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Thinking About Retiring Early? Here Are 3 Key Considerations:

An early retirement seems to be something almost everyone dreams about. The idea of being able to do what you want, when you want, is appealing to most people. It could be spending more time doing the things you love, such as hunting, fishing, traveling or spending more time with the grandkids. Whatever it is that you plan on doing in retirement, you should be aware of some areas that should be addressed when planning for an early retirement.

1. Health Insurance Coverage

One the most important considerations when deciding on an early retirement is the cost of health insurance prior to Medicare eligibility, which is usually at age 65. Many employer health insurance plans allow you to maintain your health insurance coverage for a limited time through COBRA at a higher cost. However, healthcare coverage under COBRA is usually limited to a period of 12 to 18 months, after which health insurance coverage has to be purchased in the health insurance marketplace through an individual health insurance plan. Some employers may allow you to maintain their coverage beyond the COBRA limitations, however, this varies by employer. Private health insurance plans purchased in the marketplace are often more expensive than plans offered through employers and Medicare. For example, monthly health insurance premiums for a 56 year old man in Louisiana ranged anywhere from $780-$1,500 per month on One way to get an idea of your potential health insurance costs prior to Medicare eligibility age is through Using their website, provides you the ability to determine the estimated costs of different health insurance plans based on your specific circumstances. Understanding your specific options and potential health insurance costs will help you be better prepared before making the decision to retire early. 2. Retirement Savings Withdrawals Prior To Age 59.5

There is a good possibility that if you are thinking about retiring early, you have already begun preparing for retirement. Perhaps you make regular contributions to your employer sponsored 401(k) retirement savings plan and receive a generous employer match, which over time may grow into a healthy nest egg of retirement savings. However, if you are planning to retire prior to age 59½, you should be aware that there are some disadvantages on taking distributions from your retirement accounts before age 59½. There is a 10% tax penalty imposed by the IRS for withdrawals from retirement accounts such as 401(k)s or IRAs prior to age 59½. Due to the restrictions associated with withdrawals from retirement accounts prior to age 59½, you may consider splitting your savings between different account types. For example, an individual brokerage account is a taxable investment account where funds can be withdrawn without penalty prior to age 59½. Accumulating savings outside of the retirement account could allow you to use these funds for income until age 59½, where distributions could then be taken from a retirement account without penalty. This provides you with options when it comes to deciding how you will fund your early retirement. However, if the majority of your savings are in employer sponsored retirement plans, there are two exceptions that allow you to access those funds earlier than age 59½, without being subject to a penalty. Rule 72(t)

IRS Rule 72(t) or substantially equal periodic payments, allow an individual who has separated from service prior to age 59½ to begin taking distributions from a qualified retirement plan or IRA account without incurring the 10% early withdrawal penalty tax. The rule allows the account owner to take equal periodic payments that cannot be modified for 5 years following the date of the first payment, or if later, age 59½. If the equal distributions are started at age 58, the account owner would not be able to modify the distributions until age 63, even though they are passed age 59½. If a modification to the payments is made during the 5 year period, the account owner would no longer have the exemption to the 10% early withdrawal penalty and the 10% penalty would be reinstated retroactively to all the distributions made before age 59½. Once the required distribution period has passed, the distributions can be modified without incurring the 10% tax penalty for early withdrawals.

The 3 methods for determining the substantially equal periodic payments are explained here:

Due to the complexity of IRS Rule 72(t), you may want to consult a tax professional before initiating the payments. The Rule of 55

A second method of accessing retirement funds for distributions prior to age 59½ is the rule of 55. The rule of 55 is an exception to the 10% penalty tax for retirees who have separated from service in or after the year they reach age 55, which allows the retirees to take distributions from their most recent employer sponsored retirement plan penalty free. For federal state or local government public safety employees this exception applies when the retiree separates from service in or after the year, they turn 50. However, the limitation is that the penalty free withdrawals are limited to the funds in your most recent company’s 401(k) or 403(b) plan. This implies that if you roll over your 401(k) plan into an IRA prior to taking distributions, the distributions from the IRA will incur the 10% penalty tax. Every employer plan will have specific rules around distributions from the plan, so it is important to review these with your plan administrator ahead of time. Because of the complexity associated with early distribution rules, you may consider consulting a financial planner and tax professional before initiating the process. 3. Life Expectancy

Trying to guess how long you will live may seem morbid, but it is something that should be considered before you decide on an early retirement. A good place to start would be to reflect on you and your spouse's family history of longevity. How long did each of your parents live? What about your grandparents? If they are deceased, how did they pass? Was it due to natural causes or pre-existing medical conditions, which may be genetic? Do you or your spouse have any health issues that could possibly shorten your life expectancy? While no one knows exactly how long they will live, all of these questions should help give you a better idea of how life expectancy may look for you and your spouse in the future. According to data from macrotrends, the current average life expectancy in the U.S. in 2022 is 79.05 years. Assuming this average, someone who retired at age 55 would want to plan for their retirement savings to last a minimum of 24 years. However, as advancements in technology and medicine continue to develop, life expectancies may continue to increase. This means that your assets may need to support your retirement income for longer than you think. Over time the costs of living will likely rise, so it is important to factor in potential adjustments to expenses to account for inflation, as well as increases for healthcare expenditures later in life. It is important to know ahead of time if your savings will be enough to support your lifestyle and expenditures before making the decision to retire early, including things such as car replacements and major house repairs. Many people consult a financial planner to help then determine if they are on the right path to successfully achieve retirement goals or if it might be best to continue working a few more years.

Brandon Bergeron

Portfolio Manager, Crescent Sterling Ltd.

Brandon Bergeron

Brandon Bergeron is an Portfolio Manager at Crescent Sterling Ltd.

He works primarily with individuals and families to help them plan

for their long term financial goals.


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