Retirement

Can I Retire Early? Becoming Financially Independent

By Chris Duderstadt

July 10, 2023

Can I Retire Early? Becoming Financially Independent

Key Points – Can I Retire Early? Becoming Financially Independent

  • The Issues Surrounding the Question, “Can I Retire Early?”
  • How Do You Know If You’re Financially Independent?
  • Do You Really Need to Wait Until Medicare Age or Full Retirement Age to Retire?
  • A Financial Plan Is the Only Way to Answer This Can I Retire Early Question
  • 10 Minutes to Read

Are You Asking Yourself, “Can I Retire Early?”

Did you have a blast celebrating the Fourth of July? Several of our team members sure did, and we hope you did as well. Along with celebrating America’s independence, we celebrate whenever we can help someone achieve financial independence. In this case, we’re going to talk about financial independence and discuss the possibility of retiring early.

The question “Can I retire early?” crosses a lot of people’s minds. You’re probably asking yourself that question quite a bit if you don’t like your job. But even if you do like your job, that question is worth thinking about as you start planning for retirement. Unless your name is Warren Buffett or Charlie Munger, you’re not going to work forever.

Setting Up a Spending Plan for Retirement

It’s critical to start planning for retirement at least five to 10 years before you’re wanting to retire. And we’re not just saying that so that you have a good idea of how much you need to save for retirement. Yes, being aware of how much you’re saving and understanding where you’re saving to is important. However, knowing how much you need to retire—or if you can “retire early”—can’t be answered until you’ve defined your retirement lifestyle. What are your goals? What do you want your retirement to look like? Once you’ve defined your retirement lifestyle, you need to create a spending plan that allows you to accomplish those goals.

Remember that every day is a Saturday in retirement. When you’re preparing for retirement, there’s a big shift that takes place. You go from your work being a large part of your identity to having a lot more time on your hands in retirement. What are you going to do with it? And if you’re retiring early, there’s even more time that you’ll have on your hands. It’s a nice “problem” to have, but it needs to be considered if you’re asking yourself the question, can I retire early?

Couples Retirement Planning

You might think that being bored in retirement impossible, but you could be staring boredom right in the eyes if you don’t define your retirement lifestyle before retirement. As you’re planning for retirement, you need to do so with your spouse or significant other. Much of that time that you’ve been spending at work is now going to be spent with your spouse. So, you not only need to outline your retirement lifestyle but your partner’s ideal retirement lifestyle as well.

You might think that you already know your partner’s goals for retirement, but we see so many times when we’re meeting with couples for the first time that they learn something new about each other. Being on the same page on retirement planning with your partner is pivotal to a long and happy retirement. Maybe you like to volunteer, spend time with your family, travel, garden, or other hobbies.

Go make the most of retirement with them rather than sitting around with nothing to do because you didn’t plan for retirement.

And as you’re trying to determine your retirement lifestyle with your spouse, we highly recommend downloading and reviewing our Retirement Plan Checklist. It gives you a detailed list of things to consider as you’re approaching and going through retirement. Get a better gauge of your retirement readiness as you ask yourself, “Can I retire early?” by getting your copy below.

Can I Retire Early

Retirement Plan Checklist

When You Ask Yourself “Can I Retire Early?” How Early Is Early?

So, ask yourself, can I retire early? If you keep thinking about it, you’ll probably really that there are some underlying connotations within that question. What ages are considered to be early with early retirement? Early retirement for you might look completely different for someone else.

Can I Retire Early? – Retiring Before Reaching Medicare Age

There are so many people who think that 65 is the earliest that they can retire because that’s when everyone becomes eligible for Medicare. Retiring before 65 means that you’ll no longer have your employer to support some of your health care coverage cost. Therefore, you’ll need to find an alternative coverage option(s) until turning 65. While this can be a big additional expense, if health insurance is the only thing that’s keeping you from retiring prior to 65 and you have the means to pay for it without derailing your plans for retirement, then why not “retire early?”

Don’t Forget to Factor in Inflation

Given what we’ve all experienced over the past year and a half or so with inflation, it’s harder now for people to overlook its impact. But we’ve still seen people do it. When it comes to health care costs, inflation tends to have an even bigger impact. Taxes and health care are typically the two biggest wealth eroding factors in retirement. That’s why we apply an even larger inflation factor to health care costs when we’re creating someone’s financial plan.

Can I Retire Early? – Retiring When You’re Eligible to Claim Social Security

Do you think that retiring before 65 is retiring early? Some people don’t want to wait near that long and want to immediately retire when they turn 62. That’s when you become eligible to start claiming Social Security benefits.

While that is an option, if we tell someone they can retire at 62, being eligible to claim Social Security at that time isn’t the reason why.

Social Security is generally the foundation of someone’s retirement income. When retiring early, it can be attractive to claim your Social Security as early as possible so you can capture that income as soon as it’s available. By doing that, though, you could be leaving even more money on the table by not properly planning your Social Security claiming strategy.

Can I Retire Early? – Retiring Before Reaching Your Full Retirement Age for Social Security

While some people want to claim their Social Security ASAP, others want to delay that decision until they’re closer to being 70. Many people don’t feel comfortable with retiring until they reach full retirement age, which is the age that you can receive full retirement benefits from Social Security. If you were born in 1955, your Full Retirement Age is 66 years and two months. Full Retirement Age gradually goes up to 67 for anyone who was born in 1960 or later.

But just like with Medicare age, don’t feel compelled to wait until you’ve reached your Full Retirement Age to retire if your plan is telling you that you’re financially independent. Maybe your spouse can claim earlier and you can postpone claiming your benefits (or vice versa) if you feel like you will need some additional income to confidently retire. To help figure out the ideal Social Security claiming strategy for you and your partner, download and review our Social Security Decisions Guide.

