10 Early Retirement Considerations

Before taking the plunge into retirement, early or traditional, you need to consider factors that will reflect the rest of your life. Handled correctly, early retirement can be a fulfilling blessing. Without proper planning you risk a return to employment you wanted to get away from.

Retirement means different things to different people. Some want to sit back and enjoy a life of leisure. Others wish to travel extensively. And there are some who consider retirement the grand opportunity to start the business of their dreams (maybe not technically retirement, yet still fulfilling), write a book or engage in charitable work.

The path you choose is up to you; there is no right or wrong answer as long as it suits your temperament. There are considerations with right and wrong answers. Get these wrong and retirement can be less than the blessing planned.

Money and taxes play a large role in when you retire and what activities you engage once in retirement. Meaningful activities and family are also serious considerations. 

To help you prepare for retirement, I will discuss 10 things of vital importance to smooth the transition. I provide a starting point. You need to prepare from the starting point I provide so retirement plans are retirement realities.

 

1.) Meaningful Activities

Money gets all the attention. What you do with all the extra time available to you is even more important.

The planning takes on heightened significance when a spouse, significant other or children enter the picture. Will you travel or be a homebody? Where will your travel plans take you? World or domestic travel? And what activities will travel involve? Hiking? Mountain climbing? Tourist areas or off the beaten path? Tours or on your own? These and other questions need to be addressed.

Travel duration also needs consideration. Some people are wired for long duration trips, with the itinerary stretching months to even years. Other folks start feeling anxiety after a week or so on the road.

Between travel you will have time to explore things you may have wanted to do in the past. Charitable work now becomes more than just a small donation periodically. You can put serious work in at the food bank or homeless shelter. Animal lovers might consider animal shelters.

When working on retirement issues I remind clients, “Retire to something, not from something.” Don’t turn retirement into an empty shell. Make it the most exciting time of your life. So exciting you wonder why you didn’t start retirement sooner. That requires moving to something better than you have right now.

 

2.) Dream Business

There is always that one thing you wanted to do, that business you wanted to open. Early retirement is the perfect opportunity. Not that you can’t start your dream business if you retire at an older age; you just have more years to explore and evolve your business if early retirement is on the menu.

The time to start planning your dream business is before you punch the clock the last time. Every business idea requires research, and the time to start that research is now. You might discover your dream business pays better than working for the man, which means you get to retire to the life you want as a business owner a lot sooner.

The business ideas that excites you will determine your course toward and in early retirement. Many businesses are full hands-on operations. Restaurants, for example, are not a side hustle, while forensic accounting can be.

 

3.) Share Your Knowledge

Retirement is not death. If you look up the definition of retire in the dictionary it isn’t something you want to aspire to. Who wants to be “used up”, “obsolete”? When you don’t plan your retirement it can end up that way. Not you! The most important part of your life is about to begin.

You have a story and you need to tell it. You have acquired skills and experience from years of work and living. Don’t let it go to waste.

A large part of life outside formal work, what we call retirement, is sharing. You never know when an opportunity to help someone arrives.

Retirement should offer a comfortable pace in living life. This means you have time to notice things and help as needed. 

You can also create the opportunities to make a difference. Consider mentoring a child or even an adult. 

Write a book. I mean it! It doesn’t have to be an 800 page doorstop. It doesn’t have to find a home with a traditional publisher either. It should be a long as it needs to be and not a word longer or shorter. Offer it for free as an e-book if your story doesn’t fit traditional book categories. Your personal experiences are a story you need to tell. Your experiences in your profession are another story. You may need to write several short books or maybe a long one will do. Regardless, get your story, knowledge and experiences on paper. Let your story continue on with all your readers. Let your readers grow from the base you built. I call it the pay-it-forward revolution. Join the greatest army ever envisioned.

 

4.) Where Will You Live?

As you consider your options in retirement be sure to think in three dimensions. Planning your finances are important. Planning life activities are important. Where you live is of vital importance.

Your favorite accountant lives in the backwoods of Nowhere, Wisconsin. I love it here and will spend my remaining days on this hallowed ground. You may feel the same about where you live. Or, maybe not.

Thinking in 3D means opening your mind to options. Living in a home bolted into the ground is traditional, but not required. I know many people who took to the road in an RV once they retired.

Challenging vacation destinations are still on the table since you probably still possess the vigor of youth. (Note: Never grow old. It’s a trap!)

Little pink houses might be the traditional course expected of you. Instead, living in the mountains might fill you with the juice of life. Then you should do it! Maybe you want to live in another country, enjoying a new culture, people and language. If that is you, then do it! 

