When Does An Early Retirement Make Sense? 5 Scenarios

early retirement

Is 40 the new 65?

According to a lot of millennials, it is!

A popular trend among the new generation of workers is to set a nest egg target, work and save like crazy to hit it, and then plan to quit the 9 to 5 life at around the same age their parents were probably thinking about buying a first home!

Now I don’t have any clients at Keen Wealth who are ramping up their retirement planning THAT much. But this is just another example of how the very nature of retirement, and the goals a lot of folks have for their golden years, continue to evolve.

Still…  No, I don’t think 40 is the new 65 – and neither does the Social Security administration!

But I do see five scenarios where an early retirement before age 60 could be a plan worth following:

1. You have a clear vision for your ideal retirement.

Imagine you’re retiring tomorrow. How are you going to spend your time? Are you going to get a part time job? Volunteer? Start your own small business? Globe-trot? Master golf? Write the Great American Novel?

And where are you going to live? Are you going to sell your family home and move to a retirement community? Buy a second vacation house?

At Keen Wealth, we believe that retirement planning doesn’t start with numbers on a page. It starts with answering these kinds of lifestyle questions.

“I just don’t want to work anymore” might sound like an appealing answer, especially if you have a stressful job. But if you don’t retire TO something, you’re setting yourself up for a life of boredom, depression, health problems, and strained relationships.

So, what are you going to retire TO? Don’t retire until you have a clear vision of your answer.

And one additional caveat here: as my friend Mitch Anthony says, a life of “ease” is two steps away from a life of “dis-ease.” It’s vitally important to have more to retirement than just fun and games.

2. You have a solid nest egg saved that can support you in retirement.

Compound interest is a magical thing. The earlier you start harnessing its awesome retirement-boosting power, the earlier you may retire. And if you’ve always had a clear vision for retirement in mind, you probably kept your expenses in check and your debt low – you might even be close to paying off your mortgage.


3. Your investment accounts don’t penalize you for early withdrawal.

Just because your nest egg is already nice and fat, that doesn’t mean it’s a good idea to grab it early. The taxes and penalties you can face for taking early distributions from your retirement accounts can be substantial. If early retirement is a goal, you want to talk to your financial advisor about the best investment and withdrawal strategies to limit those liabilities.

For example, you can start taking tax-free distributions from an employer-match 401(k) at age 55, as long as you don’t roll that plan over into an IRA. Six months after your 59th birthday, you can take withdrawals from other 401(k)s and many other qualified retirement plans. You can also withdraw early from a 457 plan with no penalties, although you do have pay income tax.

Again, the tax and penalty picture here can get very complicated very quickly, especially if you’re married and your spouse has separate plans. It’s prudent to have a pro help you plan ahead for early withdrawals if early retirement is a goal.

4. You won’t be relying on Medicare for your health care.

Medicare eligibility begins at age 65. And remember: if you’re married, you each have to be 65 to take Medicare, as you qualify separately based on your individual ages. Once you transition to Medicare, you’re done with group insurance plans. You and your spouse (and any dependent children) will each need a plan that covers you as individuals.

So, if the younger spouse is still working and providing employer-subsidized health care, then the older spouse can retire early without worrying about Medicare. Another option would be to set up a Health Savings Account from which you can take tax-free distributions to pay for out-of-pocket medical expenses until your Medicare eligibility kicks in.

5. You won’t be relying on Social Security.

Social Security eligibility begins at age 62. But if you take those benefits early on then your total earnings may decrease and, if you are the primary breadwinner, then so will your spouse’s.

Also keep in mind that your Social Security distributions are based on the average of your 35 highest-earning years. If you’ve worked less than 35 years, then the formula the government uses plugs in a zero for every year without earnings. Five or ten goose eggs are going to drag your benefit payments down.

There are plenty of valid reasons for taking Social Security before age 65, such as a medical situation that makes it impossible for you or your spouse to work, or an unexpected change in your employment status. In those cases, you might need that safety net. Just don’t expect Social Security to foot the bill for an unforced early retirement.

And, as I said before, don’t expect early retirement to make you happy in and of itself! At Keen Wealth, all these retirement issues circle back to the individual needs and lifestyle dreams of our clients. Don’t be in a big rush to go just anywhere – work with a fiduciary advisor to get exactly where you want to go.

Bill Keen: If early retirement is your goal, make a plan with your fiduciary advisor.

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 24 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.  

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