What To Know Before Retiring Early

Early retirement may seem like an appealing thought. However, good preparation is key to considering an early retirement. If you’re not prepared, you might run into complications. Here are a few things to consider before you put in your resignation at your job. 

Will You Have Enough Money for Your Entire Retirement?

Retirees tend to spend more money than expected, especially in early retirement. They might spend more on travel, home renovations, or other retirement-related lifestyle changes. Sticking to a budget early in retirement might not be a high priority compared to enjoying your free time, but you need to consider the later years, even as you’re enjoying the early ones. Making a budget with plenty of room for travel and other things you finally have time for will help you strike a balance.

Many retirees today are having to plan for retirement that could last 25 to 35 years or longer.. This means that you might need to make your savings last longer than expected. If you talk to any group of retirees or pre-retirees, the prospect of outliving their money is likely to be one of their top concerns. Some people will live past 90 or even to 100. If your retirement lasts 20, 30, or even 40 years, how well do you think your retirement savings will hold up? What financial steps could you take in retirement to try to prevent those savings from eroding?

Some retirees choose to continue working part-time in their 60s and 70s, whether for financial reasons or because they enjoy the purpose, structure, and social connections that work can provide. Even a modest amount of earned income can help reduce the amount withdrawn from retirement savings, allowing investments more time to grow. For example, earning $20,000–$30,000 per year could help cover living expenses and potentially extend the longevity of a retirement portfolio.

Plan for Healthcare Costs in Retirement

Healthcare costs can be high before Medicare starts. Until then, you will have to pay for private health insurance, which can be costly, so one of the benefits of remaining employed is maintaining workplace insurance coverage. Even after Medicare begins, many retirees continue to face healthcare expenses that Medicare doesn’t fully cover, including deductibles, prescription drugs, dental, vision, hearing care, and potentially long-term care. How many people retire with a dedicated account or lump sum to address future health costs? Some retirees end up winging it, paying their out-of-pocket expenses out of income, Social Security benefits, and savings.

While couples can save together, individuals may have considerable healthcare costs. People have begun adjusting their retirement expectations by considering projected healthcare expenses, and businesses have quietly made some changes. If you possibly can, you should take advantage of employer matching contributions.

If you’re eligible, contributing to a Health Savings Account (HSA) can also be an effective way to prepare for future healthcare expenses, as HSAs offer valuable tax advantages for qualified medical costs.

There is no easy answer for retirees preparing to address future healthcare costs. Staying active and fit may lead to long-term healthcare savings, but tomorrow’s retirees may already have some physical ailments. Planning for future health costs is always a good idea, especially if you want to retire early.

Accessing Retirement Savings Before Age 59½

Retiring before age 59½ can create additional planning considerations when it comes to accessing your retirement savings. Withdrawals from many tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, may be subject to ordinary income taxes and a 10% early withdrawal penalty. However, certain exceptions may apply depending on your circumstances, so understanding the rules before withdrawing funds is important.

Roth IRAs can provide additional flexibility in retirement because contributions are made with after-tax dollars. Qualified Roth IRA earnings can grow tax-free and can be withdrawn tax-free if IRS requirements are met. Additionally, because contributions were made with after-tax dollars, they can generally be withdrawn at any time without taxes or penalties, providing added flexibility if the money is needed before traditional retirement age.

Having different types of retirement accounts can give retirees more options when creating an income strategy. By understanding how taxable, tax-deferred, and tax-free accounts work, retirees may be better positioned to manage taxes and determine which accounts to draw from throughout retirement. Thoughtful tax planning before and during retirement can help retirees make informed decisions about withdrawals, potentially reduce unnecessary taxes, and improve the long-term sustainability of their retirement savings.

Giving Your Retirement Savings Time to Grow

The longer you work and save for retirement, the more opportunity your investments have to grow. If you retire early or begin withdrawing from your retirement accounts sooner than planned, those investments have less time to benefit from the power of compound growth.

Compound growth occurs when your investment earnings generate additional earnings over time. While the effects may seem modest in the early years, the impact can become significant over decades, making time one of the most valuable assets in retirement planning.

The power of compound growth has fascinated investors for generations. Benjamin Franklin famously left the equivalent of about $4,550 each to the cities of Boston and Philadelphia in his will in 1790, instructing that the money remain invested for future public projects. After 100 years, each fund had grown to approximately $572,000, and by the time the trusts were closed in 1990, they had grown to nearly $7 million. While investment returns are never guaranteed, Franklin’s story illustrates the remarkable impact that time and compounding can have on long-term savings.