And remember, you are not wedded to any choice you make. You might have an itch to RV for a few years before settling down. No problem. While on the road you can open your horizons and start planning where you will live as you enter the next phase of your life.

Planning your early retirement is planning your future. Who you travel with makes all the difference.

5.) Manage Assets

We started with the fun stuff to consider as you prepare for early retirement. Now we need to get serious and talk about money and {ugh!} taxes. 

First, debt in retirement is an unacceptable risk. Paying off the credit card in full each month is not considered debt in my book. Credit cards used this way are a money management tool. Some debt isn’t the kiss of death. Still, if you enter retirement, early or traditional, with debt, you need to have a firm action plan to reduce and eliminate that debt.

Your investments now need attention. The current economic environment will determine the stock/bond/cash mix. As I write, I do not consider bonds a viable option for most investors. Maybe a few bonds in the right situation, but when interest rates are low, bonds will not do the job. And long-term bonds have high risk if interest rates climb.

Having all your money in stocks (index funds preferred) isn’t a smart move either. Instead, you need the right mix of index funds and cash. How much you need in cash takes some explaining. Good thing I fleshed out the details in a previous post. I highly recommend you read, bookmark and re-read that post. It is vital information.

 

6.) Taxes: Overview

Like it or not, you need to spend time considering tax consequences in retirement. Taxes take a serious bite out of your wealth. Retirement does not change that.

We will spend a few minutes discussing the more important issues surrounding taxes in retirement. Nearly every consulting session I have in my office involves the issues I discuss below. 

Taxes are complex. Even the Tax Court disagrees with itself on what the tax code means in certain instances. You might think you understand tax law. You don’t. No one human can understand the entire U.S. tax code. That is why I strongly recommend you build a relationship with a competent tax professional. Pay them for consulting! My wealthiest clients demand 2-3 consultations per year on taxes alone. That is why they are the wealthiest. Read and study tax issues that apply to you. Then bounce it off a tax professional with the experience to show you the cause and effect over all tax years involved.

 

7.) Taxes: Converting Traditional Retirement Accounts to a Roth

A common issue I have in consulting sessions is the client’s focus on required minimum distributions (RMDs) from traditional retirement accounts. While it is a tax issue, it usually should be third or fourth on the list.

A primary concern as you plan for early retirement is using low tax brackets. Unless you have a high income from a side hustle, business or investments, converting traditional IRAs to a Roth is a primary concern. Over your working career you built a retirement account. The non-Roth retirement monies will be taxed at ordinary rates when they are distributed. Using your lower tax rate once you retire allows you to move money from traditional retirement accounts to a Roth with little to no tax pain. Under current tax law, the 0%, 10% and 12% tax brackets are where you want to play. Your facts and circumstances will determine your course. For most, utilizing low tax brackets is a powerful wealth retention tool.

I want to toss another tax planning tip into this section. Long-term capital gains (LTCGs) and qualified dividends are taxed at preferential rates. On a joint return in 2021, for example,  LTCGs and qualified dividends that fall under the $80,800 threshold are taxed at 0%. Knowing this, you now have an interesting interplay between converting traditional IRAs to a Roth and maximizing the LTCG 0% tax bracket. A tax professional can help you maximize the benefits of converting to a Roth while considering the LTCGs preferential tax treatment.

 

8.) Taxes: Social Security Benefits

Early retirement has benefits few consider, but should. Social Security benefits might be in the distant future. But time counts and before you know it you will actually be retirement age. (Good thing you were practicing all the while.) 

In Point #7 we discussed the interplay between tax rates for ordinary income and LTCGs. Here is why it is so important to use those lower tax brackets when you can.

Social Security benefits are sometimes tax-free. There are income levels where Social Security benefits start getting taxed. For example, on joint returns, combined income (see link for calculating combined income) over $32,000 can see up to half of benefits added to taxable income and 85% of benefits for combined income over $44,000. These numbers are low so it is getting harder each year to stay below these limits because they are not indexed to inflation. Early retirement changes that! You might save serious taxes currently and down the road with proper planning. Utilizing low tax brackets optimally can reduce taxes even more once you start collecting Social Security benefits.

 

9.) Taxes: Required Minimum Distributions

The Secure Act raised the age where you must take required minimum distributions (RMDs) from 70 ½ to 72. As I write, Congress is working on the Secure Act 2.0, where RMDs will gradually more to age 75. Both sides of the isle like the higher RMD age and passage is likely.

