Challenges with Retiring Early

Retiring early sounds like a dream—but it comes with some unique financial hurdles. In this article, we’ll explore the biggest early retirement challenges and how to plan for them effectively. Whether you’re thinking about leaving the workforce before Medicare, Social Security, or age 59½, there are important strategies you’ll need to consider to avoid penalties, cover income gaps, and ensure your money lasts.

A Key Early Retirement Challenge: Accessing Retirement Funds Before 59½

One of the first early retirement challenges is figuring out how to access your savings before age 59½ without penalties.

If we want to retire at age 58, we’re not going to yet be eligible for taking penalty-free withdrawals. In most situations, if we take out money from one of these retirement accounts, we could get hit with a 10% early withdrawal penalty.

However, one option is on a 401(k) plan—as long as you separate service after you turn 55, or at least in the year you turn 55—you can take penalty-free withdrawals from your 401(k) plan and not have that 10% penalty. Still, you’d pay ordinary income taxes on it.

Another option is something called 72(t), which applies to IRA accounts. This says that as long as you take out what the IRS refers to as substantially equal payments for the greater of either five years or until you turn 59½, you can avoid the penalty.

Other Accounts and Strategies

If you have money in a non-retirement account, you can of course access that. There wouldn’t be any penalties there, although capital gains taxes might apply. Roth IRA contributions are also accessible tax and penalty-free at any time. But in general, I’d prioritize other accounts before dipping into a Roth.

Timeline of Key Retirement Milestones

At 62, you’re first eligible for Social Security, though it may make more sense to wait until full retirement age (likely 67) to collect.

A pension might kick in around age 65, helping to boost your income. Your spouse may also qualify for Social Security based on their record or via spousal benefits. These timing considerations are important as your retirement timeline unfolds.

How Healthcare Costs Add to the Challenges Retiring Early

Healthcare expenses can be one of the biggest early retirement challenges—especially for those retiring before Medicare eligibility at age 65.

If you retire before Medicare eligibility (age 65), healthcare expenses can be significant. For planning purposes, we usually estimate about $12,000 annually per person. Resources like the Fidelity healthcare study, Kaiser Foundation calculator, and JP Morgan’s studies can help you refine these numbers.

Once you qualify for Medicare, costs may drop to around $6,000 for one person or $12,000 for a couple.

Your Income Gap and Expenses

If you don’t yet have Social Security or a pension, most of your income will come from your investment withdrawals. Budgeting is key. Higher early retirement expenses—like supporting kids or a mortgage—can shrink as you age and debts are paid off.

These early gaps will likely stabilize over time as fixed sources of income like Social Security kick in.

Withdrawal Rates and Longevity

If you retire early, your money has to last longer. The 4% rule is a common benchmark, but newer studies suggest safer withdrawal rates may be closer to 3% or even lower. That original 4% rule was based on a 20-year retirement span. Retiring at 58 could mean needing income for 30+ years, especially if one spouse lives into their 90s.

Overcoming Early Retirement Challenges With Strategic Planning

Using our Money Evolution Plan or Retirement Time Machine program, we map out different cash flow scenarios. In our hypothetical example, income drops off when one spouse retires, but picks back up with pensions and Social Security. A key focus is understanding your ‘net cash flow’ and how that impacts your withdrawal strategy.

Positive cash flow in your working years can be used for travel or boosting savings before retirement.

If you want assistance building out a strategic cash flow plan, see how we can help you at moneyevolution.com

Final Thoughts

You can do a lot of this planning just by drawing out your own timeline and identifying these key milestones. Hope you enjoyed the video and be sure to check out our Retirement Time Machine webinar for a deeper dive into this planning process.

Disclosure:

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.