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Considering Early Retirement?

Do these relaxing summer days have you contemplating early retirement before age 65?  The Pandemic and Working from Home (WFH) has more people contemplating retiring early.   By planning and being realistic, you can move toward an early retirement with a greater level of confidence.

What To Do When You Retire Early

Many retirees who leave the workforce at a traditional retirement age or early find themselves struggling to adjust to their new life. While you may have all your ducks in order financially for an early retirement, you should be emotionally and socially prepared as well.

As you begin to envision retirement, consider developing new hobbies, giving back to your community, investing in your friendships and understanding where your passions lie and what brings you happiness. Don’t put it off until after you’re done working. If you find yourself wanting to work part-time on a passion project or taking a job with your favorite nonprofit, do it.

Phase I: Pre-Retirement Planning

1. Your Vision for Early Retirement

It’s critical to start your retirement planning process with a clear vision of your life during retirement and your emotional readiness to retire.  While fishing, golfing and pickleball may be great activities, they will not replace the 40-50 hours previously dedicated to the work week.  You also don’t want to ignore the sense of purpose a career brings and the psychological and social benefits that a work environment can provide.   

Give some thought to some type of part-time or volunteer work, pursuing new or existing hobbies and planning for those “bucket list” trips, among countless other goals.

2. Your Health Insurance Plan

The most common thing people fail to plan for when pursuing early retirement is health insurance.  You are not eligible for Medicare until you’re 65, and early retirement likely means that you need a strategy to bridge the gap from your retirement date until Medicare kicks in. Further considerations are if your spouse is younger than you or if you have an adult child on your plan.

COBRA coverage is one option that allows you to continue your last employer’s health insurance. Once you leave your job, you’re responsible for 100% of the premium—and then some. Due to administrative fees, you may be stuck with a bill that’s up to 102% the cost of the employer’s plan.  Keep in mind that COBRA coverage only lasts between 18 and 36 months, depending on your circumstance, so it alone may not be able to bridge you to Medicare.

To save on costs or to protect yourself after COBRA ends, you may consider a health insurance plan in your state’s insurance marketplace. Keep in mind that deductibles and out-of-pocket maximums may be markedly higher than your employer coverage.  When deciding on a pre-Medicare health plan, be sure to compare costs across any COBRA and marketplace plans. You may also reach out to a health insurance broker for estimates.

3. Plan Out Your Early Retirement Housing

Most pre-retirees focus on getting their investments ready for retirement, but attention should also be paid to getting your home ready while you are still working and making a good income.

Prepping your home for retirement could mean different things to different people. Some considerations may be:

  • Pay off your mortgage early
  • Downsize your home
  • Make major repairs 
  • Complete renovations (kitchen, bath, landscaping)
  • Research homes in your dream location 
  • Secure a Home Equity Line prior to retirement to have access to the equity in your home

4. Plan to Keep Earning Income

Early retirement is not always about stopping work, but rather leaving the 9-to-5 grind and gaining more control of your schedule.   If feasible, finding part-time or consulting work that fits with your new lifestyle can offset living expenses. These jobs may even offer benefits, like health insurance, that can help bridge you to retirement.

By planning to continue earning income, you may be able to achieve early retirement because you don’t need as much money saved up in investments to support your lifestyle.

During your retirement planning phase, think about the kind of work  and activities you’d find rewarding during retirement. Take time to research your options. Knowing that you have options for retirement income can help alleviate concerns that you might outlive your savings. 

5. Have a Social Security Strategy

Another consideration if you are contemplating an early retirement is to determine when you will need to tap Social Security.  By waiting until age 70, you can boost your lifetime annual benefit by 30%.

Talk with your advisor or use the Social Security planning tools on their website to plan for when you’ll start drawing benefits and potential delays you can make to ensure you receive the maximum benefit.

Phase 2: Managing Finances in Early Retirement

Early retirement isn’t a destination so much as the start of a new journey. You can’t put your finances entirely on autopilot just because you’re no longer working full time.

1. Set Guidelines for Your Spending

To retire early, you need to know how much cash you need to maintain the lifestyle you envision. The most critical variable in financial planning, and the one you can control, is your spending. You should plan to set up “guardrails” for your budget and spending: lean, moderate, and fat.  Most of the time you will be right down the middle, but you have those occasional years where you exceed your budget. Planning will help you reduce anxiety give yourself permission to increase spending on experiences you truly value, so long as you stay within the guardrails.

2. Adjust Rate of Return Assumptions

The past 5 or 10 years is not a good measure of what the next 30 to 40 years might hold.  Given the average rate of return for the S&P 500 has been 9.8% over the past 90 years, you’ll probably want to model your portfolio more conservatively with estimates of 5% or 6% for rates of returns.  This means adjusting your portfolio to a more balanced asset mix towards capital-preservation. This will cushion the volatility through all market cycles as you start to drawdown from your portfolio.  It doesn’t mean giving up all your market upside potential, though your returns will likely be more modest than a portfolio invested only in stocks.

3. Consider Segmenting Your Savings

You may also consider creating different buckets for your investments.  For instance, a cash bucket which is for short-term needs and emergencies.  We have some clients who have multiple buckets including for taxes, second home, vacations, gifting, etc. They are building discipline around different goals and needs and have constructed frameworks and barriers to access these funds.  A longer-term portfolio should seek to achieve your goals, keep up with inflation and provide for your annual cash flow needs.  

4. Remember to Enjoy Your Early Retirement

Once you have achieved early retirement, you should avoid a tendency not to enjoy your wealth. By committing the time to come up with a financial plan customized to your unique spending habits and financial goals, you will have the confidence to spend and enjoy retirement.

Often spending for retirees takes on a U-shaped pattern, with higher spending in the early years when traveling, health and energy levels are high, then will experience a natural slow down.  Some will incur increased spending patterns in the later years when health care becomes an issue. 

Why it is Important to Plan Early for Your Retirement?

The earlier you start planning for your retirement, the more likely you are to be successful.  Determining how to create a life that feels abundant but is still within your means is best done early.  

Remember that retirement is always a major adjustment financially, emotionally, and socially. Be mindful of how this may impact your spouse and other family members and be respectful of each other’s space and daily routines.