Unlocking Your Early Retirement: Essential Insights for Thriving Before 65 and Beyond

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Imagine a life where the constraints of a 9-to-5 job are a thing of the past, and your time is entirely your own. This is the allure of early retirement. Yet, this dream requires more than just saving money; it demands comprehensive planning across various aspects of your life. In 2019, half of retirees reported retiring before the age of 62, according to a report from the Federal Reserve. This both reflects the wide range of retirement timing across different demographic groups and highlights that a significant portion of the population chooses to retire early​​. Let’s take a look at the essentials of retiring early: healthcare before Medicare, Social Security benefits, investment strategies, tax planning, and lifestyle changes. Here are key strategies and insights that can help to make your early retirement both achievable and enjoyable.

Health Care Before Age 65

For individuals considering early retirement, navigating healthcare options before Medicare eligibility at age 65 is crucial. Affordable Care Act (ACA) plans available through healthcare.gov offer a range of choices, including premium tax credits that can significantly reduce costs for eligible individuals. For insights into managing healthcare costs and understanding ACA plans, check out our blog on reasonably priced health insurance before 65. High deductible plans can be effectively paired with a well-funded Health Savings Account (HSA) to cover out-of-pocket expenses, offering a strategic option for managing health care costs. Additionally, medical bill-sharing programs like Medi-Share present an alternative to traditional insurance, catering to those who prefer a community-based approach to health care cost-sharing. Coverage under COBRA also provides a temporary way to maintain your existing employer-sponsored health insurance, ensuring continuity of care during your transition to early retirement.  You may also use a combination of these strategies depending on your health condition, income needs, tax situation, and how long before you reach age 65.

Social Security – To Delay or Not Delay

When it comes to determining when to draw Social Security benefits, it’s crucial to understand the financial gains of waiting. Each year you delay, up until age 70, your benefits increase by about 8% a year, enhancing your lifetime earnings and providing higher survivor benefits for your spouse, which can be particularly beneficial if they are in good health and likely to outlive you. This decision can be complex, especially when considering health status and financial needs. For a deeper dive into the nuances of when to claim Social Security benefits, including considerations for survivor benefits and strategies for couples, visit our detailed blog post on When to Claim Social Security.

Drawing from Investment Accounts Before 59.5

To navigate the period before turning 59 and a half without incurring penalties on retirement account withdrawals, creating a “bridge account” with funds from a non-retirement investment account can be an effective strategic move. This bridge account can provide the necessary financial support until you can access retirement accounts penalty-free. Other options include withdrawing the principal from a Roth IRA without penalty, leveraging the rule of 55 for penalty-free withdrawals from an employer-sponsored 401(k) if you retire at or after age 55, or setting up a 72t distribution as part of a Substantially Equal Periodic Payments (SEPP) plan. Each of these strategies has specific rules and considerations, making it important to plan carefully to avoid unnecessary taxes or penalties.

Tax Considerations

Tax planning is critical in early retirement. Withdrawals from traditional retirement accounts are taxed as income, whereas Roth IRAs provide tax-free withdrawals under certain conditions. Effective tax planning involves understanding how different types of withdrawals will impact your tax liability.

In tax planning, understanding when to accelerate or defer income is crucial. Accelerating income in low-income years can take advantage of lower tax brackets, employing strategies like Roth conversions, taking distributions from retirement accounts, or tax gain harvesting. Conversely, in high-income years, deferring or delaying income through contributions to pre-tax retirement accounts, tax loss harvesting, delaying Social Security benefits, or drawing from non-retirement accounts can be beneficial. For comprehensive guidance on navigating these strategies and optimizing your tax situation, our “Tax Planning 101” blog provides valuable insights.

Housing and Lifestyle Adjustments

When considering housing and lifestyle adjustments for early retirement, an essential aspect to plan for is the impact of downsizing your home. Not only should you aim to have your mortgage paid off and any major home remodels completed in order to enjoy retirement, but you should also evaluate the potential tax implications of selling your home, especially if you stand to make a significant profit.

Downsizing can offer numerous benefits, such as reduced living expenses and less home maintenance. However, if the sale of your home results in a large gain, understanding the tax implications becomes significant. The Internal Revenue Service (IRS) allows individuals to exclude up to $250,000 of profit from capital gains tax, and married couples filing jointly can exclude up to $500,000. Yet, to qualify for this exclusion, you must have owned and used the home as your primary residence for at least two out of the five years preceding the sale.

Despite these exclusions, those whose homes have appreciated significantly may still face considerable tax bills. This makes it essential to plan your downsizing strategy carefully, considering both the financial benefits and the tax consequences. For more on managing the tax implications of downsizing, read this article by Charles Schwab that views downsizing from a tax perspective.

Moreover, with about 40% of retirees choosing to move—and often downsize—after retirement, it’s clear that making such a transition is a common step toward adjusting to a new lifestyle in one’s golden years​​. This underscores the importance of preparing for downsizing as part of your retirement planning, taking into account both the financial advantages and the potential tax implications to optimize your retirement outcomes.

Early retirement is more than a financial goal—it’s a lifestyle choice that requires careful holistic planning. By understanding and strategically approaching aspects such as healthcare, Social Security, investments, taxes, and lifestyle, you can look to make your dream of retiring early a reality. Remember, each journey is unique, and seeking personalized advice is always beneficial.

Matthew Benson, CFP®

Owner / Certified Financial Planner™

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Important Disclosure

Advisory services are offered through Sonmore Financial LLC, an Investment Advisor in the State of Arizona.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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