Navigating an Early Retirement

Retirement is a major accomplishment – and a major transition! When it comes earlier than expected, or as expected but earlier than your average worker (think professional athlete, successful business owner), navigating the transition can be especially complicated. Do you have enough saved? Will your money last? Will you outlive your assets if your retirement stretches 20, 30 even 40 years?

These are all good questions, and they’re questions that the team at Watts Gwilliam & Company can help you with.

At Watts Gwilliam & Company, our specialty is working with high net worth individuals who have a more complicated financial life – and that often includes an early retirement. While you may have been successful in business, enjoyed a comfortable income and were diligent with your savings plan, early retirement isn’t always a given.

Early retirement requires careful planning to make sure your nest egg can last the rest of your life. In this guide, we address some of the common concerns that come with an early retirement, as well as strategies that can help you navigate the financial side of early retirement, from creating a plan to understanding your health insurance and income options.

If you have a concern that is not addressed here or you’d like to discuss your specific situation in more detail, schedule a no-strings-attached conversation with our team to see how we can help.

Chapter 1

Planning for an Early Retirement

Planning for an early retirement can be more complicated than a traditional retirement. Many of the traditional retirement benefits, like Social Security and Medicare, aren’t available until your 60s. If you plan to retire before then, you’ll need a plan for how you’ll cover your retirement costs before reaching traditional retirement age.

The first step in early retirement planning is to determine how much retirement income you’ll need. This way you can start to identify income sources to cover these costs. Start by listing your necessary retirement expenses, like housing, food and utilities. You’ll also want to include a line item for health insurance in your budget, which we discuss in more detail below.

After your necessary expenses, you can add any discretionary expenses, or the costs of things you won’t need in retirement but would like to do, such as hobbies or travel. If you plan to relocate (many retirees across the country move to Arizona, for example, for the warm weather and desert air), talk to a financial advisor about the cost of living in your new locale. It’s important to know what you can expect to pay for your current expenses in another area.

Adding everything up will give you your monthly or annual retirement budget. You can then compare this to your sources of income in retirement to create a financial plan that works for you.

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Chapter 2

Navigating an Unexpected Retirement

Sometimes retirement doesn’t come on your schedule. The COVID-19 pandemic made this a reality for many Americans. But even if your retirement is unexpected, you can and should still create a plan for it. In fact, all of the topics discussed here apply to unexpected early retirement as well as the anticipated early retirement. The biggest difference is you may have less time to prepare when retirement comes as a surprise.

If you’re facing an unexpected retirement, first and foremost, don’t panic. As scary as an unexpected retirement may be, it’s not unmanageable. The financial advisors at Watts Gwilliam & Company can help you create a plan to get on track. This plan will usually start with taking stock of your full financial picture. Inventory your assets and expenses, including any debt or other obligations you have. Just as when planning for an early retirement, try to create a monthly or annual budget of your retirement expenses and match your income sources to these costs.

A big question you may have if you’re retiring unexpectedly before age 59-½ is when to start withdrawing your retirement savings. The IRS imposes a 10 percent penalty on most withdrawals from pre-tax retirement accounts before age 59-½, which can make it costly to use your retirement savings early. That said, there are strategies that work around this 10 percent penalty, such as Rule 72t, which we’ll discuss next.

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Chapter 3

Rule 72t

One of the biggest challenges to early retirement is not being able to access your pre-tax retirement savings without incurring an early withdrawal penalty if you’re still under age 59-½. Luckily, there is a way around the IRS early withdrawal penalty through Rule 72t.

Rule 72t states that individuals can withdraw funds from their qualified retirement accounts before age 59-½ without incurring a penalty as long as they do so using Substantially Equal Periodic Payments (SEPPs). In short, the rule requires you to set up a periodic withdrawal schedule using one of the IRS’s 3 calculation methods outlined below and stick to this schedule for at least five years, or until you turn 59-½.

The IRS lets you choose between 3 methods to calculate the amount of your SEPPs:

  • The Required Minimum Distribution (RMD) method requires you to divide your retirement account balance by a dividing factor from the IRS’s single or joint life-expectancy table to determine how much you must withdraw each year. This amount is recalculated using a new divisor each year and generally yields the lowest withdrawal requirement of all three methods.
  • The amortization method amortizes the balance of your account over a single or joint life expectancy to determine how much you can withdraw. This amount stays the same for all five years and is usually the highest of the three calculator methods.
  • The annuitization method uses the IRS’s annuity factor method to calculate the amount you can withdraw, which remains the same over all five years. This method usually yields an amount between the RMD and amortization methods.

