Early Retirement: Strategies to Make Your Wealth Last

How to make sure you won't end up broke in your later years

Retiring ahead of schedule may seem like a dream, but it is doable with the proper planning. Depending on when you were born, the normal retirement age is currently 66 or 67. If you’re planning to retire five, 10, or even 15 years early, one of the most important things to consider is how to make your savings last for the long haul.

There are several things, in particular, that you need to look at to make sure retiring early won’t leave you shortchanged in your later years.

Key Takeaways

  • Create a realistic budget to determine if you have enough saved to retire early—if not, you'll need to lower your cost of living.
  • You’ll also need to factor in how to pay for healthcare until eligible for Medicare, as well as out-of-pocket-costs throughout your retirement years.
  • Delay taking Social Security until age 70 if you can, which can increase your benefit amount significantly. 

Create a Realistic Budget

The first step in managing your savings in early retirement is being realistic about your budget. The money you’ve stashed away has to last beyond the typical 20 to 30 years that it would if you were retiring in your mid-60s. Figuring out how much you can reasonably afford to spend each year depends on what you’ve saved, your life expectancy, and what you anticipate your expenses will be.

Scott A. Bishop, a certified public accountant (CPA) and certified financial planner (CFP), and executive director of wealth solutions at Avidian in Houston, puts it this way:

How much annual income will you need in retirement? If you aren’t able to answer this question, you’re not ready to make a decision about retiring. And, if it’s been more than a year since you’ve thought about it, it’s time to revisit your calculations. Your whole retirement income plan starts with your target annual income, and there are a significant number of factors to consider; so it is important to actually take the time to create a good retirement budget.

How Early Retirement Impacts the 4% Rule

The 4% rule has long been the baseline for determining your withdrawal rate. This rule dictates that you withdraw 4% of your savings the first year in retirement, then withdraw that same amount, adjusted for inflation, going forward. Theoretically, drawing down your nest egg at that rate should allow it to last for 30 years.

When you need your savings to last an extra decade or longer, however, the 4% rule may not be realistic. Instead, you may need to consider dropping your withdrawal rate to 3.5% or 3%. For example, let’s say you retire at 50 with $1.5 million saved, and you choose a moderate asset allocation. If you live another 40 years, your initial withdrawal rate would be 3.2%, allowing for an initial monthly distribution of $4,000. If you waited until 55 to retire, those numbers would adjust to 3.4% and $4,250, respectively.

If you run the numbers and your estimated withdrawals aren’t going to be enough to cover your expenses, you’ll either need to find a way to lower your cost of living or push back your early retirement date so that your income aligns with your spending.

Knowing how much you have to work with on a monthly and yearly basis can help you tweak your budget.

Plan Ahead for Medical Costs

Seniors are eligible to sign up for Medicare coverage beginning in the three months before they reach age 65. If you retire before that, you’re responsible for maintaining your health insurance until Medicare kicks in. The costs may be low if you’re relatively healthy and all you’re paying is the monthly premium, but out-of-pocket costs can skyrocket if you develop a serious health problem.

A 65-year-old couple retiring in 2021 will need to save $300,000 to cover healthcare costs over their remaining lifetime, according to Fidelity Investments. Costs continue to rise, which means a 55-year-old couple retiring in 2021 can expect to spend more and for longer.

Putting money in a health savings account (HSA) while you’re still working is one way to prepare for future medical expenses if you’re planning to retire early. “Working people should, if possible, make tax-deductible contributions to their HSAs and let the money grow tax-free. Invest the money in the stock market,” says Louis Kokernak, a CFP and certified financial analyst, and owner of Haven Financial Advisors in Austin, Texas.

Withdrawals are tax-free if they’re used for healthcare expenses, and once you turn 65, you can pull money out of an HSA for any reason without a penalty. You will, however, still pay taxes on the distribution.

You may also want to think about investing in long-term care insurance​, which would keep you from having to spend down your assets to qualify for Medicaid if you need nursing home care later on.

Wait to Take Social Security Payments

As mentioned earlier, full retirement age is 66 or 67 if you were born in 1943 or later, but you can begin taking Social Security benefits as early as 62. That may be tempting if you’re worried that your savings may run thin in early retirement, but there’s a catch. Taking Social Security early diminishes the number of benefits you receive. Conversely, waiting longer to apply increases your benefit amount.

63 and 65

U.S. Census Bureau data suggests that the retirement age in the United States averages 63 for women and 65 for men.

If your full retirement age is 67, for example, but you start taking Social Security at 62, you would receive a permanently reduced benefit. If you wait until age 70, however, your benefit will increase 8% for every year you wait.

If you’re retiring early, taking benefits at 62 might help your savings go further, but you will get more money if you can afford to put it off. Doing the math on applying earlier or later makes it easier to decide when the best time to take benefits would be.

​The Bottom Line

Making early retirement a success means looking at the financial aspects of it from a slightly different perspective. The longer your retirement outlook is, the more important it is to have a roadmap for how you’ll spend what you have saved. 

“A pre-retirement checklist requires a detailed spending plan or you will most likely outlive your savings,” says Eric Flaten, founder and senior advisor at ePersonal Financial in Bellevue, Wash. “Track your expenses online using an expense tracking tool. This places your daily spending literally at your fingertips with any smartphone or tablet.”

Paring down your budget, factoring in medical care costs, and delaying Social Security benefits can all help keep you from going broke.

Article Sources
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  1. Social Security Administration. "Retirement Benefits."

  2. Medicare.gov. "When Will My Coverage Start?"

  3. Fidelity. "How to Plan for Rising Health Care Costs."

  4. Internal Revenue Service. "Instructions for Form 8889 (2019), Health Savings Accounts (HSAs)."

  5. Center for Retirement Research at Boston College. "What Explains the Widening Gap in Retirement Ages by Education?"

  6. Social Security Administration. "Retirement Benefits: Delayed Retirement Credits."

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