By Bryan Trugman, CFPⓇ
(Almost) gone are the days of 30-year careers spent at the same company and pensions that will allow you to live comfortably for the rest of your life. Also gone are the days of being content with retiring at full retirement age; 55 is the new 65 and early retirement is on everyone’s mind, especially as the pandemic has forced many people to reconsider their retirement timelines.
If this sounds like you, you’re probably wondering just what it would take to make your early retirement dreams a reality. At Attitude Financial Advisors, we help clients figure out their unique early retirement needs and create a customized plan to get there. Here are 6 questions we ask to better understand what early retirement looks like for you and how to make it happen on your terms.
What Do You Want Your Early Retirement Life to Look Like?
Have you thought about the type of lifestyle you want to have in retirement? Retiring early could give you an extra 10 years to travel, play golf, or spend time with your grandkids. No matter what you want to do, you’ll need to factor in what it looks like, how much it will cost, and how you’ll make it happen.
For example, if you plan to travel, you’ll need to consider:
- Will you be traveling stateside or internationally?
- How often do you want to travel?
- How would you like to get there? (e.g., car or RV; first class or coach)
- Where would you like to stay? (e.g., 5-star hotel, Airbnb, with family members)
- Will you be traveling with your family? Would you like to cover their expenses too?
- Will you maintain your primary residence? If so, who will watch your house and maintain it while you’re gone?
Even if your dream is simply to spend time with your grandkids, you’ll still need to think through your expectations. To some people, “spending time with grandkids” means babysitting a few times a week. To others, it means footing the bill for all-expenses-paid trips to various destinations of their choosing. Whatever it is you want to do with your time, map out the details so you can have a clear picture of how much you need to allocate to make it a reality.
Will You Earn an Income in Early Retirement?
Because early retirement can add 10-plus years between when you officially exit the workforce and when you can begin claiming Social Security, it’s important to consider whether you will continue to earn an income during the early years of retirement.
Not only is continuing to work a great way to stay active, keep your mind sharp, and maintain a sense of purpose, but it may even help you live longer. Some retirees choose to build a second career around things they are passionate about. No matter what you do, if you plan to work during retirement, you’ll have more resources to afford even greater financial flexibility.
What Kind of Healthcare Coverage Do You Expect to Have?
Right now, you most likely have health insurance. When you stop working, you’ll need to secure healthcare coverage another way. You may be able to utilize your spouse’s plan if he or she is still working. Or you can get coverage through the healthcare marketplace.
You qualify for Medicare starting at age 65, but if you retire early at age 55, that’ll still be 10 years away. It’s crucial to factor in the costs of private healthcare between the time you retire and the time you qualify for Medicare. Without an employer-sponsored health plan, your costs could increase substantially.
Even when you do qualify for Medicare, you may want additional coverage to pay for prescription drugs, dental care, eye exams, and other expenses. Retirees sometimes fail to fully plan for expenses during the later stages of retirement, and medical care often tops the list.
It’s estimated that retirees will use 15% of their income for health expenses, and the average retired couple could see healthcare expenses of approximately $315,000 (after tax) after age 65. Don’t let this be a planning oversight that prevents you from retiring early!
What Impact Will Rising Costs and Taxes Have on Your Early Retirement?
Not only do you need to plan for basic healthcare expenses, but you must also factor in the impact of rising costs. We have seen historically high levels of inflation over the past year, which has driven the cost of everything up significantly. Though this level of inflation will not last forever, even a more conservative 3.8% increase each year can drastically affect the longevity of your retirement income.
Not only that, but healthcare costs tend to rise faster than inflation and they can become a huge burden later in life if you are not taking proactive steps to save today.
Don’t forget to consider the impact of taxes as you plan for future retirement withdrawals. Because different financial accounts are taxed at different rates, it’s important to structure your retirement withdrawals in a tax-efficient way.
Traditional IRAs and 401(k)s are taxed at the ordinary income tax rate when you withdraw. Roth IRAs and Roth 401(k)s are taxed beforehand, so the money is withdrawn tax-free. Funds in a taxable investment account are taxed at the capital gains tax rate, which is different from your ordinary income tax rate.
By understanding the tax characteristics of your retirement income, you can plan ahead and avoid a hefty tax bill. This is especially important for early retirement since additional portfolio withdrawals will be necessary to bridge the gap between initial retirement and when you receive Social Security benefits.
Will You Have Any Dependents?
The earlier you retire, the more likely you are to have dependents either living with you or relying on you for financial support. Over 79% of parents said they still give financial support to their adult children (ages 18 to 34), according to a Merrill Lynch study, and the COVID-19 pandemic caused a boomerang effect, with 67% of adult children still living at home with their parents after returning home in need of financial help.
What Type of Legacy Do You Want to Leave Behind?
Even if you aren’t helping your kids out with daily expenses, you may want to contribute to their weddings, home purchases, or leave a lasting legacy down the road. As difficult as it may be to think about, it’s important to think about the type of inheritance you want to leave behind as you plan for retirement. Not only will this inform the amount you must save, but it will also affect your estate plan and should be factored in accordingly.
If you plan to leave tangible assets like real estate to your kids, be sure the assets are structured properly to avoid probate. Similarly, if you have substantial financial assets that near the estate tax exclusion of $12.06 million per person, you should consider trusts and other estate planning techniques to reduce your tax liability and ensure your legacy goals are accomplished according to your wishes.
Make Your Early Retirement Dream a Reality
Early retirement doesn’t just have to be a dream. At Attitude Financial Advisors, we can help you make it a reality. Planning for early retirement requires much more than a one-size-fits-all solution. To learn more about our customized financial planning process, reach out to me via email at firstname.lastname@example.org or give me a call at (516) 762-7603 to set up a consultation. You can also schedule a free consultation here.
Bryan Trugman is managing partner, co-founder, and a CERTIFIED FINANCIAL PLANNER™ practitioner at Attitude Financial Advisors. With more than 14 years of experience, Bryan specializes in addressing the financial needs of new parents as they seek to realign their finances, assisting divorced individuals as they navigate an unforeseen fork in the road, and strategizing with those seeking to accrue a dependable retirement nest egg. Bryan is known for being a good listener and building strong relationships with his clients so he can help them develop a customized financial plan based on what’s important to them. He is passionate about helping his clients experience financial confidence so they can worry less and play more. Bryan has a bachelor’s degree in industrial and systems engineering with a minor in mathematics from State University of New York at Binghamton. He has served on the board of the Financial Planning Association and continues to be actively involved in the national organization. He is also a member of the Plainview-Old Bethpage Chamber of Commerce and has served as its vice president and as a board member. When he’s not working, you can find Bryan on the ballroom dance floor or engaged in a fast-paced game of doubles on the tennis court. To learn more about Bryan, connect with him on LinkedIn. Or, watch his latest webinar on: How Much Is Enough? A Surprisingly Simple Way to Calculate Your Retirement Savings Needs.