What You Need to Know
- Early retirement means that a client’s retirement assets must last for a longer period of time.
- Defining what early retirement means to a client will help drive your financial planning recommendations.
- Be sure that your client has a plan to cover health care expenses prior to being eligible for Medicare.
Some of your clients may want to retire early. This is certainly a great aspiration, but like any financial goal, achieving early retirement takes planning.
Here are six steps to help your clients achieve their goal of an early retirement.
1. What’s driving the decision?
When clients express a desire to retire early, be sure to have a conversation with them to help you understand what is driving this decision. Perhaps a parent died at an early age and never got to enjoy their retirement. Perhaps they feel they have accumulated a sufficient level of wealth through all of the work you’ve done for them and they feel comfortable taking the leap.
For clients within 10 years or so of their normal retirement age, many companies might offer them a buyout to entice them to retire early.
Whatever their situation, understanding the client’s motivation is important to the planning work you will be doing to help them make their early retirement dreams a reality.
2. Define ‘early retirement.’
Early retirement can mean different things to different people. It can mean retiring “cold turkey” from any sort of paid work. It can also mean phasing out of a position, perhaps scaling back to part-time work with an employer for a few years prior to moving to full retirement.
Some clients may decide to retire early to pursue their passion. This might mean starting a business or perhaps doing consulting work in their area of expertise.
Defining what early retirement means to a client will help drive your financial planning recommendations to help them achieve their goal.
3. Review current retirement savings and investments.
Part of the planning process is to review all retirement accounts and other investments that could be used to fund an early retirement. You will want to take an inventory of all accounts and other sources of retirement income. These will typically include items like:
- Tax-advantaged retirement accounts such as an IRA or a 401(k)
- Taxable investments
- Social Security
- An employer pension, if applicable
Each client’s situation is different and may well include other retirement resources beyond these.
For a client retiring around their normal retirement age, all of these potential sources of income can easily be tapped when they retire or soon after. Clients planning an early retirement, however, will have fewer options at the outset.
One issue for early retirees is the taxes and penalties that may come with accessing retirement accounts early. One consideration is to try and accumulate a sufficient amount of assets in taxable accounts to tide your client over until they reach age 59 ½ and can access assets in retirement accounts without incurring penalties.
There are some exceptions to this, such as taking a Series of Substantially Equal Periodic Payments, or SOSEPP. These are allowed under IRS rule 72(t). Distributions can be taken penalty-free from an IRA or other retirement plan prior to age 59 ½ as long as certain rules are followed.
The main rule is that the distributions must continue for five years or until your client reaches age 59 ½, whichever is longer. While there are no penalties, these distributions would be subject to income taxes.
Another option is to withdraw contributions made to a Roth IRA without taxes or penalties at any time. Earnings, however, cannot be withdrawn without penalties or taxes prior to age 59 ½, though there are other exceptions, such as in the event of a disability.
Clients leaving their employer at age 55 or older can utilize the rule of 55 to withdraw funds from their current 401(k) or 403(b) penalty-free, but not tax-free. The plan must have elected to offer this option to participants. This can only be done for your client’s current plan at the time they leave the employer; retirement plans at prior employers or IRAs are not eligible. Some public safety workers may be able to take advantage of this option as early as age 50.