Social Security Decisions Guide

Being Aware of IRA Early Withdrawal Penalties

So, we’ve looked at some important things to consider with retiring before 62, 65, and as late as 67. But the question in the headline reads, can I retire early? Keeping that in mind, let’s think about being retired before your 60 (or in the case we’re about to look at, before 59½).

What’s so special about 59½, you ask? Well, one common issue with retiring before 59½ is accessing money in retirement accounts. Depending on the type of account, like an IRA, there may be restrictions or even withdrawal penalties.

It’s vital to consider which accounts will be available to take withdrawals from before you turn 59½ so you can avoid such penalties. If you were to retire at 55, you could take a penalty-free withdrawal from your 401(k). However, if you roll that into an IRA, you will lose that penalty-free withdrawal option. So, when retiring early, it’s crucial to plan ahead to make sure you’re not making potentially costly mistakes.

Are You All in with the FIRE Approach?

As we finishing diving into the question, can I retire early, let’s talk about a popular retirement acronym you may have heard of: FIRE (Financially Independent Retiring Early). If you’re one of those people who thinks that retirement can’t come soon enough, this acronym probably caught your attention.

Being financially independent is a great feeling. But how do you know when you’ve achieved it? When you’re trying to decide whether you can retire early, it’s natural for the fear of running out of money to creep into your mind. After all, you don’t know when you’re going to die, so you don’t know how long your retirement is going to last.

You Can Live Out Some of Your Retirement Lifestyle While You’re Still Working

Retirement is a very tricky thing to balance. By retiring early, you could be putting yourself in the position to fail. Likewise, if you work too long, you could miss out on your retirement savings altogether. However, you can discover that balance with some savvy prior planning. One thing we try to emphasize during the retirement planning process is that some of your retirement goals don’t need to wait until retirement.

If you don’t want to retire quite yet, remember that you can be financially independent and still decide to keep working. That being said, if you want to keep working but also want to take a trip that you’ve always wanted to go on, put that trip into your plan and sees if it impacts your probability of success for retirement. If it doesn’t alter your probability of success, take the trip! And if it does move the bar a little bit more than you’re comfortable with, maybe you can make some trade-offs so that you can still take the trip.

It’s always our hope for everyone to have a long and healthy retirement, but unfortunately, we all know that doesn’t end up being the case for everyone. It’s true that your health is also your wealth.

Understanding What You’re Leaving on the Table by Retiring Early

Many individuals begin thinking about early retirement in some of the highest-earning years of their career. What does that mean? They’re potentially going to leave more retirement savings on the table than ever. You would be limiting your time to save more for retirement during the years when you could save the most.

While this might be the best solution for some, it’s something everyone needs to think about before retiring early. The risk of running out of money in retirement is a very real risk. You need to be sure you’re covered before jumping out of the working world.

Understand What You Can and Can’t Control

When you’re thinking about retirement, it’s important to understand the things you can and can’t control. You obviously need to pay attention to all the factors, but there is no point in crying over spilled milk when it’s outside your realm of control.

Things You Can’t Control

Oftentimes, the biggest disruptors in someone’s retirement plan can come from outside forces. Investors can’t control market volatility. It seems crazy to think one could. So, why is it that so many focus on the market when they should be focusing on the entire plan?

Another component outside of your control is legislation. You can vote and make your voice heard, but unfortunately legislation is out of our complete control. Instead, you need to prepare for changes to the law with a team of professional planners to support you. You can’t control the law, but you can plan with the changes as they come.

And as we mentioned earlier, inflation can be a beast that we can’t control. The great thing about inflation is that you can plan for it by making sure your plan to retire early includes a higher inflation rate than expected. That way, if inflation does take off, your plan is ready for the change.

Things You Can Control

As there are things you can’t control when you retire early, there are things you can control. You can control your risk exposure, making sure you’re not putting more of your money at risk than you need to for your retirement plan to be successful. Greed is not your friend when you’re living off your retirement nest egg.

A more obvious thing you can control when you retire early is your spending. That’s where the spending plan that we mentioned comes in.   Retiring is different than working. Income and spending are different in retirement too. You need a whole new budget in the post-working world. Make sure you have one when you retire because we’re guessing that running out of money and going back to work isn’t something that you want to leave as a possibility.

You’re Ultimately in Control of When You Retire

The bottom line is that the only way to confidently know when you can retire is by creating a forward-looking financial plan. You won’t get a clear answer to the Can I Retire Early question—no matter how early you’re planning to retire—without that plan. A comprehensive financial plan can help give you confidence to do the right things with your money, freedom from financial stress, and time to spend doing the things you love. Those are all critical as you’re asking yourself, can I retire early?

Becoming Financially Independent by Building a Financial Plan

So, are you still asking yourself, can I retire early? There’s only one way to find out. That’s by building a financial plan so that you really know if you’re financially independent. We want to help you get to the bottom of answering that question. One way we’re doing that is by giving you the opportunity to use our industry-leading financial planning tool.

This isn’t your ordinary online retirement calculator that leaves out so many of the things that we’ve covered in this article, such as inflation, insurance, medical expenses, Social Security, your goals—the list goes on and on. We don’t want anything to derail your retirement. You can begin building your plan with our tool today at no cost or obligation by clicking the “Start Planning” button below.

Can I Retire Early

START PLANNING

If retiring early is something you’re strongly considering, you need to be working with a team of professionals that will help you with building and updating your plan leading up to and through retirement. As you’ve hopefully realized, there are a lot of questions that need to be answered before answering, can I retire early? We’re ready to go through those questions with you. You can ask us your questions during a 20-minute “ask anything” session or a complimentary consultation with one of our CFP® Professionals by clicking here. We can meet with you in person, virtually, or by phone.

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.