Whichever calculation structure you choose for your Rule 72t withdrawals, it’s important to stick to the schedule provided for all five years or until you turn 59-½. Failing to meet these requirements will result in a 10 percent penalty on all of the funds you’ve withdrawn up to that point.

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Chapter 4

Health Insurance

Health insurance may be the most commonly overlooked element of early retirement planning. Most conventional retirees can count on Medicare for their health coverage, but you don’t qualify for Medicare until age 65, so if you retire before then, you’ll need to have another plan to fill the gap until Medicare kicks in.

There are a few ways you can get health insurance after early retirement:

  • COBRA: COBRA coverage lets you stay on your employer’s plan after retiring, but it comes at a high cost. While employed, your employer pays close to 80 percent of your premium, but once you retire, you’ll need to pay 100 percent of the premium plus additional administrative fees. COBRA coverage also only lasts for 18 to 36 months after you leave your employer.
  • State insurance marketplace: Each state offers a health insurance marketplace where self-employed or unemployed people can buy private insurance. Plan costs and coverages will vary, but are generally less than COBRA.
  • Your spouse’s plan: If your spouse isn’t retiring with you, you may be able to get health coverage through his or her workplace plan.
  • Working part-time: Another option many early retirees take is getting a part-time job that lets them work just enough hours to qualify for the workplace health insurance plan.

When planning for early retirement, take some time to compare the costs and coverage options available to you. A financial advisor can help walk you through your options and determine what makes sense for you.

Chapter 5

Rules for Withdrawal

In general, you cannot withdraw funds from your qualified retirement accounts until you turn age 59-½ without incurring a 10 percent penalty. The good news for early retirees is that there are some ways around this rule, such as Rule 72t, which we outlined above. Here are a couple other early withdrawal strategies to help you fund your early retirement:

  • Use after-tax funds first: Perhaps the easiest early retirement withdrawal strategy to avoid the 10 percent IRS penalty is to not use your pre-tax savings until you reach age 59-½. You can withdraw money from your Roth IRA without penalty before age 59-½ as long as the account is at least five years old. As an added bonus, you won’t have to pay any income taxes on the money when you withdraw it, either.
  • Rule of 55: If you retire in or after the year you turn 55, the IRS will waive the 10 percent penalty on your 401(k) or 403(b) withdrawals. Given this, it may make sense to wait to rollover your 401(k) to an IRA until you turn 59-½ if you retire at age 55 or later because the Rule of 55 only applies to employer-sponsored plans. Early withdrawals from a Traditional IRA will still incur a 10 percent penalty.
  • Use non-retirement funds: You can also use your non-retirement accounts for taxable income. Most long-term capital gains and dividends are taxed at the lower capital gains tax rate, making them a more cost-effective source of income.

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Chapter 6


Unfortunately, taxes don’t end with your working years. You’ll still most likely need to pay taxes on at least some of your retirement income, so tax planning is an important step in navigating an early retirement. The good news for retirees in Arizona is that the state does not tax your Social Security benefits and has fairly low income-tax rates on other income sources.

When it comes to minimizing retirement taxes, Roth IRAs can be very helpful. Since Roth IRAs are funded with after-tax dollars, distributions are tax-free. This can help keep your taxable income low in retirement. For instance, you might withdraw just enough from your Traditional or pre-tax retirement accounts to stay below a certain tax bracket and use your Roth IRA for the rest of your income.

If you don’t already have a Roth IRA, you can effectively create one for yourself using Roth conversions. This is when you convert part of your pre-tax retirement savings to a Roth account. You’ll need to pay taxes on any amount you convert in the year you do the conversion, but can then withdraw the funds tax-free in later years. If you plan to have lower taxable income in a year, doing a Roth conversion may be a smart tax planning move. Make sure you talk with a financial advisor first, as there are many elements to consider!

Another possible source of tax-free income in retirement can be your home. If you haven’t already sold your home to relocate, the IRS lets individuals take up to $250,000 and married couples up to $500,000 in gain from the sale as tax-free.

Depending on your situation, you may qualify for other tax deductions that a financial advisor can walk you through. The key is to treat tax planning as an integral part of your early retirement planning. After all, the goal is to keep as much of your hard-earned retirement savings for yourself so you can live a long and fruitful retirement.

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