Over the past 35 years, our firm has helped many people retire and, despite what you hear from some mainstream media outlets, I rarely find people wishing they had worked longer. I also find that traditional retirement planning tends to confuse people into thinking they should work longer than necessary. There are several reasons why this occurs.
This article will focus on five reasons why many people can retire earlier than they think possible.
Reason 1: Declining Spending Trends
The first reason many people can retire earlier than expected is the tendency for spending to decline with age. According to the Bureau of Labor Statistics, people’s real spending decreases beyond the age of 55.
Unfortunately, traditional retirement planning assumes that an individual’s real spending increases at an assumed inflation rate from the first day of retirement through the end of life. This flaw in traditional retirement planning gives the impression that people need to work longer than necessary. If individuals expect to reduce real spending in later retirement years, their plan should reflect this for an accurate savings estimate to maintain their desired lifestyle in retirement.
Reason 2: Overestimating Medical Expenses
The second reason many people can retire earlier than they think is attributed to overestimating retiree health insurance costs before Medicare kicks in at 65.
Many people who do not have retiree health insurance provided by a former employer will use Affordable Care Act insurance or a state-sponsored version of Affordable Care Act insurance. The cost of this health insurance is partially determined by a household’s modified adjusted gross income (MAGI). Generally, the lower the MAGI, the lower the cost of health insurance. Distributions from non-qualified investment accounts and qualified distributions from Roth IRAs do not count toward MAGI.
Investors who properly plan for this in advance of retirement can frequently keep the cost of this health insurance lower by keeping their MAGI low before receiving Medicare at age 65.
Reason 3: Minimizing Taxes
The third reason many people can retire earlier than they think is due to taxes. Frequently taxes in retirement are lower than taxes during one’s working years. This occurs because not all Social Security income is subject to federal income tax. Also, many states do not subject Social Security income to state tax.
Additionally, most employees and business owners are accustomed to paying a 7.65% FICA tax on their income during their working years. Social Security, pension income and distributions from IRAs are not subject to this FICA tax during retirement years.
Finally, qualified distributions from Roth IRAs and the basis from non-qualified accounts are not taxed at all.
For all these reasons, retirement income is generally more favorable than working income due to the reduced tax burden.
Reason 4: Shrinking Expenses
The fourth reason people can often retire earlier than expected is reduced expenses in retirement compared to their working years. This happens for a variety of reasons:
Reduced spending on children
Debts more likely to be paid off
Reduced (or zero) interest expense owed on debts
No longer budgeting for retirement savings
For all these reasons, and others, many retirees will see their spending shrink in retirement.
Reason 5: Leveraging Liquidity Options
The final reason why many people can retire earlier than they think possible is attributed to liquidity. IRA and 401(k) investors have frequently been told that if they take distributions from these retirement accounts prior to age 59.5, they will have to pay a penalty. Although this is generally true, there are several exceptions to this and two of those exceptions are relevant to people who want to retire younger than age 59.5:
One of these exceptions is available to 401(k) investors who leave their employer at age 55 or later. If they have a 401(k) with the company they are leaving at age 55 or later, they can take withdrawals from the employer’s 401(k) penalty-free. Ensuring a portion of this money is set aside in a conservative investment option within the 401(k) can provide a penalty-free dependable income stream prior to age 59.5, which is not susceptible to market fluctuations.
A second liquidity option applies to IRA owners. There is something called 72(t) distributions, which allows investors to withdraw income from their IRA penalty-free at any age. For 72(t) distributions to avoid any early withdrawal penalties, there are a few rules that must be followed; however, it can be another effective liquidity technique for those who want to retire young.
I wanted to write about the five reasons why many people can retire earlier than they think possible because frequently we find these talking points are missed when people are looking at retirement.
Planning for an individual’s unique circumstances accurately plays a significant role when calculating retirement age. Traditional retirement planning doesn’t account for all these variables. I strongly encourage investors considering early retirement to talk to a financial professional about these variables before making any decisions about retiring earlier than they think is possible.
Originally published in Forbes on March 13, 2025.
The use of Ty Bernicke’s research or publication of articles he has written does not indicate an endorsement of his work as an Investment Advisor. The publications did not receive compensation for publishing Mr. Bernicke’s work.
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