The Early Retirement Equation: Possibility Meets Precision
Ask an experienced skydiver, and they’ll tell you the most important part of the jump isn’t in the air – it’s beforehand on the ground with proper preparation. Most big outcomes are usually decided long before the moment that matters, and retirement is no different.
In fact, retirement is probably one of the most important “jumps” or “trips” any of us will ever make, and it clearly requires careful pre-planning and preparation; you don’t want to step out the door of the plane until you’re as confident as possible. And for those contemplating an early retirement, the preparation and planning are, if anything, even more crucial.
Many Americans appear to be opting for an early exit from the 9-to-5 grind. A recent report indicates that the average age Americans think retirement should begin is 58, considerably sooner than “full retirement age” as set by the Social Security Administration, which is 67, for those born in 1960 or later. In 2024, the average retirement age for men was 64, while for women it was 62, according to Boston College’s Center for Retirement Research.
Early Retirement Considerations
For many, the attractions of early retirement are strong: more years to spend your time according to your own priorities; better health to permit important activities like travel, recreation, or even a post-retirement career, and others. But there are some important considerations to keep in mind as you evaluate your retirement readiness.
1. What is your retirement budget? An essential first step is obtaining an accurate forecast of what your income and expenses will be after you’re retired. Don’t forget to include the costs of healthcare, especially health insurance, if you’re younger than 65 and don’t qualify for Medicare or coverage on a group plan (more on this below). In addition to your regular monthly expenses, you need to estimate the costs of the things you want to do after you retire: travel, additional recreation and entertainment, and whatever else you plan to make a part of your retirement lifestyle. The more clarity you can bring to this part of your early retirement planning, the less likelihood of unpleasant surprises along the way.
2. What are your sources of income? Especially for those leaving the workforce prior to eligibility for Social Security, perhaps the most important consideration is income replacement. Are the balances in your accounts sufficient to maintain your desired lifestyle, based on your forecasted expenses? If you’re younger than 59 ½, will the balances in your taxable accounts hold you over until you can start withdrawing from your tax-favored accounts (401(k), 403(b), IRA, etc.)? For executives who may be tapping into executive compensation in the form of deferred compensation (whether qualified or nonqualified), supplemental executive retirement plans (SERPs), and others, executive wealth management should include tax considerations and careful timing to avoid spending too much of your retirement income on taxes. If you participate in a pension plan, do you know your benefit amount and options (i.e., length of income guarantee, survivor benefits, etc.)?
3. How will you cover healthcare expenses? Early retirement usually means leaving the workforce before age 65, which is when you become eligible for Medicare. What is your plan for maintaining coverage for healthcare expenses? If your spouse is still working and covered by an employer plan, can you obtain spousal coverage? Does your employer offer a plan for company retirees? Do you intend to obtain a stand-alone plan through the Healthcare Marketplace? Certain pension plans also offer group coverage for members; is that an option for you? For highly compensated persons or others with more significant resources, have you considered funding a tax-advantaged health savings account (HSA) in connection with a high-deductible health plan (HDHP)? Costs and benefits for these various options differ widely, so we can assist you with the research and choosing the plan that works best for you and your post-retirement budget.
And speaking of stand-alone health plans, it is essential for early retirees to understand the Premium Tax Credit (PTC). The PTC is a refundable tax credit designed to help eligible individuals and families with low or moderate income afford health insurance purchased through the Health Insurance Marketplace. Though the additional subsidies available with the PTC expired at the end of 2025, this can still be a significant benefit for early retirees in income gaps who are looking to manage healthcare costs effectively. Your PTC size is based on a sliding income scale. Those with lower incomes get a more significant credit to help cover the cost of their insurance. Strategically planning your retirement distributions to maintain an income level within certain thresholds becomes important when trying to maximize the benefit of PTC. The goal is to keep your modified adjusted gross income (MAGI) within the range that allows you to qualify for the most generous PTC available, thus reducing your health insurance premiums. This might mean taking smaller or strategically timed distributions to maintain a lower income level. Navigating this balance can be complex, as it involves understanding the specifics of the PTC and managing your retirement accounts and tax implications effectively.
Strategic Withdrawal and Tax Planning for Early Retirement
A fine-tuned approach to withdrawing from your retirement accounts includes considering how withdrawals will impact your MAGI. This path might mean taking smaller or strategically timed distributions to maintain a lower income level. It's important to remember that it's not just retirement account withdrawals that count towards MAGI. Your MAGI calculation also includes any income generated from taxable investment accounts in the form of capital gains, dividends, and interest from your taxable investment accounts.
As an early retiree, you face a strategic choice: you can claim Social Security as early as age 62, or you can choose to wait. Delaying benefits until your Full Retirement Age of 67—or even up to age 70—can significantly boost your guaranteed monthly income for life.
The challenge, then, is navigating the “income gap” years in between. To fund this interim period, you may need to rely more heavily on distributions from your investment portfolio. This requires a delicate balance: drawing enough to maintain your lifestyle without over-leveraging your assets during the early years of your retirement and thus jeopardizing your long-term financial independence. By strategically utilizing your portfolio to bridge the gap, you can allow your future Social Security benefits to grow while covering your income needs.
While your income is temporarily lower before your Social Security benefits and required minimum distributions (RMDs) from retirement accounts begin, it is a unique opportunity for early retirement tax planning. One strategy involves Roth IRA conversions. For example, let's say you're in an income gap year and the 12% tax bracket. Once required minimum distributions from your retirement plans and Social Security kick in, you anticipate moving into the 22% tax bracket. In this scenario, converting a portion of your traditional IRA to a Roth IRA during your tax gap year can be advantageous from a tax perspective. It can offer you the opportunity to pay lower taxes now, reducing your lifetime tax liability. In addition, the converted amount in the Roth IRA grows tax-free, and qualified distributions in retirement are tax-free.
It's important to remember that this strategy requires careful planning to ensure you're converting only a little and not inadvertently pushing yourself into a higher tax bracket. It's also vital to have funds available to pay the tax on the conversion without dipping into your retirement accounts, as this could counter the strategy's benefits.
At GEM Asset Management, we work with clients planning early retirement to create strategic plans for retirement income that are understandable, detailed, and tax efficient. When you have a solid plan in place, you can make the “jump” to early retirement with confidence and clarity.
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