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Taking Retirement in Your 40s or 50s

Successful app developer plans for early retirement in her 40s or 50s

Questions to Ask Yourself as You Prepare for an Early Retirement

If you have a goal of retiring in your 40s or 50s, you probably already know it’s going to take a lot of planning to get there. But have you thought about the specifics? Following are a few important questions to ask yourself as you plan for an early retirement.

How much will I need?

As you prepare for an early retirement, it’s important to gain an understanding of how much savings you may need to support your desired lifestyle. A general rule of thumb advises retirees to plan on spending about 80% as much in retirement as they do in their working years, but your exact number depends on how you envision living in retirement.

To determine how much you may need in retirement, consider the following:

  • The type of lifestyle you hope to live
  • Whether your current monthly expenses will be similar to what they are now (consider the cost of housing, food and groceries, transportation, utilities, travel and hobbies, etc.)
  • Whether you anticipate any major purchases (such as a car, boat, second home, children’s college tuition, etc.)
  • Any debt obligations you’ll have in retirement
  • The potential cost of insurance

What retirement income sources are available to me?

Keep in mind that traditional sources of retirement income may not be available to you early in retirement. For example, withdrawals from a qualified retirement account are subject to a 10% penalty if taken before you reach age 59 ½, and Social Security benefits aren’t available until you reach age 62.

Before you retire and leave behind a steady paycheck, be sure to have a retirement income plan in place.

How will I pay for healthcare?

Healthcare is one of the largest expenses many retirees face. A recent study indicated that a 65-year-old couple that retired in 2023 can expect to spend approximately $315,000 on healthcare expenses throughout retirement.1 However, many Americans significantly underestimate the amount they’ll pay for healthcare in retirement, with 68% believing they’ll spend less than $25,000.2

A health savings account (HSA) offers a tax-efficient way to save for retirement medical expenses. HSAs offer three distinct tax benefits.

  • Tax-free contributions –Similar to contributions to a traditional 401k or IRA, contributions to HSAs are made with pre-tax dollars, which reduces your taxable income in the year contributions are made.
  • Tax-free growth – Once contributed, HSA funds grow tax-free in the account. This is a significant benefit over a regular savings account in which earnings are considered taxable income. In an HSA, both the contributions to the account and the earnings accumulated within the account can grow tax-free.
  • Tax-free withdrawals –Unlike pre-tax contributions made to traditional 401ks and IRAs, which are taxed upon withdrawal, distributions from HSAs are completely tax-free as long as they are used to pay for qualified medical expenses. Also, HSAs never expire and don’t have required minimum distributions (RMDs) like other retirement savings accounts.

Keep in mind, however, that if you haven’t yet reached age 65 and use HSA funds to pay for non-medical expenses, the distribution will be subject to taxes as well as an additional 20% penalty.

You may also want to consider the pros and cons of long-term care insurance. For some people, it makes sense to purchase a policy early. For others, it’s wise to invest in a diversified portfolio rather than paying premiums for many years. Your wealth manager can help you determine whether a long-term care policy is right for you.

How long will I need my savings to last?

Your life expectancy plays an important role in your retirement planning strategy. The average life expectancy is 73.5 years for men and 79.3 years for women. That means a man who retires at age 50 can expect to live in retirement for 23.5 years, while a woman who retires at age 50 can expect to live in retirement for 29.3 years.3

Of course, your exact life expectancy depends on a variety of factors, but it can be helpful to use these numbers as a general guideline. If wishing to be more conservative, one could assume longevity well into their 90s. Before you leave the workforce, consider whether you have enough retirement savings to last your lifetime.

How should I save and invest?

A downside to retiring early is that you have fewer years to accumulate compounding interest in your accounts. It’s important to make up for that missed opportunity by maximizing your savings. That means maxing out contributions to any available retirement accounts, such as 401ks, IRAs and HSAs.

And, because you have fewer years to recover from a market drop than someone retiring in his or her 70s, it’s important to maintain a diversified investment portfolio that’s intentionally positioned to weather market volatility and keep up with inflation.

How will I spend my time?

For some people, the idea of retirement is enticing until they’re actually living it. When you retire, you go from 40+ hours of work per week to none, which can leave you with a lot of free time to fill. In addition, it’s unlikely many of your current friends will also retire in their 40s or 50s, which means you may need to find a new social group.

Before taking the leap, be sure to have a plan in place to fill your days, such as volunteering, teaching or taking a class, trying out a new hobby, etc. Not only can finding your purpose make your days more fulfilling but it can also provide you with an opportunity to make friends with similar interests.

Could you use some help planning for an early retirement? Creative Planning is here for you. Our experienced teams work together to help ensure your financial life is optimized and working to achieve your personal financial goals. For more information, schedule a call with a member of our team. We look forward to getting to know you.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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