People worrying about RMDs at a young age might be focusing on the wrong issue, as a result. Yes, contributions into a traditional retirement account feels like taking out a loan sometimes, since you later have to pay tax back on all the distributions, your original money, plus gains. With RMDs getting pushed to higher ages, you have more years to maneuver your finances for lower taxes. 

As easy as the RMD concept is, it is really very complex. The interplay between LTCG rates and traditional IRA distributions taxed at ordinary rates, requires a seasoned hand in the planning process. This is where your tax professional comes in. Your facts and circumstances will determine your optimal tax and financial course. 

 

10.) Legacy Planning

 

Early retirement means you are still young. Thinking about your legacy doesn’t always cross the mind. It should.

As you review early retirement considerations, commit time to legacy planning. Are there charities you would like to support? How much do you wish to leave the kids (enough to help, but not too much to spoil)? Are there family members that could really use financial help? Friends?

Planning your legacy means seeing an attorney. You need a will and a durable medical power of attorney. Consider a living will. Your legal and tax professionals team can help you determine which tools are best for your situation. There are so many vehicles out there to accomplish your goals. Who know? You might end up with a NIMCRUT

 

11.) Bonus: Dealing with Medical Issues

I write for an American audience primarily. That doesn’t mean incredible people around the globe shun your favorite accountant. For my friends around the world, you can sit this first bonus tip out, since this is solely an American problem.

Early retirement has once serious flaw, health insurance. Prior to age 65, when Medicare kicks in, you need to have a budget that includes medical insurance and out-of-pocket medical expenses. I wish I had a magic bullet that serves all readers. Instead, I have a few options to consider. 

There is medical health sharing to consider. However, these are Christian based and not all readers are of the Christian faith. I published previously several choices when it comes to health care coverage. Having a side hustle or small business helps. If you are looking for health insurance options, be sure to read the linked post.

 

12.) Bonus: Loneliness

No matter what age you retire, time will keep counting. Friends will move on to different things. Family and friends may not retire when you do. Health issues may change your best-laid plans.

And worst of all, couples need to talk about the inevitable. The odds are one of you will leave this world first. The crushing pain can become unending loneliness.

Talk with your significant other, children and friends about life when one of you is gone. Build a network. 

The best time to start planning for loneliness issues is yesterday. You never know when the Good Lord will call. I have ample examples in my small tax practice of people dying at a young age. It will be a difficult time regardless the age the Reaper comes knocking. By planning ahead you give ample consideration to your options. There will still be times of loneliness, but they can be kept to a minimum.

As you discuss with your significant other about life where one of you is gone, topics to discuss include: travel plans, activities, support, living arrangements and friends. 

 

Coda

Retirement is a major lifestyle change. This accountant would like to manage his business forever, but reality suggests that is not the best plan. The earlier you retire the more financial resources you will need. Your health plays a powerful role. 

Early retirement isn’t a solo journey. Many will travel with you, if only for a short distance of the journey. Have a team. Family and friends, of course. But seasoned professionals, experienced in working with people on a life journey.

Remember, you only come this way once.

 

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

 

Keith Taxguy

3 Comments

  1. Brian on May 16, 2021 at 1:04 am

    Great list! Number two resonated as I know people who retire then get bored. If more retirees started a business, could be another great chapter in life with new goals and purpose!

  2. Bob on May 18, 2021 at 2:30 am

    South Africa has the same issue with medical as the US. Need to pay for private healthcare (I will for now ignore that all government services are a waste amd require payment of a private alternative) . So at least 1 more international reader can commiserate about US health care costs =)

    Nice article, are you going through the thought process for yourself if you cut back on your practice?

    • Keith Taxguy on May 18, 2021 at 8:57 am

      Bob, I think I have already taken some of these steps. The reason? While I love what I do, I also notice the clock on the wall. I’ll be 57 soon and as the years add up, tax season gets more demanding on my body.

      In some regards I already use many of these tips. My practice is down to 500 or so clients and a few employees. I enjoy the work so I will keep doing it as long as I’m able to in an efficient manner. This blog is also something I would keep doing if I closed my practice or cut the size of my practice further.

      It brings me no joy knowing that a day will come when I can’t serve my clients any longer. It is a stressful job and there are times it does hurt. Many years ago I had to let an employee go. She was 70 at the time and she struggled getting to work in the harsh Wisconsin winters. The stress also caused he to lose a step in her tax knowledge. She is a client now.

      I might be in my prime now, but probably on the wrong side of the halfway point. The day will come when I can provide peers support only. This blog should be something I can do until the finish line. I would be happy with that.

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