more to early retirement than simply walking away from work. With the right strategy in place, those extra years of freedom can be financially sustainable and truly rewarding. The SKG Team can help you build a plan designed to make early retirement possible and sustainable.
Ben Soccodato and Chris Kampitsis lead the The SKG Team at Barnum Financial Group in Elmsford.
