Deciding on Early Retirement: Lining up the Moving Parts

Retiring early has become much more popular over the last several years, as people reassess the value of continuing to work and weigh the benefits of exiting their careers. While the first question is about the size of your retirement savings fund and whether it’s possible – or advisable – to give up a few more years of income, there are other factors to keep in mind.

An effective retirement plan has a lot of moving parts to it, so it’s a good idea to think through the various decisions you need to make and be sure you are tracking on everything before you stop work.

Making the Decision – the Psychological Impact

Retirement is less a transition and more of a shift – because once you stop work everything else changes and you need to have a plan in place. Separating the decision into two parts can be a useful exercise – first, do you really want to? Think through:

  • Will you miss work?
  • What will your social life look like?
  • How will you create meaning for yourself?
  • Will you launch a new career or undertake part-time work?

The psychological impact of one of the biggest life changes shouldn’t be overlooked, not only because it safeguards your mental health but also because it puts you in a better position to budget effectively and make the right financial decisions.

The Financial Impact of Early Retirement

You’ll be sacrificing additional years of wealth accumulation – but you may also be sacrificing social security benefits you may need.  If you don’t know what your social security benefits will be and if you’ve paid enough in to maximize them – check it out here:  https://www.ssa.gov/myaccount/

Your next decision is whether to claim social security as soon as you are eligible or wait for a few more years to take advantage of the late retirement boost. The difference in monthly benefit for waiting until you hit or exceed full retirement can be very significant. Early Retirement is considered to be 62 years old; Full Retirement is 66 or 67 depending on your birthdate, and Late Retirement is 70.

The amounts aren’t absolutes – they increase by a specific percentage for every year you delay, so you don’t have to make it all the way to age 70 to see some benefit.

Maximum Monthly Retirement Benefits for 2023

According to the Social Security Administration, a 2023 retiree that is eligible for maximum benefits would be entitled to as much as $2,572 if they retired early at age 62; $3,506-$3,808 if they retired at full retirement age of 66 or 67; and $4,555 if they waited for late retirement benefits at age 70.

Can You Bridge the Gap with Retirement Savings?

Deciding when to claim social security may come down to whether you’ve created enough 401(k) or IRA savings to see you through. Accessing these savings (assuming you are over age 59 ½ and will not have to pay the 10% penalty for early withdrawal) can have tax implications both now and later.

The more you drawdown now, the lower these balances will be when you have to start taking required minimum distributions at age 73.  Your social security benefit will also be higher – and contrary to popular belief, up to 85% of social security benefits are taxable.

 Health Insurance

Are you getting the idea that there are a lot of moving parts here? And we haven’t enough talked about health care yet!

Medicare eligibility begins at age 65. There are several ways to bridge the gap if you’re not eligible yet. These include part-time work that includes coverage, spousal coverage, or purchasing a policy through an exchange.  For many people, depending on their overall health situation, the availability of affordable healthcare can be the determining factor in deciding to retire early.

If you do decide to retire before Medicare kicks in and purchasing insurance through the exchanges is the best option – think carefully about what level of care you need.  The different tiers of plans allow you to control how much you pay for insurance, with the trade-off being how much the insurance pays towards your care.

If you are generally healthy and don’t need to visit the doctor often, a lower tier of coverage may be the right choice for you. However, if you have existing health conditions or would just feel more comfortable with the ability to have more flexibility with your health plan, you may want to purchase a more comprehensive – and expensive – level of coverage.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™ and owner of True Equity Wealth Management LLC. Email him at michael.shea@trueequitywealth.com or fill out a contact form.

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This blog is provided for informational purposes only. Such views are subject to change at any point without notice. The information in the blog should not be considered investment or tax advice or a recommendation to buy or sell any types of securities. Some of our blogs or information therein have been obtained from third party sources believed to be reliable but such information is not guaranteed. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.

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