Dreaming of Early Retirement? Start With These 9 Questions

Maybe it started at a coworker’s retirement party. Or perhaps it was a quiet evening at the kitchen table, looking at your 401(k) balance and wondering, “Could I actually retire a few years early?”

For many Nebraskans in their late 50s and early 60s, it’s a question worth exploring. Retiring early could mean more time for travel, grandchildren, or weekends at the lake. But it also means fewer years to earn and save, along with more years your retirement savings may need to support you.

How do you know when you’re financially and personally ready? Before choosing your last day of work, consider these nine questions.

1. Have You Tried Living on Your Expected Retirement Income?

You probably have a general idea of your monthly expenses. But have you considered how they might change once your paycheck stops? Some expenses may decrease, while travel, hobbies, healthcare, and other costs could increase.

Start by estimating your expected retirement income and comparing it with your anticipated spending. Then consider a practical exercise. For several months, try living on the amount you expect to have available in retirement. Set aside the difference between your current take-home pay and that amount. This will not perfectly reproduce retirement, but it may reveal spending habits or assumptions worth reviewing.

Think about which expenses you could comfortably reduce and which are essential to the lifestyle you want. For additional perspective on retirement savings goals, read Retirement Planning and the $1 Million Benchmark.

2. Do You Know Where Your Retirement Paycheck Will Come From?

During your working years, income generally arrives through a regular paycheck. In retirement, it may come from Social Security, pensions, 401(k) accounts, IRAs, investments, or other resources. Having retirement savings is important, but understanding how those savings will provide income is a different challenge.

You will need to consider how much to withdraw, when to access different accounts, and how taxes and investment performance could affect your plan. Leaving an employer may also introduce decisions about your 401(k). Rolling it into an IRA is one possibility, but leaving assets in your employer’s plan or considering other available options may also deserve attention. Learn more in What Happens to Your 401(k) When You Change Jobs?

Retirement income needs can change over time, too. Our article, Your Retirement Withdrawal Rate Is Not Set for Life, explores this important consideration.

Ask yourself: If your paycheck stopped tomorrow, could you explain where your retirement income would come from?

3. Have You Considered Social Security and Medicare Timing?

Social Security and Medicare are important retirement milestones, but they do not necessarily begin when you stop working. Social Security retirement benefits can generally begin at age 62, although claiming before full retirement age results in a reduced monthly benefit. For people born in 1960 or later, full retirement age is 67. Delaying benefits beyond full retirement age can increase monthly retirement benefits until age 70.

Medicare eligibility generally begins at 65. If you are considering retiring at 58, 60, or 62, how will you pay for healthcare before Medicare begins? Potential options include coverage through a spouse’s employer, COBRA, or an individual health insurance policy.

Social Security claiming decisions can also affect household income and potential survivor benefits. Rather than automatically claiming benefits as soon as you are eligible, consider how different timing decisions fit your overall retirement plan.

4. Could Your Plan Handle Market Declines and Inflation?

Imagine retiring at 60 and experiencing a significant investment market decline during your first few years. You are no longer contributing to retirement accounts, and you are withdrawing money to cover living expenses.

This introduces what financial professionals call sequence-of-returns risk. Losses early in retirement can have a greater effect on a portfolio when withdrawals occur at the same time.

Inflation creates another challenge. Property taxes, insurance, groceries, and healthcare expenses may increase faster than expected, even when national inflation readings improve. Our article, Your Personal Inflation Rate: Why Nebraska Retirees May Experience Inflation Differently, explains why household spending patterns matter.

Would your retirement plan remain workable if investment values declined or expenses increased more than anticipated? A thoughtful plan considers different scenarios rather than relying on everything going according to expectations.

5. Have You Planned for a Retirement That Could Last 30 Years?

Retiring at 60 could mean funding three decades or more of retirement. Rather than relying solely on average life expectancy, consider evaluating scenarios that extend into your mid-90s or beyond.

Healthcare needs may also change substantially over time. Medicare generally does not cover ongoing custodial long-term care. Potential planning approaches include personal savings, insurance coverage, and other available resources, each with different costs and limitations.

If you already own life insurance or annuity contracts, retirement may be an appropriate time to review how they fit your circumstances. Our article, Do Your Life Insurance and Annuities Still Fit Your Retirement Plan?, discusses these considerations.

The goal is not to predict every future expense. It is to recognize that your financial needs may change during a long retirement.