The same principle applies to retirement savings. For example, $100 left alone in an account earning a hypothetical 10% annual return for 30 years would grow to approximately $1,744. Likewise, someone who starts with $5,000 and contributes $100 per month to an account earning a hypothetical 8% annual return could accumulate approximately $128,988 over 25 years. These examples are hypothetical and are provided for illustrative purposes only. Actual investment returns will vary.

Retirement income needs increase over time as inflation raises the cost of everyday living. A million dollars does not go as far today as it did decades ago, and it may buy even less by the time you retire. While there may be times when retirement savings need to be accessed, withdrawing money early means those dollars lose the opportunity to continue growing through the power of compounding.

Your Home is Not Necessarily an Investment

You will need to live somewhere in retirement, whether you rent or own your home. Home ownership has associated costs, especially if you plan to sell the house at some point, including making additions and improvements. Your home is an expression of your lifestyle, a wonderful setting for your life, and a place where you can enjoy privacy and comfort. While home equity can become a valuable financial resource, relying too heavily on your home to fund retirement may leave you vulnerable to housing market conditions or unexpected expenses As an investment, though, it is essentially illiquid, and its rate of return is uncertain.

Over the decades, real estate values have generally increased, but appreciation varies by location and market conditions. Stocks and bonds, unlike your home, do not need upkeep. You will never need to repair, reroof, or repaint a portfolio. Houses need maintenance over time, and you must also pay property taxes. If you envision your home as an income-producing asset during your retirement, that means playing landlord on some level. Many are not ready to take that step.

Remember that home values tend to increase gradually. If you see your home as an investment, consider it a long-term one. While every household is different, be careful if you plan to use your house to fund your early retirement.

Careful Planning Matters for Early Retirement

Early retirement is possible if you can finance your lifestyle from the day you quit working. It’s a worthwhile goal for anyone willing to take the steps to make it both feasible and relatively uncomplicated. You can take these steps in tandem with your trusted financial planner, someone who has helped others pursue similar goals and succeed. 

Spiritual Application

While the term “retirement” may not be mentioned in scripture, the Bible talks much about the concept of seasons. Ecclesiastes 3:1-2(NLT) states, “For everything there is a season, a time for every activity under heaven. A time to be born and a time to die. A time to plant and a time to harvest.” Retirement can many times be viewed in our society as a lifestyle of sitting back or not being productive. However, if done correctly, “retirement” can still be productive on many levels, but not at the expense of as much of our time or labor. If you have prepared properly, a diligent pre-retirement lifestyle of saving and stewarding the wealth and resources God has given you can lead to an enjoyable, less taxing lifestyle that is just as impactful as when “working”. 

If you are approaching a new season of your life, consider the ways that you can prepare for your next season. In the case of early retirement, are your spending and saving habits aligned with your goal of one day being able to work by choice? From a spiritual standpoint, are you prepared to take the next steps to be ready for the next season? While we can never be completely prepared, we can always make adjustments that will make the results more favorable for us. As we faithfully steward what God has entrusted to us, we can approach each new season with greater confidence, trusting Him to provide wisdom and guidance along the way.

Frequently Asked Questions About Early Retirement

What should I consider before retiring early?

Before retiring early, consider whether your savings, income sources, and investments can support your lifestyle for the long term. Healthcare costs, taxes, spending habits, and access to retirement accounts are all important factors.

How much money do I need to retire early?

There is no one-size-fits-all answer. The amount you need depends on your lifestyle, expected expenses, income sources, and how long your retirement may last.

Can I withdraw money from retirement accounts before age 59½?

You may be able to, but withdrawals from many retirement accounts before age 59½ can result in taxes and penalties. Understanding the rules and available exceptions is important before taking withdrawals.

How does retiring early affect my retirement savings?

Retiring early means your savings may need to support you for a longer period while also having less time to grow. Working longer or earning income part-time may help extend the life of your retirement savings.

Can I use my home to fund early retirement?

Your home may be a valuable financial resource, but relying only on home equity can create challenges. A home is less liquid than investment accounts and still requires ongoing costs like maintenance and taxes.

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This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Evergreen Financial Group, LLC is a registered investment advisor offering advisory services in Montana, Utah, Wyoming and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision. All opinions and estimates constitute Evergreen Financial Group’s judgement as of the date of this communication and are subject to change without notice. Evergreen Financial Group does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk.