6 Steps to Help Clients Plan for an Early Retirement

SOSEPPs, withdrawing Roth contributions and the rule of 55 all have the advantages of eliminating penalties (and taxes, in the case of the Roth withdrawals) prior to age 59 ½. The downside that has to be weighed is that your client is reducing the value of their retirement accounts for the latter part of their retirement.

4. Plan for health care costs in retirement.

Covering the cost of health care in retirement is a major issue for those who retire at 65 or a more “normal” retirement age. Older adults generally have the benefit of being able to enroll in Medicare when they retire or soon after.

In the case of early retirement, it’s important to be sure that your client has health insurance coverage in place to tide them over until they are Medicare-eligible. If they are leaving an employer early, they need to check into whether there is some sort of retiree medical plan they can utilize.

Some employers may offer extended medical coverage as part of a buyout incentive, if this is applicable to your client. COBRA is also an option, but this is expensive and only lasts for up to 36 months.

If the client is married and their spouse continues to work, coverage under the spouse’s plan is also an option.

For most early retirees, purchasing health insurance on their state’s insurance marketplace is going to be their best bet. In terms of budgeting for the cost of the policy, it’s important to keep in mind that while the costs of this plan will be lower than with COBRA, they should expect higher premiums and perhaps higher deductible limits than with their former employer’s plan.

If your client is planning to work for an employer on some type of part-time or consulting basis, they may be able to negotiate being included on the employer’s health insurance plan as part of their compensation, which could save them some money.

An excellent planning tool for clients contemplating early retirement is to fund a health savings account (HSA) if they can. HSAs allow for pretax contributions, and the money can be carried over from year to year if not needed to cover medical expenses while the client is working. The money can be used to cover the cost of health insurance, as well as other eligible medical expenses, during the client’s early-retirement period until they are eligible for Medicare.

5. Create a retirement spending plan.

As with a client retiring at their normal retirement age, it is critical to formulate a retirement spending plan. What will it take to support their early retirement lifestyle? There are a number of issues to consider here, including:

Housing: Will your client stay in their current home or perhaps sell it and downsize?
What activities will they pursue and how much will they cost?
What will their normal monthly expenses look like?

It’s also critical to formulate a retirement withdrawal strategy for their early retirement years with considerations for what might change further down the road. Which accounts will be tapped, and in what order to help your client meet their spending needs? How might this evolve over the course of their retirement years?

This second question is multi-faceted and must take into account the client’s tax situation, any employment or self-employment income, the timing of Social Security and pensions, among other considerations.

6. Weigh the impact of early retirement on the client’s overall retirement planning.

Early retirement is a valid option for your clients to aspire to. However, as their advisor, you need to review their situation to be sure that by retiring early they are not putting themselves at risk of outliving their assets over the course of their lifetime.

This can help your client formulate what their early retirement will look like and to make decisions as to a full early retirement or perhaps a partial one where they do some sort of work or self-employment for a period of time before totally retiring from work.

Beyond this initial analysis, you will want to run a retirement projection periodically to determine where they stand for the longer term and to see if any adjustments need to be made to their investing plan or their retirement withdrawal strategy.

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Roger Wohlner is a financial writer with over 20 years of industry experience as a financial advisor.