I recently met with two clients who completely changed how I think about retirement planning. Both were retiring much earlier than they had anticipated, and both situations were related to unexpected health issues. One client is now on disability, though thankfully, his wife is still working for a few more years, and he does have a disability policy in place. The other received a cancer diagnosis and is potentially retiring much earlier than planned as well.
These conversations took me back to my days studying for the RICP (Retirement Income Certified Professional) designation. There was a statistic that really resonated with me. After reviewing my coursework and notes, I found it: 51% of retirees retired earlier than anticipated. That’s right! There’s a better than 50% chance that whatever age you think you’re going to retire, you’re going to retire earlier.
The number one reason? Health issues. This reality made me realize something important. We need to stop planning for a “normal” retirement age in our assumptions, even if we end up working until 70 or 65.
The Reality of Uncontrollable Retirement Factors
Let me share another example. I’m working with a client right now who’s 62. He plans to work at least until 65, when he becomes eligible for Medicare. During the pandemic, he moved from New York to Florida. The plan was to work remotely, feel good, and coast into retirement while continuing to build his assets.
Unfortunately, the company is bringing everyone back to the office. He has two choices.
- Move back to New York
- Pick a random satellite location in Florida to work in
Neither of these is convenient based on where he now resides. So, he might retire this year.
My point is that things outside our control often lead people to retire earlier than planned. The inputs you give your financial advisor, including “I want to work until 70,” significantly impact the calculations on:
- How much you need to save for retirement
- How much risk you need to take
- How long your portfolio needs to last while you’re spending it down
I don’t think it’s prudent to build those optimistic assumptions into your plan.
I recommend assuming you’ll retire at 62, 63, or 64, even if you love what you do, and genuinely want to work until 70. Then control what you can control.
Understanding Why People Retire Early
The research shows us exactly why 51% of people retire earlier than expected. Here’s the breakdown:
46% cited health reasons – This is the largest category and completely uncontrollable. Whether it’s a sudden diagnosis, chronic condition, or physical limitations, health issues force many people out of the workforce earlier than planned.
30% were laid off or offered an early retirement package – Again, this is largely uncontrollable. Company restructuring, economic downturns, or industry changes can force your hand regardless of your personal timeline.
11% needed to care for a loved one – Caring for aging parents, a sick spouse, or other family members is another uncontrollable factor that can derail retirement plans.
When you add these three categories together, that’s 87% of early retirees who left work due to circumstances beyond their control. This is why early retirement planning makes sense for everyone, not just those dreaming of early retirement.
What Changes When You Plan for Early Retirement
If you’re 55 and had been planning to work until 70, you probably had a pretty nice-looking financial plan. You’d get maximum Social Security benefits at 70, which would line up perfectly with when you start portfolio withdrawals, creating no income gap. But what happens when you plan to retire at 60 or 62 instead? Several things change, and you need to prepare for them.
1. You Need to Save More and Invest More
This one’s pretty straightforward. A good saver typically saves about 10-15% of their gross income. But if you’re planning for early retirement – even if you don’t actually retire early – I’d argue you need to save closer to 20-25% of your gross income.
I’m personally planning to have financial independence before I turn 55. Now, I love what I do and don’t see myself at 60 doing nothing. I’m having more fun in my career today than I ever have. But by planning for retirement significantly earlier, I’m building the option to quit if I want to or sell my business if I want to. That’s the power of early retirement planning – it gives you choices.
2. Healthcare Before Medicare
Medicare eligibility starts at 65, and many people work until then specifically because they’re afraid of what they’ll do for health insurance if they retire at 60, 61, or 62. But here’s what most people don’t realize: buying private health insurance or through the Affordable Care Act isn’t that complicated.
I do it with my family. It’s not cheap, but if you’re retired, your taxable income is going to be pretty low. You might have some interest income from bonds or high-yield savings accounts, maybe dividends from stocks or ETFs, perhaps Social Security or a pension. But generally, folks who retire at 60-62 have relatively low taxable income.
This low income often qualifies you for ACA subsidies. If your income is relatively low, your health insurance costs could be next to nothing – possibly less expensive than what you were paying when you were working. Don’t let healthcare force you into a job you hate until 65 just because everyone else talks about working until Medicare kicks in.
3. Stay Aggressive with Your Investment Strategy Longer
This is a mistake I see repeatedly. People preparing for retirement think, “I need this money in one, two, three, or four years, so I need to dial back my risk.” Or worse, they pick a target-date fund for 2025 because they want to retire in 2025, and these funds force you into being super conservative.
