Sixty-six and two months is the age the Social Security Administration considers full retirement age for those born in 1955. This will gradually rise to 67 for those born in 1960 or after. The financial realities of most workers in the U.S. require that they remain part of the workforce until full retirement age. Yet some seek to be the exception to the rule.

For a high-income earner who maintains an aggressive savings strategy throughout her career or for a successful business owner who sells his operation at a profit, the option to retire early may be realistic. Those who have the resources to be in such a fortunate position still need to do significant planning and take steps to push up retirement timelines.

With the vast majority of retirement blogs and articles dedicated to “conventional” retirement preparedness, our focus here will be on factors to consider should you wish to retire early – as well as the realities this choice will require you to address.

Retiring Early? Plan Even Earlier. Steps to Take Before You Retire

Few people who plan an early retirement wake up one morning and simply decide to retire right then and there. Instead, most take time to deliberately plan out that retirement and consider a few key questions to assess their retirement circumstances. Following are several steps to take before taking an early retirement:

Determine whether you will enter a full or partial retirement – Will your early retirement consist of traveling the world full-time? Sitting on a board? Consulting work? A combination? Answer these questions to help illuminate the work-related desires you have for the first stage of your retirement. For many, a full retirement at an early age would leave them feeling restless. Pivoting to a “retirement project” – working but with significantly less demand – is a popular way to be semi-retired.

Tally up your income sources – If you choose the semi-retired route, you may find yourself with some income, but it will likely not be enough on its own to support your lifestyle. Consider other income sources: Does your spouse work? Do you have passive income? Some business owners choose to sell the operations but retain ownership of the real estate, thereby generating an annual passive income from rental payments.

Create an emergency reserve – Making sure you have an emergency reserve is important so you don’t need to tap your retirement accounts and potentially pay a penalty.  You may also want to arrange a line-of-credit before you retire while you still have income to report on the loan application.

Understand your company benefits – If you are fortunate to be covered by a pension, understanding the ramifications and impact on the monthly benefit of retiring early and/or starting benefits early is important.  In general, deciding on the correct claiming strategy for a pension can be incredibly difficult, and it is a good idea to consult with a professional.

Evaluate your portfolio – For many, most cash flow needs will be met through portfolio assets.  Do you have robust, diversified, and flexible retirement accounts? Some retirement account vehicles will incur penalties (over and above regular income tax) if you withdraw money before a certain age. Do you have other accounts that you can tap for your early retirement?

Anticipate a drop in your marginal tax rate – The loss of your salary may mean a new, lower tax bracket. Planning completed in the years prior to this can help reduce your lifetime tax liability. For example, if you are charity focused, consider opening a charitable trust or donor advised fund in the years before you retire. Pre-funding 5-10 years’ worth of charitable gifts before you retire will allow you to maximize the tax benefit of your gifts while you are still in a higher marginal tax bracket and while giving you the ability to support your charitable causes without it affecting your retirement cash flow.

Other Considerations for Retiring Early

Longevity – Retiring 5 or 10 years early sounds like a great prospect after decades of work. But do you have the cash flow to maintain your lifestyle for a long, retired life of potentially 40 years or more? Early retirement will require a meticulous strategy for managing your cash flow and expenses. A lifestyle analysis may help determine what everyday costs you can expect during retirement, which will then help you prepare to meet those costs or cut out some personal expenditures if you need to.

Healthcare* Ensuring that you have adequate healthcare coverage in retirement for you and your spouse is imperative, especially since the probability of unexpected health events increases as you grow older. As most people are not eligible for Medicare coverage until age 65, you will need to determine how to maintain appropriate coverage for yourself and potentially your spouse or children also if they rely on you for coverage. Developing a complete plan for your early retirement requires an understanding of the available options, the criteria for eligibility, and their associated costs. Determine if a spouse is offered coverage through an employer or if your company offers retiree health benefits. Keep in mind that an unexpected health event could seriously jeopardize your financial security during retirement if you are not properly covered, so it is best to not leave your health care coverage to chance.

Social Security – A well-planned early retirement should consider the lifelong impact of Social Security benefits. While you can begin claiming reduced benefits as early as 62, Social Security is unlikely to serve as your sole retirement income. However, a thoughtful claiming decision incorporating the various strategies available will contribute to the overall success of your long-term plan. While delaying benefits results in a higher lifetime benefit, lesser known claiming strategies, such as claiming benefits as a surviving spouse, if applicable, or filing for benefits for minor children, can be helpful to fill cash-flow gaps for early retirees.

Accounts – Maintaining flexible, diverse but separate accounts to manage your assets is essential to a successful early retirement. Organize your accounts such that some are dedicated to your everyday spending during early retirement, others are invested to grow for later, and at least one account includes money for emergencies. Avoiding restrictions, penalties, and inefficient taxation will be key to this thoughtful strategy. For example, in most instances your 401(k) will penalize you for early withdrawals, so it is best to avoid tapping those accounts until later. Speak with a trusted advisor to ensure that your retirement accounts are robust enough to serve your unique retirement needs and your cash flow is managed in the most efficient way possible.

Taxes – When determining how you plan to fund your early retirement, consider how your tax status will change. In the years just after you retire, and before you start tapping 401(k)s or IRA accounts or initiating Social Security benefits, you might be in the lowest tax bracket of your retirement. In such an instance, consider converting traditional IRAs to Roth IRAs. You’d likely pay tax on the converted funds at a lower rate than if you were to access the funds later from a pre-tax IRA. If your planning has been robust and thorough, the various sources of cash flow will have different impacts on your taxable income allowing you to minimize lifetime taxation.

Education planning – It is not uncommon for someone retiring at 55 or 60 to still have high school or college-aged childrenIf you have children or grandchildren with higher education needs, and it is important to you to cover all or a portion of these costs, you will want to address this in your early retirement planning. Additionally, early retirement could actually create new opportunities for a family to qualify for tax credits or financial aid based on parental income.  Planning your early retirement cash flow to stay below relevant income thresholds can be smart planning for you and your children.

Transitioning from Early Retirement to “Normal” Retirement

A successful “early” retirement anticipates transitioning to a more traditional retirement, eventually claiming Social Security and Medicare, and ultimately drawing down 401(k), IRA or other retirement accounts. A well-planned early retirement will incorporate all of your benefits into a holistic retirement strategy meant to support you and your family for 30 or 40 years or more.

Retiring early is an exciting prospect, but it is not a decision that should be taken lightly. The same deliberate planning required for retirement at any age is necessary – if not more so – for those considering an early retirement. Plan your early retirement in advance to ensure that you have the necessary cash flow, sufficiently diverse retirement accounts, health care plan, and tax strategy to truly retire early and retire happy.


*For more about planning for long-term care, read our whitepaper.

Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP®, Certified Financial Planner™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors, LP cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2019 Wealthspire Advisors

Razi Hecht, CFP®

Razi is a wealth advisor in our Delafield, Wisconsin office.