Is It Possible?
Probably the most important detail is whether or not early retirement is feasible given your unique situation. This is a great question to ask your financial advisor! The answer largely depends on your resources and what you want to accomplish. Review your retirement plans. Take inventory of your retirement accounts, investments, savings and post-retirement income such as pensions or rental properties. Don’t forget to consider taxation! That can have a major impact on how quickly you deplete your retirement accounts.
Think about the future of the economy as well. Some of my clients have wanted to retire early, and based on their situations, I’ve sometimes suggested that the cons to retiring early outweigh the pros, and now might not be the right time. They were basing their assumptions on the economy we saw in the decade or so preceding the Coronavirus pandemic. That was a wonderful opportunity to make money at relatively low risk, but that’s in the past. Assuming your investment accounts will always continue to perform as they have in the past is risky; if the economy doesn’t cooperate with your assumptions, you could run out of money well before you thought you would.
Is It Desirable?
If, after careful analysis, you know you have enough resources to fund a retirement that could be decades longer than normal, then you know you can retire early without substantial risk of running out of money too early. But you still need to ask yourself if you should. Many enter retirement, then discover they hate it! They find themselves bored, missing being a part of their work community, or lacking a daily purpose.
It can almost be harder to predict your emotional reaction to retirement than it is to project your future cash flow. But it’s important to try determining whether or not you will like retiring early before you actually do. It could save you a lot of headaches by not having to exit retirement after it’s begun.
Voluntarily exiting retirement and reentering the workforce just for something to do can lead to problems. You may find it challenging to secure work at the same career stage you retired from. You might not make nearly as much money as you were used to. On the other hand, making too much after retirement can be a problem as well. For example, in 2023 if you’ve started drawing Social Security before the full retirement age of 67, Social Security will deduct $1 in benefits for every $2 you earn over $21,240.
Assuming you’ve determined you can — and want to — retire early, it’s now time to start carefully preparing. Work with your financial advisor to plan your money moves before and during retirement. Keep in mind the early-retirement caveats that could make your retirement more complicated than those who retire “on schedule.”
Early Retirement and Finances
You can’t sign up for Medicare until age 65. If you retire before your 65th birthday, you’ll have to arrange for insurance coverage until you are old enough for Medicare. That can be quite expensive and should be considered as part of your early retirement planning.
You also won’t get your full Social Security benefits unless you wait until age 66 or 67, depending on the year you were born, to begin drawing on them. You can start as early as age 62, but you will give up 30% of your benefit. If possible, it may be a good idea to wait until after your full retirement age to begin drawing Social Security. Every month you delay accepting Social Security payments up to your 70th birthday, your benefit payments increase. For example, people born between 1943 and 1954 who wait until they turn 70 will get a 32% higher monthly benefit check!
Unless you meet specific criteria, you can’t begin drawing from your retirement accounts before age 59 1/2 without paying a 10% penalty. A million dollars saved for retirement is great, but if you have to take a penalty to use it, that’s a problem.
If you wish to retire early, you must have enough cash flow from after-tax assets or passive income sources to tide you over until your retirement accounts, Social Security and Medicare are accessible.
Tax Efficiency is Vital
Finally, don’t forget to plan for taxes! Arguably the most important part of early-retirement planning, tax efficiency can make or break your finances during that permanent vacation. Your financial advisor has resources to help you calculate projected taxes throughout your retirement and plan an efficient tax strategy.
Retiring early is something many people dream of. If you decide it’s a goal you want to pursue, proper planning can help prevent that dream from becoming a nightmare. At Asset Preservation Wealth & Tax, we regularly work with clients to help them decide whether or not to retire early and how to manage their assets either way. Those aren’t issues you should make without expert advice. Always consult a financial planner for advice when considering retirement!
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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