Retiring early, usually prior to age 65, can present a unique set of circumstances. As a result, it is important to keep in mind the minimum age that applies to:

  • accessing funds or income sources
  • securing quality healthcare coverage prior to Medicare eligibility
  • planning for a longer-than-average retirement period

Below are 10 financial planning Items that anyone considering retiring early should review and discuss with their financial planner and CPA:

Easing into Retirement

More workers are transitioning into retirement by gradually reducing their hours, rather than stopping work completely. Those considering early retirement may be able to ease into part-time employment by gradually reducing their workload. If your current employer does not offer a phased retirement option, consider a consulting role outside of your existing firm.

Having part-time earned income in early retirement can help alleviate strain on the investment portfolio’s ability to provide income over a longer retirement period. This part-time income could also help to delay any pension, Social Security, or annuity payments that could result in increased income payments the longer you delay collecting.

Health Insurance

Medicare is available once you turn age 65, but how will you fund healthcare expenses early in retirement? Employer-sponsored insurance plans allow you (and possibly your dependents) to stay on your current employer’s insurance plan under COBRA for up to 18 months. Note that employers with less than 20 employees are not subject to the insurance continuation provisions of COBRA.

If you are married, securing coverage under a spouse’s employer-sponsored insurance plan could be an option. Private insurance could also be sourced from the marketplace, however it may be prohibitively expensive.

If you’re thinking of retiring early, funding a health savings account (HSA) now could help assist you with funding your future healthcare needs. These “triple tax advantaged” accounts can lower your current tax bill, while funding a spending bucket for future healthcare costs and premiums.

Social Security

Are you eligible to begin taking Social Security, and if so, when is the optimal time? Collecting these payments at the right time can affect several financial factors in your life. While you may be in a position to retire early, drawing Social Security immediately at age 62 may not be in your best interest. Weighing factors such as your health, ability to live on assets in the existing portfolio, and tax implications of qualified distributions can help guide the decision.

Keep in mind that Social Security estimates received from the SSA assume that the worker is employed through their full retirement age (FRA) when calculating your future benefit amount. Depending on how early you retire, your Social Security benefit may be decreased due to lower earnings, in addition to the normal reduction in benefit that applies when one starts collecting prior to their FRA.

The Rule of 55 and Penalty-Free Retirement Plan Withdrawals

Under these IRS guidelines, you can withdraw funds from your current employer’s 401(k) or 403(b) plan prior to age 59 ½ with no 10% tax penalty, if you leave the job on or after the year you turn 55. The terms of your job departure are not relevant as you could be laid off, fired, or just quit, and still utilize this early-withdrawal approach. If you return to the workforce, this penalty-free withdrawal option is no longer available.

There is an exception called the 72(t) option which allows withdrawals from your 401(k), 403(b), or IRA at any age without any penalty. This option is called SEPP (substantially equal periodic payments), and these payments are not subject to the 10 percent early withdrawal penalty. Once these distributions begin, they must continue for a period of five years or until you reach age 59 ½, whichever comes later.

This rule only applies to the current employer’s retirement plan. Any old employer retirement plans need to be rolled into the current plan in order to qualify for penalty-free early withdrawals.

Just because you are able to take a penalty-free early withdrawal, does not necessarily mean that it is in your best interest. Consult with your financial advisor to assist in developing a tax-efficient cash flow plan that complements your early retirement goal and specific financial circumstances.

Pension Plans

Learn the details of any pension payments or defined benefit plan payments you are eligible to receive as there may be certain age requirements that must be met prior to starting the receiving of distributions. The details surrounding your payout can be complex, and there are often several options to structure the payout. If you are married, should you select the joint payout option to also include an annuity for your surviving spouse if you were to predecease your spouse? Is there a guaranteed term for the payout?Reviewing the risks and benefits of each payout option can be beneficial.

Employer Retirement Plans

Take the right steps for any employer-based 401(k) or 403(b) plans: What elections do you need to make? Do you plan to rollover the amount from those plans into an individual IRA, and how might that help you with the investment options available to you? Do you have any employer stock in a stock purchase or stock option plan? There could be tax-efficient ways to distribute that stock to you.

Retirement Income

Prepare for retirement by making sure you are comfortable and understand where your cash flow will come from each month. Knowing the tax consequences of where your cash flow comes from is incredibly helpful. You will be affected differently if you pull funds out of your traditional IRA vs. your Roth IRA or your personal investments.

Income Taxes

How do you plan to pay your income taxes in retirement? Because they’re not withheld from a paycheck, you may need to estimate taxes or determine how much to withhold from pension payments, IRA withdrawals, and Social Security payments. In the early years of your retirement, there may be a possibility for a Roth conversion between your retirement date and age 75, when your required minimum distributions will begin as it’s possible you could be in a lower tax bracket.

Professional Management

Decide if you feel comfortable managing your retirement plans and investment funds yourself or if you would like professional help as you prepare for retirement. Working with a financial planner to manage your portfolio can help you ensure your retirement needs are met and coordinate your overall risk to match your goals. You will be able to answer questions such as – will your tax rate change? When should you begin pension or Social Security income? What risk level and investment options are the best for your specific plans and goals? How will charitable giving and tax planning affect your retirement?


This is intended for informational purposes only and should not be construed as personalized investment or financial advice. Please consult your investment and financial professional(s) regarding your unique situation.

Author Richard P. Ellenberger Financial Advisor

Richard has been involved in the financial services industry since 2014. A U.S. Marine Corps veteran, he earned a bachelor of science degree in business from Penn State University.

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