Navigating the Early Years of Financial Independence - Key things to consider

Those that pursue early retirement, or some form of FIRE have unique challenges they must deal with. Many of those come before the actual retirement date, like knowing how much is needed, what your ideal lifestyle looks like, and whether or not you wish to continue work and choose a CoastFI path. In this post, we will break down 6 of these, and how to attack them. 

Health Insurance / Medicare 

Covering expenses in retirement / income sources 

Roth Conversions 

Managing Investments in retirement 

Social Security Timing 

Finding Fulfillment and Purpose in retirement 

Health Insurance / Medicare 

Health insurance costs are one of the key factors in making the early retirement decision. Often, individuals and couples may opt to go under an ACA policy in the years leading up to medicare, barring access to other options or a spouse continuing to work. 

Early retirees may look to keep income low, while also ensuring that pre-tax dollar asset growth doesn’t get to a point where high income or Required minimum distributions become a problem down the road. Using Roth IRA withdrawals early in retirement, in some cases, may be beneficial in keeping income low before/between age 60-65. 

Once you reach retirement, avoiding or reducing IRMAA, and choosing a medicare supplement vs advantage plan comes into play. 

Covering expenses in retirement / income sources 

Another big factor when retiring earlier than 65 is when and how to pull from your savings to offset your expenses. Retiring before 62 and 59 creates even more challenges as you would not be able to draw from social security and may face a penalty when pulling from retirement assets. 

Naturally the key takeaway is to start by having an idea of your expenses in retirement, income sources, and knowing where to draw down from. I often see early retirees who retire in their 50s or earlier pull from their taxable brokerage accounts, excess cash savings, and may have part time or passive income. Perhaps they are also able to pull from their 401k at age 55 in some cases. 

Roth Conversions

This is a big consideration for early retirees, as they have a longer period of time in which to convert pre-tax assets to Roth. It is important to balance these with actual income needs from the portfolio, ACA credits, but also aiming to limit or reduce required minimum distributions long term. 

Managing Investments in retirement 

I work with a majority of clients who manage their own investments. Some items to consider would be: 

● How should I allocate accounts I plan to draw down early on? 

● How should my overall asset allocation change over time? 

● How should I handle extreme market fluctuations? 

● Should I conduct an annual re-balance of my portfolio? 

● Do I enjoy managing investments, or should I outsource? 

● Should I consider hiring an asset manager for when/if I were to go into skilled nursing care? 

Managing one’s own money can be rewarding, confidence building, and save on fees over time, and many retirees choose to continue to self-manage into retirement. Do note that the complexity and decision making does change as you begin to draw into your investments. 

Social Security Timing 

Upon reaching social security age, it can be challenging to decide when to best start pulling. It can be tempting to take SS Benefits earlier to ‘lock in’ a payment in case something were to happen, but oftentimes this is not the best strategy. 

Social security timing should be a decision about income management and risk management when procuring ongoing financial planning. 

Finding Fulfillment and Purpose in retirement 

The most important key item to consider in early retirement is life fulfillment. Ask yourself key questions like: 

● What will I do with my time? 

● What will I do if I am no longer able to pursue travel or other various hobbies I had planned for? 

● How much is my identity tied up to what I do? 

● Would I want to pursue an encore career?

Early retirement looks different for different people. There is no right or wrong way to spend that time, but it is important to think about how you will maximize your time. In reality, retirement is never the end of the road, as people pursuing passions is something that all should continue to do no matter when their arbitrary retirement date is. 

In summary, navigating life transitions to retirement, and shifting the mindset from save to spend is complex and nuanced, as there are many decisions to make. Even the most knowledgeable people who do their own planning will benefit from a second opinion, and an outside source of knowledge like an advice only planner, to help them find potential mistakes, review scenarios, and cut through any hidden biases impacting these decisions.