Retiring earlier than the “traditional” retirement age brings with it a number of unique factors and considerations. In this episode, we dive into five of the most important areas to address if you’re planning to retire early, and what’s unique about these compared to someone who’s retiring a decade or more later. Specifically, we cover health insurance (including the important period between retirement and Medicare at age 65), cash flow considerations and the rules for withdrawing from various investment accounts (including which ones have more or less flexibility), safe withdrawal rates and strategy for withdrawing from your accounts (while also balancing tax and other considerations), how to view your investment allocation, and the difference between retirement and financial independence and making sure you know exactly what you’re retiring “to” before making the transition.
Outline of this episode
- Health insurance expenses that come with retiring prior to 65 [1:48]
- Funding your early retirement and creating your own retirement paycheck [5:31]
- How to manage the withdrawal phase and tax considerations to be aware of [9:00]
- Differences in investment allocation when retiring at 50 vs 65 [13:30]
- What now or what next? Non-financial questions to consider [16:34]
- The recap [18:43]
Health insurance costs when retiring early
It’s important to understand and have a plan for private health insurance when you retire prior to age 65. A big reason why many people can't retire in their 50s, especially earlier in their 50s, is because of health insurance and more specifically the cost of paying for private health insurance prior to Medicare age.
Unless you're self-employed and have had to pay for private health insurance you may be surprised just how expensive it is. You're probably used to paying a relatively small monthly premium and having pretty comprehensive coverage with reasonable copays, deductibles, and overall out pocket maximum costs. This isn't to say that health insurance during your working your years is "cheap," but compared to paying for private health insurance on your own it definitely looks that way. Private health insurance can range between $1,000-2,000 or more per month for premiums alone, so for a couple retiring in their 50's health insurance could cost $24,000 or more per year, just for the premiums.
Funding early retirement while avoiding early withdrawal penalties
In many ways, whether you retire in your 50s, 60s, or 70s, there's a core set of concepts you'll face that focus on how to create your retirement paycheck. However, there are additional factors that come into play when you retire in your 50s. The first factor is how you will fund your retirement. If you're over the age of 59.5, there aren't penalties you have to worry about when withdrawing from your investment accounts. That's not the case if you retired before 59.5.
The majority of physicians end up having large pre-tax 403bs, 401bs, or IRAs from all the years of saving and deferring taxes by contributing to those accounts. This doesn't inherently cause a problem but if you want to retire at 52 and have $5 million in a pre-tax IRA and $10,000 in your bank account, you're stuck in a tough spot because every $1 you take out of that IRA before 59.5 is not only subject to taxes but also a 10% early withdrawal penalty. The main takeaway is that you want to be aware of the early withdrawal penalties and avoid them if possible. An easy way to do that is to have a variety of accounts with different tax treatments that you can tap into to fund your retirement.
Other things to consider when retiring in your 50’s
When you retire early you want to ensure you have a safe withdrawal rate and are aware of how an early retirement can impact what that is. From there, and based on your unique situation, you should have a 30 to 40-year tax plan and then back into what you should do each year based on minimizing your lifetime tax bill, which earlier on includes areas like your health insurance tax credit and the order in which you withdraw from your investment accounts.
You will also want to look at your investment allocation and what to think about when deciding on the right mix for you, along with how it changes over time. To do this it's helpful to break down your retirement into a couple of phases based on the time until 65 when Medicare starts and then from the time you start collecting social security. And lastly, is to ask the question of what now or what next to make sure that you're excited about the next phase beyond just the next year. This is where it's helpful to understand the difference between financial independence and retirement.
Resources & People Mentioned
- Podcast Episode #15: How to Minimize Your Tax Bill in Retirement
- Podcast Episode #35: Explaining Social Security and How to Maximize Your Benefit
- Download our guide: The Financial Checkup