Thinking of Retiring Early? Here are Five Wealth Management Tips You Need to Consider


Studies show that most Americans say they hope to retire at age 62, even though the age in which you can receive full Social Security benefits from the federal government is 66 or 67 years old depending on when you were born.  Between 2019-2021, more than twice as many people retired than normally would have done so over a similar two year span. While the pace of early retirees is slowing in 2022 due to inflation and recent declines in the investment markets, many people still say they want to retire early. If you’re one of those people, here’s what you need to know.

What financial elements do I need to have in place to retire early?

One of the best things to do as you contemplate retirement is to take stock of your current financial situation. Put together a personal balance sheet consisting of assets such as your home, investment accounts, retirement accounts, bank accounts and any investment property such as real estate.  Then list any liabilities you may have such as mortgage, home equity line, credit card debt, auto loan, etc. From there, compare and contrast the two; how do you look from a financial health standpoint? Do you have ample assets over and above any debt obligations?

The next item to really scrutinize is your spending and income.  What is fixed and what is variable? How will your spending differ in retirement? What does your income look like today and how will it look when you retire? What is your Social Security benefit? Do you have any pension funds that will help out?

Finally, you will want to marry all of these items together –  balance sheet, income and expenses. Hopefully by going through the spending and income exercise you got a good feel for what income you will have in retirement and what your expenses might look like. Any excess cash to cover your expenses will need to come from your portfolio of assets. In an ideal world, your withdrawal rate from your portfolio should not be greater than five percent annually. By keeping your withdrawal rate below that level, you will hopefully allow your principal portfolio to stay intact and even grow with solid investment performance.

I’ve read that my retirement portfolio balance should be ten times my final year’s salary to ensure I’m okay financially to retire.  I had that level in 2021, but it’s lower now in 2022. Does this mean I should wait to retire?

There is a ton of literature out there regarding multiples of salary, percentages, etc. and those are all decent guideposts but the truth is that every situation is different. You really need to look at those items above all in coordination to make an informed decision.

When it comes to drops in the market, while it is never fun to experience these downturns those are events that need to be factored into a long term investment portfolio. If you retired last year, my hope is that you set aside 3-5 years’ worth of income needs from the portfolio in a very conservative, short duration fixed income investment. These investments while likely modestly negative this year, have held up much better than stocks and longer dated bonds. Having this pool of more conservative dollars provides you with time for your more volatile stock investments to come back as the market recovers.

On the flip side, if you remained in all equity funds after retirement and need substantial dollars each year from your portfolio to live on, you are faced with some difficult decisions. You will really need to evaluate your portfolio and potentially look at obtaining some type of outside income to supplement your lifestyle in an effort to prevent having to take more out of your portfolio at these substantially lower levels.

Our hope would be to have discussions with individuals and families about retirement prior to the actual event. This way we can make sure the portfolio is set up properly to distribute cash for living expenses in any market environment and we can really evaluate if you can afford to retire.

What about taking Social Security benefits if I retire early?  Should I take them as early as possible or wait until I’m closer to full retirement age?

Again, I sound like a broken record but every situation is different. Depending on your cash flow needs and the types of assets/investment accounts you have, it may make sense to elect to take your benefit early, wait until age 70, or collect any time in between. The typical suggestion is to wait until at least full retirement age in order to lock in your full benefit amount, especially if you are married and you were the primary earner. This will guarantee your spouse your full benefit if you were to predecease.  However, waiting until age 70 will maximize your annual lifetime and survivor benefit and may be right for you if you are healthy and have other cash flow or assets to fund your lifestyle expenses until you collect.

It is very difficult to make the Social Security election in a vacuum as it really should be made in coordination with your overall financial plan taking into account your health history, other income sources and pools of assets.  For married couples, it is important to analyze collection options for each spouse to create a coordinated collection strategy that best fits with your overall needs.

Some of my friends who retired early say they miss working – but they’re concerned about going back to work and changing their retirement distribution plan. Is it hard to stop taking money from my retirement account if I decide to go back to work and no longer need those funds?

Generally speaking if you are under age 72, it is pretty easy to stop taking money from your retirement investment account regardless of whether it’s a 401k, 403b, IRA or some other plan.  This should be as simple as contacting your advisor or provider and shutting off the distributions.

However, Social Security can be a more challenging issue. You are able to withdraw your Social Security application within 12 months of the date you first claimed your benefits. However, you would then have to repay every dollar of Social Security benefit you had received in the initial collection period. Essentially, Social Security treats this as if you never applied for benefits in the first place.

Another Social Security scenario is if you claimed benefits prior to your full retirement age, continued receiving the benefits and then obtain employment again. In this scenario, if you earn more than $19,560 you can expect to have one dollar withdrawn from your Social Security benefit for every TWO dollars earned over the limit. Ultimately, when you reach your full retirement age, your Social Security payment will be recalculated to give you credit for the portion of your benefit that was withheld.

Bottom line – it is easy to stop and start distributions from a retirement account but more complicated when it comes to Social Security.  

What other financial planning steps should I take if I want to retire early and don’t want to worry about running out of money in my “golden years?”

The most beneficial thing you can do as you contemplate retirement is to speak with a financial advisor prior to making any big decisions. An advisor can walk you through your current financial situation and then help you look ahead into retirement. This process will help you determine if you can truly afford to retire. From there, the advisor will be able to assist you with structuring your investment portfolio, navigating Social Security, healthcare, including Medicare and long-term care and ultimately put you on a good path to retirement. We have many great advisors here at Legacy Trust who can assist you with this process.

Another item to look into and confirm is your estate plan. This may seem like a daunting and unenjoyable task but it is better that you handle this when you are competent and thoughtful rather than after a significant health event.  Trust me, your loved ones will thank you for the planning.

Brian Balke, CFP®, CIMA®
Vice President, Wealth Advisor