Although everyone needs to decide at some point whether they have enough money to retire, there are some challenges that are unique to early retirees. Here are some of the most important things to think about if you're considering retiring early.
This is probably the number one concern facing early retirees. If you retire at the traditional retirement age, you move from employer-covered health care into Medicare without too much trouble. But early retirees can be facing a decade or more where they are not covered by any health care plan. That means you must pick from a few options, some more expensive than others:
- Staying on a spousal plan if your spouse is still working. This is often the cheapest option if it's available.
- COBRA. This is usually meant for short gaps, because it tends to be ridiculously expensive.If you're planning on this option, research well, because there are a few interesting nuances to the coverage provided.
- Federal or state marketplaces. The ACA has subsidies for low-income brackets, and early retirees can often structure their income lower to get bigger subsidies.
- Some companies provide coverage for part-time employees. If your goal is simply to scale down work, this could be a possibility.
- Whichever option you pick, contribution to an HSA now will help you pay for health coverage during these "bridge years."
With a retirement of 30+ years, longevity issues can rear their head. Traditional rules of thumb for retirement savings targets may not apply.
- Consider a bond tent strategy to protect against sequence of returns risk.
- With a longer retirement drawdown, asset allocation may need to be more aggressive than traditional retirement portfolios.
Normal retirement provides a number of easy withdrawal strategies, but trying to pull money out of accounts earlier than normal may cause you to face penalties on "early withdrawals." Be very careful when creating a withdrawal plan, and make sure to build in some buffer. Here are some tips for withdrawing from your investment accounts:
- Try to create different "buckets" of investments - IRAs, Roth IRAs, HSAs, and taxable accounts. This will give you more flexibility in retirement to withdraw from different places in order to minimze your tax burden.
- For a traditional IRA, you can create a Roth conversion ladder starting 5 years before you intend to begin withdrawals. This essentially spreads your tax burden out over years when you are in a low tax bracket. This trick relies on having 5 years of expenses saved up in non-retirement plans such as taxable accounts.
- Another option for early IRA withdrawals is the 72(t) SEPP strategy - Substantially Equal Periodic Payments. This is a bit more complicated, but it allows you to distribute your IRA withdrawals over a period of time before traditional retirement age. The schedule is more strict than a Roth conversion ladder, but if all your money is in IRAs, it may be your only option for early withdrawals.
Retiring early comes with many perks - the ability to optimize your taxes with lots of years in low tax brackets is probably the biggest benefit (apart from being retired itself!) And while creating a multi-year tax plan for early retirement can be challenging, the benefits are well worth it.
For couples who are already starting to think about retirement, this is a good overview of how to discuss and manage the challenges you will face when retiring. Don't go into retirement without a plan!
Will you be able to retire early? Need help setting up a plan? Let's talk about it!