The Early Retirement Dilemma: Planning, Risks, and Smart Moves

This week’s insight looks at early retirement. More Americans than ever are mulling it over, but there are important planning activities to perform—lifestyle & financial—and risks to weigh.

Morningstar reports a record number of 401(k) millionaires—500,000+ as of the end of 2024. That presents a happy conundrum for folks in their 50s: keep grinding or call it quits? Of course, traditional retirement age is 65. You can take Social Security as early as 62, and for those with seven-figure workplace retirement accounts, 55 may be the age in focus.

So long as a 401(k) hasn’t been rolled over into an IRA, an individual can generally use the “rule of 55” to take penalty-free 401(k) withdrawals once they leave the employer. This strategy only works if you leave the job in or after the year you turn 55, and it doesn’t apply to previous employer plans. As always with retirement accounts, key nuances exist, but this is a potential early-out for elder Gen Xers today.

But early retirement is sometimes not all it’s cracked up to be. Starting your golden years a decade before normal means you could have upwards of 30 or 40 years—almost as long as your career—of time to fill. What’s more, a protracted gap between your final paycheck and your first Social Security payment requires financial planning.

So, there are lifestyle and wealth scenarios to consider. Along with looking inward, you can also learn from what successful retirees claim works. Here are a handful of boxes to check:

1. Estimate Retirement Spending Needs & Build Savings: The usual spiel here…calculate your current living expenses and analyze potential changes in retirement. Healthcare costs, travel, new hobbies, and one-off items can sum to something much different than when you’re in the 9-5 routine. Heuristics like the “rule of 25” suggest saving 25 times your expected expenses to preserve retirement financial security.
2. Plan for Healthcare Coss & Prepare for Longevity: Ditching employer-sponsored healthcare means you’ll likely have to procure your own plan before Medicare eligibility. Plans from Healthcare.gov may be your best option, or if your spouse continues to work, hopping on their policy is probably the smarter play. You may also consider a low-cost immediate or deferred annuity to mitigate the risk of outliving your money.
3. Invest Wisely & Consider Part-Time Work: 30 or more years in retirement means you may still need a stock-heavy portfolio to beat inflation. That means being okay with greater volatility and enduring bear markets. That’s the money side of the equation…from the life-planning perspective, you might find joy (and sanity) by working or volunteering a few days a week.

Lots to think about, indeed.