How a Financial Advisor Can Help Support Early Retirement
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Early retirement typically means leaving the workforce before your mid-60s (which is when you can tap into Social Security), or even before age 59½ (which is when most retirement accounts can be accessed without penalty).
However, in the last decade or so, the definition of early has evolved alongside a trend called the FIRE movement, which is an acronym for financial independence, retire early — under that trajectory, some folks target a retirement age of 35, 40 or even earlier.
It can be an appealing idea to say goodbye to the work world as soon as possible, but doing so without a financial plan can make it tricky. This is one reason why some early retirees — or early retiree hopefuls — work with a financial advisor to make sure they stay on track. The expense of engaging an advisor can be well worth it.
Why early retirement can be more complicated
If you’re retiring early, you still face many of the same questions as someone preparing to retire at a traditional age: how much you’ll need to retire, for example, and how much you can withdraw each year without outliving your savings.
But retiring ahead of schedule magnifies those decisions. Instead of retiring at the more traditional age of 67, which typically requires funding 20 or 25 years of retirement, your savings may need to last anywhere from 30 to even 50 years, depending on when you choose to retire. (Check out our FIRE calculator if you’re trying to determine what that number is for you.)
That longer timeline offers less margin for error, especially if markets decline in the first few years of retirement and you need to withdraw money from your investment accounts when the value is down.
It also requires a strategy for accessing your money while minimizing taxes and early withdrawal penalties, especially if the bulk of your retirement savings is housed in tax-advantaged retirement accounts. You must be 59½ or older to avoid the 10% early withdrawal penalty from most retirement accounts. Early retirees can consider strategies such as the Rule of 55 to tap into Social Security benefits early, substantially equal periodic payments (SEPP) under IRS Section 72(t) or Roth conversion ladders.
If you were receiving health insurance benefits through your job, you'll also need to find replacement insurance before you become eligible for Medicare at age 65.
Given all that, it's very easy to see how early retirement quickly grows more complicated than expected.
When a financial advisor could make sense
Not everyone who wants to retire early needs help from a professional. But if any of the below apply, it may be beneficial to work with an advisor.
You’re managing a large financial portfolio. The more money you have, the more important tax efficiency and risk management become.
You want a well-structured withdrawal strategy. It's important to consider all your potential expenses and their timing in order to know what you'll need and when. Knowing when to take money out of taxable, pre-tax and Roth accounts over the years can make a big difference.
You want to do Roth conversions. Low-income years are ideal for Roth conversions, which means early retirement can be perfect timing. But you’ll have to decide how much and when to convert by projecting future tax brackets.
You want a plan that also encompasses healthcare and Social Security. Retiring before you become eligible for Medicare and Social Security can affect your long-term income and should be part of a broader strategy.
However, you might not need a financial advisor if:
Your financial portfolio is relatively straightforward and easy to manage.
You're living very lean in early retirement and you don't want to add the extra expense of an advisor. (Learn how much an advisor costs before you make a decision based on this — there are a variety of fee structures, and it's generally easy to find an advisor who will work for your situation. Some will even make you a one-time financial plan for early retirement that you can then carry out on your own with no additional or ongoing fees.)
You understand how to sequence withdrawals and how it affects your taxes.
You expect to maintain similar or lower cost of living in retirement, which won’t heavily reduce your assets.
You’re comfortable rebalancing your own investments and reducing your living expenses when markets are down.
What a financial advisor does for early retirement
Typically, you can expect these services from the advisor:
Cash flow and spending projections. An advisor can turn your lifestyle goals into a year-by-year income plan, estimating how much your portfolio needs to grow in order to support expenses such as housing, travel, inflation, one-time expenses and more.
Retirement income and investment strategy. Financial advisors know that early retirees need an investment strategy that takes into account near-term withdrawals and long-term compounding.
Tax-efficient withdrawal planning. With your advisor, you can map out when to take money out of taxable, traditional or Roth accounts, especially if you plan to do Roth conversions in lower-income years.
Healthcare and Medicare planning. If you plan to retire before age 65, an advisor can help you manage your income to account for ACA subsidies and healthcare costs.
Risk and contingency planning. A financial advisor can help you think through plans for other areas of your financial life, including emergency reserves, insurance coverage, long-term care, and estate planning.