By doing this, you’re bringing inflation and longevity risk into the picture more than necessary. When I say stay aggressive, I’m not talking about putting 100% in stocks or betting everything on high-risk investments. I’m talking about maintaining a higher equity allocation than traditional retirement advice suggests.
If the benchmark portfolio for retirees is 60% equities and 40% fixed income, maybe you stay at 75% or 80% equities for the first phase of retirement. This helps you capture returns early on (assuming the market cooperates), continue building your portfolio, and protect against inflation and longevity risks that come with retiring earlier.
4. Plan for Longevity
If you retire at 60 and have longevity in your genes or excellent health, there’s a possibility you or your spouse may live 30-35 years in retirement. This goes hand in hand with staying aggressive longer – you may need to maintain a fairly aggressive investment approach throughout your retirement years to protect against inflation and longevity risks.
You also need a sound Social Security strategy to maximize survivor benefits should one spouse pass away before the other. That Social Security benefit will be one of the best inflation hedges in your retirement income plan, so you’d better maximize it if you plan to live a long life.
5. Develop a Sound Income Distribution Plan
If you plan to delay Social Security until 70 to get maximum benefits but retire at 60, that’s a potential 10-year gap where you’ll have no Social Security income. You need to replace that income with portfolio withdrawals and distributions.
Preparing your portfolio for income distributions is critical. You need a disciplined, unemotional, repeatable process to generate cash flow monthly or quarterly. We’ve all heard about buying low and selling high. When you’re accumulating wealth and saving in your 401(k) or IRA, it’s all buying – you’re purchasing shares of investments.
But in the distribution phase, you’re not just buying anymore. You’re turning the portfolio on for income. Some will come from cash flows such as interest and dividends, but others will come from selling investments each month, quarter, or year. Having a disciplined process so you’re not selling the wrong thing at the wrong time is critical for maintaining portfolio longevity when retiring early.
What Happens If You Plan Early But Don’t Retire Early?
Let’s say you do all these things and prepare to retire early, but you don’t actually retire early. What’s the impact? Nothing really negative that I can think of.
The main drawback is that you might need to tighten your belt more. If you’re struggling to save 10-15% and early retirement planning calls for 20-25%, that might be tough without working a second job or getting a significant pay raise. But if you have the capacity to save and invest more, there are only benefits.
You could potentially spend or gift more in retirement. Maybe you could build your dream home or have a vacation home free and clear. You might have better opportunities to leave a financial legacy for your children and grandchildren. You could have different risk capacity – maybe you’ve saved more than enough for retirement, which allows you to take on more investment risk to build an even larger legacy for the next generation or for charitable goals.
Maybe this also allows you to set aside funds for self-funding long-term care. Long-term care risk is one of the top risks for any retiree today – those healthcare costs at the end of life and the potential burden on loved ones. If you’ve saved more than you need for your own retirement, you can potentially self-fund long-term care.
The Benefits of Early Retirement Planning for Everyone
The beauty of early retirement planning is that it benefits everyone, regardless of when you actually retire. It’s about building financial security and creating options in your life.
When you follow early retirement planning principles, you’re essentially stress-testing your financial plan. Instead of assuming everything will go perfectly – that you’ll work until 70, stay healthy, never get laid off, and never need to care for family members – you’re planning for reality.
This approach gives you financial flexibility. If you do face unexpected health issues, job loss, or family caregiving responsibilities, you’ll have options. You won’t be forced into desperate financial decisions because you’ll have built a solid foundation.
Even if none of these challenges arise and you work until your planned retirement age, you’ll be in a much stronger financial position. You’ll have more saved, better investment strategies, and multiple backup plans. That’s not a bad problem to have.
Taking Control of What You Can Control
The key insight from all of this is focusing on what you can control versus what you can’t.
You can’t control whether you’ll have health issues, whether your company will downsize, or whether you’ll need to care for aging parents. But you can control your savings rate, your investment strategy, your distribution process, and your ability to manage risk before and during retirement.
Let’s control what we can and plan for the worst while hoping for the best. That’s what smart early retirement planning is really about – not necessarily retiring early, but being prepared for whatever life throws your way.
And if you want help planning for your retirement, we’d love to help you. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to
- Maximize your retirement spending
- Minimize your lifetime tax bill
- Worry less about money
You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
This is for general education purposes only and should not be considered as tax, legal, or investment advice.
