"I don't want to work into my mid-60s."
I often hear this from my early and mid-career clients. And as we talk, clients often voice that they wish to have the opportunity to retire in their 50s. Such a goal requires additional planning because retiring in your 50s presents new considerations. Anyone considering early retirement as a goal should begin planning today.
Waiting until 65 to retire isn't as easy as it used to be – especially since, for many people, their retirement age is now closer to 67. But successfully retiring before your 60s requires special consideration to increase your confidence to have the life you envision.
Healthcare costs over your retirement are by far the most significant expense – and one with the potential to increase at the highest rate. Over the past twenty years, medical care costs have grown an average of over 3% per year.
Will you be able to draw from your retirement accounts without penalties? What about taxes? There's a lot to think about, so breaking it down into significant areas and planning for each item can ease the financial and life transition.
It is Essential to Consider Healthcare Costs
Medicare eligibility begins at age 65, so you'll need to source healthcare coverage if you retire before that. Retiree medical benefits from your current employer may solve this problem, but it's increasingly rare for companies to offer this type of coverage.
If you're married and your spouse continues to work, joining their company plan may be the most cost-effective option. If that's possible, you can also access marketplace insurance. The Affordable Care Act created marketplace insurance that you can explore through your state's healthcare portal or healthcare.gov.
Depending on your situation, you may be able to qualify for tax credits that lower your monthly premium payments. However, these credits are income-dependent, so you must plan your income carefully and keep it below specified levels.
Accessing Your Funds Without Penalties
Withdrawing funds from a 401(k) before age 59 ½ usually means paying a 10% penalty. However, the IRS has a particular tax guideline to let you access those funds. It's called the "Rule of 55," and it allows you to avoid paying the 10% early withdrawal penalty on 401(k) and 403(b) retirement accounts if you leave your job during or after the calendar year you turn 55. Like most IRS rules, it has particular provisions you'll need to consider before working toward using this tactic.
Another option you can use is the Substantially Equal Periodic Payment (SEPP) plan. This allows you to withdraw funds before age 59 1/2 without penalty, but you must choose between three distribution methods. It's not very flexible after payments start, other than allowing you to change the distribution method once. You are blocked from continuing to fund the retirement account once distributions start. The SEPP plan guidelines last until you reach age 59 1/2 or the plan has been active for five years, whichever is later. However, for those with years to come before retiring, the SEPP likely should not be used as the first strategy, as the risk of getting it wrong is high.
Those in their 20s, 30s, and 40s wishing to have the most flexibility in their plan should consider saving to a taxable account. With proper planning and management, this account can be managed for tax efficiency and provide you with the most flexibility in your early retirement. Taxable accounts have fewer rules and complexities than tax-preferred retirement accounts. Proper planning on saving for early retirement can help you find the correct mix between taxable and tax-preferred accounts.
The Financial Side is Only Part of the Equation
A successful retirement is about what you want to do with this phase of your life and how you fund it. It's essential to make the early retirement decision because you want to add more to your life – not because you want to get away from your job.
Consider whether changing jobs, cutting down on hours, or adding something meaningful to your existing routine – such as mentoring younger employees, volunteering, or taking up a hobby – would make a difference to your feelings about early retirement. If you have more than a decade to reach your early retirement goal, you have time to position yourself for those opportunities to achieve your desired lifestyle. Don't spend years working toward early retirement without considering the life you wish to have.
Retirement is a big step and having a plan that keeps you moving forward is vital to a successful transition.
The Takeaway
Retirement is a big decision, and early retirement adds to your financial plan's complexity. That doesn't mean you shouldn't do it – some tactics and strategies can help you ensure you can plan and fund a happy, meaningful, affordable retirement at any age. It just requires some careful planning.
Are you trying to figure out what you should do to reach your early retirement goal? At Pursuit Planning and Investments, LLC, I help you think through your options. I help you make the best decisions for yourself, your family, and your money. Feel free to place a commitment-free 30-minute meeting on my calendar. We can discuss your early retirement goal and begin best optimizing your financial plan in that meeting.
Have something on your mind?
Pursuit Planning and Investments, LLC (“PPI”) is a registered investment advisor offering advisory services in the State of Oregon and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past results do not guarantee future results. Please contact us at 971-803-5948 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from PPI with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.planyourpursuit.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Pursuit Planning and Investments, LLC (referred to as “PPI”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute PPI’s judgement as of the date of this communication and are subject to change without notice. PPI does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall PPI be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if PPI or a PPI authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.