Doug Hutchinson
Successful early retirement requires a financial plan that can withstand 30–40 years. Unfortunately, many early retirees overlook landmines that can drain their wealth prematurely.
In our previous article, Seven Savings Strategies for Early Retirement, we shared proven ways to build wealth and retire early. In this article, we’ll answer another important question: Are you financially prepared for early retirement?
Health Care Before Medicare
Healthcare is one of the biggest challenges for early retirees. Medicare doesn’t kick in until you turn 65, so people who retire early face a gap of 10, 15, or even 20 years without employer-subsidized health insurance.
Medical emergencies can wipe out a lifetime of savings very quickly. More than half a million Americans who file for bankruptcy each year cite medical bills as the primary cause.
To avoid paying a significant chunk of your savings to a health care provider, it’s a good idea to have some form of insurance. This could be:
- A plan from the Affordable Care Act marketplace, possibly a high-deductible HSA
- Working a low-stress, part-time job with healthcare benefits.
- Living abroad in a country with socialized medicine
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SOURCE: J.P. Morgan Guide to Retirement 2026
If you choose to stay in the U.S., be sure to budget for premiums, deductibles and annual price increases. Since 2000, the cost for medical care, including insurance, medication and services from providers, has increased by more than 121%. This increase is 35% higher than the increase in cost for other consumer goods and services.
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SOURCE: Peterson KFF
A financial advisor can help you create a financial plan that can cover the costs of routine and emergency health care.
Early Retirement and Social Security Benefits
You can start collecting Social Security at age 62, but if you file for Social Security benefits before age 67, this is considered “early retirement,” and your monthly payment will be up to 30% less.
- Claim Social Security at age 67 to receive your full retirement benefits.
- Delay even longer, and your monthly payments will be higher.
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SOURCE: J.P. Morgan Guide to Retirement 2026
As the chart above shows, the benefit reduction depends on when you file (age 62 vs age 66). Two important things to note:
- The reduction is permanent. If you file early, you won’t bump up to your full benefit amount when you turn 67.
- You will, however, receive an annual cost of living (COLA) adjustment, 2.8% on average.
A financial advisor can help you chart out when to claim Social Security. They can help you factor in other income sources, retirement goals and any legacy wishes.
For more on this topic, read our deep dive about When to Take Social Security. The article also covers the Social Security breakeven age: the age where the value of waiting to start Social Security surpasses the value of collecting benefits early.
Early Retirees Need an Extra Large Emergency Fund
Life can throw expensive surprises your way. Vehicles break down, pipes burst and natural disasters can make your home uninhabitable. Insurance can cover some of these expenses, but you may need to pay up front and wait for reimbursement.
Economic downturns are also a major concern. If the market drops, the last thing you want to do is sell your investments at a loss. To avoid dollar cost ravaging your portfolio, it’s a good idea to have 1–2 years’ worth of living expenses in a money market account, CDs or other liquid assets.
Avoid Retirement Account Withdrawals
It can be tempting to use retirement accounts as a quick source of cash, but taking money out of 401(k) plans or traditional IRAs before you turn age 59½ can be costly. The IRS levies a 10% penalty for early withdrawals from 401(k) and IRA accounts unless the money is needed for a qualified expense. This 10% penalty is in addition to federal (and possibly state) income tax.
NOTE: If you plan to work until at least age 55, you can take advantage of the IRS Rule of 55.
What about withdrawals from a Roth IRA? You can withdraw contributions penalty-free, but doing so reduces the amount of money available to grow tax-free.
Let’s say you contributed $48,000 to your Roth over 20 years and invested in an S&P index fund. The account is now worth $122,000 thanks to stock market growth and the power of compound interest.
- The maximum amount you can withdraw without penalty before age 59½ is the original $48k.
- But if you let the account grow for another 20 years, that $122,000 could turn into $680,000.*
* The S&P’s average, annualized return has been 9% over the past 30 years (6.3% when adjusted for inflation). Past performance does not guarantee future results.
Test Your Retirement Budget
Retiring early is about more than reaching a savings goal. It's about making sure your finances can support decades of living without a paycheck.
Before making your official exit from the workforce, take these final precautions:
- Track your actual spending: Spend three to six months tracking every dollar you spend to ensure your estimated retirement budget matches reality.
- Stress test your budget estimate: Try living on your expected retirement income for several months.
- Create a backup plan: Give serious thought to how you could generate income if the economy takes a severe turn for the worse. A part-time job? Consulting? Before you officially exit the workforce, lay the foundation for your backup plan.
Adjusting your budget before you retire is much easier than discovering your plan is inadequate after you've already left your job. Also, knowing you have a feasible financial plan will help you feel more confident and able to enjoy your early retirement.
Consult an Expert
Early retirement is an exciting goal, but it requires careful planning. Underestimating your insurance needs or withdrawing from the wrong account at the wrong time can cost you thousands of dollars.
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SOURCE: TIAA Institute
Don't leave your future to chance. Consult a financial advisor who can help you optimize your investments, review your plan and make sure you are truly ready to take the leap. They can also help you account for inflation and what steps you should take (or not take) during a major market downturn.
According to the TIAA Institute, 1 in 4 Americans who work with a financial professional report nearly double the confidence in retirement planning compared to those who did not work with an advisor.
Our friendly and experienced wealth managers will help you build a personalized strategy. Contact us online or give us a call at (415) 541-7774.
Related Reading:
- 7 Strategies to Save for Early Retirement
- Are You Prepared for the Most Common Financial Challenges?
- 5 Saving and Spending Rules That Need to Be Retired
- Should Long-Term Care Insurance Be Part of Your Financial Plan?
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Assembly Wealth (“Assembly”) is an SEC registered investment adviser; however, this does not imply any level of skill or training and no inference of such should be made. The opinions expressed herein are as of the date of publication and are provided for informational purposes only. Content will not be updated after publication and should not be considered current after the publication date. We provide historical content for transparency purposes only. All opinions are subject to change without notice and due to changes in the market or economic conditions may not necessarily come to pass. Mention of a security should not be considered a recommendation or solicitation to purchase or sell the security, and any securities mentioned may be held by Assembly for client portfolios.
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