6. Have You Considered the Tax Implications of Early Retirement?

Taxes can become more complicated when you transition from employment income to retirement income. The years between your last paycheck and the beginning of Social Security or required minimum distributions may present planning opportunities, particularly if your taxable income decreases after leaving work.

For some retirees, this may create an opportunity to evaluate a Roth conversion, which generally involves moving eligible funds from a traditional retirement account into a Roth IRA and paying applicable taxes on previously untaxed amounts. However, Roth conversions are not appropriate for everyone. They can increase current taxable income and may affect future Medicare premiums.

Medicare generally uses income information from two years earlier when determining whether higher income-related premiums apply. Required minimum distributions generally begin at age 73 or 75, depending on birth year and applicable rules.

The important question is not simply how much tax you owe this year, but how your decisions could affect taxes over time. Read Could IRA Withdrawals Make More of Your Social Security Taxable? for additional information.

A Nebraska Tax Consideration

Beginning with tax year 2024, Nebraska excludes Social Security benefits included in federal adjusted gross income from Nebraska taxable income. However, Social Security may still be subject to federal income tax. Traditional IRA withdrawals and many pension payments may also be subject to Nebraska income tax.

Understanding these differences can help frame discussions with your financial advisor and tax professional.

7. Are You and Your Spouse Planning for the Same Retirement?

You may picture retirement filled with travel and new experiences. Your spouse may prefer staying closer to home, gardening, volunteering, or spending time with grandchildren. Neither vision is wrong, but different expectations can affect your spending, schedules, and retirement priorities.

Before choosing a retirement date, talk about how you want to spend your time, what major expenses you anticipate, and how you will approach financial decisions together.

Are you preparing for the same retirement, or imagining two different versions? For more ideas, see How to Have Family Financial Conversations That Truly Matter.

8. Are You Retiring to Something, or Simply Ready to Leave Work?

For many people, work provides more than a paycheck. It offers purpose, structure, social relationships, and a sense of accomplishment. When that routine ends, some retirees discover that having more free time is different from knowing how they want to spend it.

Maybe you are looking forward to volunteering, traveling, helping on the family farm, or spending more time with family. But if workplace stress is your primary motivation, it may be worth considering alternatives such as part-time employment, consulting, or a gradual transition.

If you no longer had to work, what would give your days meaning and purpose? Retirement is an opportunity to build a different kind of life. It is worth thinking about what you are retiring toward, not only what you are leaving behind.

9. Have You Connected All the Pieces Into One Retirement Plan?

Retirement decisions rarely happen in isolation. Your retirement date influences your income needs. Social Security timing can affect your withdrawals and taxes. Taxable income can influence Medicare premiums. Market performance and spending choices affect how much you may need to withdraw.

That is why choosing a retirement date based on your 401(k) balance alone may not provide the full picture. Consider two people who are both 60. One has a pension, modest living expenses, and limited debt. The other has a larger investment portfolio but higher expenses and plans for extensive travel. Their retirement readiness may be very different.

Personalized retirement planning brings these decisions together rather than examining each separately.

Your Early Retirement Readiness Checklist

Before deciding when to retire, ask yourself:

1. Have I tested my expected retirement income against my spending?
2. Do I know where my retirement income will come from?
3. Have I reviewed Social Security timing and healthcare coverage?
4. Could my plan handle market declines or higher expenses?
5. Have I considered longevity and long-term care costs?
6. Do I understand the tax implications of retirement withdrawals?
7. Have my spouse and I discussed our expectations?
8. Do I have a plan for my time and sense of purpose?
9. Have I considered how these decisions fit together?

If you are unsure about several answers, it does not necessarily mean you should delay retirement. It means there may be important planning questions worth exploring.

Thinking About Retiring Early? Let’s Talk Through Your Options.

Retirement planning is not simply about reaching a certain age or savings balance. It is about understanding how your financial resources and personal priorities fit together.

At Garnett Investment Strategies, we work with individuals and families throughout Nebraska who are preparing for retirement. Based in Beatrice, Nebraska, Garnett is a locally owned, independent Registered Investment Advisor. Our investment advisory services are provided under a fiduciary standard of care.

We focus on understanding your circumstances, explaining your options, and developing personalized financial planning relationships.

 

If you're wondering whether retiring early could work for you, a conversation about your savings, income needs, and retirement timeline can be a useful starting point.

Contact Garnett Investment Strategies to Start a Conversation

Or call our Beatrice office at 402-223-3433.

 

Primary Wealth Management dba Garnett Investment Strategies (“GIS”) is a registered investment adviser whose principal office is located in Nebraska.  A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.