Early Retirement Possibilities: Exploring 5 Factors That Could Accelerate Your Departure from the Workforce
A Looser Leash on Retirement: Five Surprising Factors That May Allow You to Call It Quits Earlier Than You Think
Hey there! Ty Bernicke, CFP®, here, the CEO and Executive Wealth Manager at Bernicke Wealth Management stationed in Eau Claire, WI. You might've heard from mainstream media outlets that some folks wish they'd worked longer after retiring. Plus, traditional retirement planning usually confuses peeps into sticking around longer than necessary. But let's debunk those myths and explore five reasons many individuals can retire earlier than they imagine.
Reason 1: Shrinking Spending Habits
One of the primary reasons so many people can call it a day sooner than anticipated is the natural decline in spending with age. Data from the Bureau of Labor Statistics reveals that real spending decreases past the age of 55. Tricky retirement planning assumes that real spending escalates at an assumed inflation rate from the very first day of retirement until the end of days. This flawed approach suggests to folks that they gotta grind longer than necessary. If individuals anticipate reducing real spending in their later retirement years, their plan should reflect that, leading to a more accurate savings estimate to maintain their desired lifestyle post-work.
Reason 2: Overestimated Medical Costs
The second reason many can retire ahead of schedule is overestimating the costs of retiree health insurance before Medicare kicks in at age 65. Those without retiree health insurance offered by a former employer often opt for Affordable Care Act insurance or a state-sponsored version. The cost of this health insurance is partially determined by a household's modified adjusted gross income (MAGI). Typically, lower MAGI means cheaper health insurance. Distributions from non-qualified investment accounts and qualified distributions from Roth IRAs do not count toward MAGI. By properly planning ahead, investors can keep the cost of this health insurance lower by maintaining a lower MAGI before Medicare eligibility at 65.
Reason 3: Tax Benefits
Taxes in retirement are often lower than during work years, thanks to these factors:
- Partial exemption of Social Security income from federal income tax
- Many states exempt Social Security income from state tax
- No FICA tax during retirement years on Social Security, pension income, and IRA distributions
- Tax-exempt qualified distributions from Roth IRAs and the basis from non-qualified accounts
Retirement income is generally more advantageous due to a reduced tax burden.
Reason 4: Diminishing Expenses
People can frequently retire earlier due to less spending in retirement compared to working years, resulting from:
- Reduced spending on children
- Debts often paid off
- Reduced (or zero) interest expense on debts
- No longer budgeting for retirement savings
For these reasons and others, retirees often see a decline in spending.
Reason 5: Utilizing Liquidity Options
The final reason many can retire earlier is financial flexibility. IRA and 401(k) investors commonly hear that withdrawing funds before age 59.5 results in penalties. Although true, there are exceptions that benefit those looking to retire before 59.5:
- 401(k) investors who leave their employer at age 55 or later can take withdrawals from their employer's 401(k) penalty-free, providing a stable, penalty-free income stream not impacted by market fluctuations.
- IRA owners can take advantage of 72(t) distributions, allowing penalty-free withdrawals at any age under specific rules. This strategy can help those eager to retire young secure a financial safety net.
I'm spilling the tea on these five reasons because frequently, these factors get missed during retirement discussions. Precision in individualized planning plays a significant role in determining retirement age. Traditional retirement planning doesn't account for all these variables. I urge investors considering early retirement to chat with a financial expert about these elements before making a decision to retire sooner than expected.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor. Great Valley Advisor Group and Bernicke Wealth Management are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance details are historical and do not guarantee future results. No indices are investable. Hypothetical examples are not representative of any specific situation.
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- Ty Bernicke, CFP®, explains that retirees might find themselves in a position to call it quits earlier than expected, citing Reason 1: the natural decline in spending with age, as evidenced by data from the Bureau of Labor Statistics.
- Ty Bernicke, CFP®, also notes that overestimated medical costs before Medicare kicks in at 65 (Reason 2) can be a reason for earlier retirement, as individuals can lower the cost of health insurance by maintaining a lower Modified Adjusted Gross Income (MAGI).
- Tax benefits at retirement (Reason 3) can lead to a more advantageous retirement income due to reduced tax burden, thanks to elements like partial exemption of Social Security income from federal income tax, tax-exempt qualified distributions from Roth IRAs, and no FICA tax on Social Security, pension income, and IRA distributions.
