8 of the Most Common Early Retirement Planning Questions and Insight on Each

Early Retirees face numerous unique challenges and uncertainties.  While planning is fluid and needs change, this article aims to educate and address the most common questions I see, and provide my context and application as it relates to what actually makes sense for most early retirees.

1. "What is the best way to bridge the health insurance gap before Medicare?"

By far and away the most common question I see is this.  Healthcare premiums can skyrocket if income is too high to take advantage of subsidies.

If you are planning to retire before age 65, your health insurance is likely your largest "wildcard" expense. The variation of income levels to qualify for enhanced credits means you must be much more disciplined about where you pull your spending money from. Keeping your "on-paper" income low is the most effective way to give yourself a massive "tax-free" raise via lower insurance premiums.

The best approach to this is to actually use Healthcare.gov to review options for plans at retirement, and annually.  Compare this to the COBRA cost and coverage options of your existing plan upon your departure from your employer.  In some cases, people have saved enough to retire and cover the full premium anyway, making this a much less worrisome option, and more of a nuisance.  

Also be mindful of asset location in your investments.  Early retirees should be cautious with high-dividend stocks or REITs in taxable brokerage accounts. These generate "forced" income (dividends) that increases MAGI and cannot be easily turned off, potentially pushing you over the subsidy cliff involuntarily.  Naturally, every situation is different though.  

Ensure that you evaluate your total expected income in retirement, including any dividend interests, Roth conversions, and side income you may generate.  

2. How should I sequence my withdrawals to minimize taxes (Roth vs. Traditional vs. Taxable)

A very common question I see, specifically for early retirees, is where to draw from.  This is answered easier once an individual turns 59 ½.  Whether or not they have a brokerage account can factor into this decision as well.  

Drawing too much from a Traditional IRA can create ACA issues, but not drawing it down can create RMD issues later on, for example.  My approach to this honestly varies person by person.  There is no correct way, other than aiming to efficiently pay taxes in doing this, staying under ACA limits when possible under medicare age, and for low income individuals, aiming to have some capital gains harvesting are common approaches.  

3. What happens if a market crash occurs the year I reach CoastFI?

Virtually a question from every early retiree I have worked with given the markets’ role in most plans.  Surprisingly, for most, a sudden drop has much less impact than most think.  Long term under-performance, sometimes caused by panic selling, is much more damaging.  Staying the course is key here.  Also, being intentional about managing the risk of your portfolio, and especially the accounts you initially draw down (Take money from), is key in reducing risk here.  

4. How do I calculate my CoastFI number accurately?

I believe the best way to do this is to start with why you want to retire early, followed by what you want to do (Work part time, no work, hobby work ,etc), then see what your expenses are, followed by seeing what your gap will be.

Naturally you need to use certain assumptions here to predict this, but most people, due to higher than average recent market performance tend to overestimate what they need.  

View this from a ‘filling the gap’ vs a “I need X amount by Y age” problem.  Understand that most easily adjust in retirement to fix problems that naturally arise.  Model out an assumed rate of return for your investments that is reasonable, and see how much you need to withdrawal to fill the gap.  For the most part, software with my own input can help answer this!

5. Is the 4% Rule still safe for a 40- or 50-year retirement?

As with most planning needs, it depends on your situation and saving.  For someone who over-saved, then yes it can be, but this also depends on the specific returns of your account and the products you hold in each account.  If your accounts do indeed continue to grow while taking 4% over time, then yes in most cases this makes sense.  

There are multiple options available and in our planning process, we review different options to determine what makes sense.  The accounts you pull from also factor into this decision, so it extends beyond just pulling a set percentage.  Also, expected expenses should determine your withdrawal rate.  

One free tool to learn more and see how different withdrawal rates impact your plan with actual market returns is FiCalc.

6. Can I still contribute to my 401(k) or IRA after I stop 'saving' and start 'coasting'?

If you are still earning then yes, in some cases it makes sense to do this.

Moreover, HSA and IRA contributions can reduce AGI, meaning ACA premiums can cost less.  This can be a powerful tool in income management for early retirees.  

The devil’s advocate side of this is that the intent of saving money is to spend or give it away, vs stockpiling more to feel ‘safe’.  If you already have enough investments saved, consider not putting money aside just for a tax break, and instead, enjoy that extra cash flow!

As always, each scenario is different, and a planner’s input is helpful here.

7. What are the best 'low-stress' career pivots for a professional in the CoastFI phase

This question is surprisingly common, as many people look for their next endeavor vs a golfing/do nothing type of retirement.  

They want to keep their mind sharp and do something they enjoy, while continuing to earn, for a multitude of reasons.

There is no one best answer here; each individual is hardwired differently.  The best way to tackle this is to try many hobbies in your spare time, see what you like, and go from there.  Be curious and have a mind of discovery, ensuring you do not take on unnecessary stress or risk with your next endeavor.  Thinking about this as your ‘why’ prior to moving on from your full time job is important too.  

8. Does 72(t) Make Sense for me?

72(t) is a means by which you can take money out of your retirement accounts (Specifically 401k or IRA), before 59 ½.  It is typically considered a last resort, and is completed with meticulous tracking, a steady distribution, and is locked in once you start.  It is rather inflexible and can create income issues around ACA planning over the long term if you end up finding something you enjoy and “Un-retire”.  

Most importantly, you pay the 10% penalty retroactively if you don’t follow the payment cadence you establish.  Here is a good resource to learn more about this topic.  

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Financial Planning around an early exit from the workforce can be challenging, and I find that there are hidden blind spots that can be missed when planning for this without help.  

Also, life changes happen, and it is important to work with a planner not just in the now, but over the long haul to proactively counter life’s pivots and seek out those blind-spots.  You can learn more about how I help early retirees feel more comfortable and confident going into retirement here.

Disclaimer: This article provides general educational information and should not be considered specific tax or legal advice. Always consult with a qualified tax professional regarding your specific situation.

Jake Stalder is a CFP® with Navigate Financial Planning LLC, located in Iowa, but working with clients virtually anywhere in the US.  

Jake offers a complimentary 40 minute introductory session at no cost; to mutually see if it makes sense to work together.