5 steps for planning an early retirement

Key takeaways:

• There’s a growing movement known as FIRE (financial independence, retire early) that may affect your clients. 
• While retiring early may seem universally appealing, some people retire early out of necessity. 
• There are steps you can take with clients to help them plan for early retirement, like a personalized Social Security filing assessment. 

01/16/2025 — The idea of retiring early is appealing to almost everyone. So much so that there’s a growing movement known as FIRE—financial independence, retire early. Some people, though, are forced to retire early even if they want (or, more often, need) to keep working because of illness, job loss or other life events. A recent Nationwide Retirement Institute^® survey found that 20% of respondents who’re currently drawing Social Security said they retired earlier than planned.¹ So what are the steps you can take with clients who want to retire early?

#1 Do a personalized Social Security filing assessment

One of the most frequently asked questions about retirement is when to file for Social Security benefits. Creating a personalized Social Security filing assessment can help clients decide when to take benefits. As you know, starting Social Security benefits before full retirement age (FRA) can be costly. Claiming at age 62 instead of age 67, for example, results in a permanent 30% reduction in monthly benefits. 

It’s a delicate balance because on one hand, your clients might need the income now for immediate expenses or financial goals. On the other hand, waiting to file could potentially increase their benefits in the future. This decision could be further complicated by other factors, such as working during retirement. If they receive Social Security benefits before their full retirement age, earnings above the annually set limit ($22,320 per year in 2024) could lead to cuts in payments.

#2 Help clients create an income bridge

For clients who choose to delay collecting Social Security benefits, they may need to create an income bridge, depending on how early they retire. You can assess their current and future spending projections, breaking down their income requirements by how much they must have to meet essential needs and the additional amount they’d like to have so they can do the things they want in retirement. As you help them plan, you can remind them that their living expenses may not decrease as much as they think during retirement, if at all. In fact, more than half (55%) of people aged 60 and older found that their living expenses stayed the same in retirement, according to our 2024 Nationwide Retirement Institute Social Security Survey.

#3 Diversify savings

Starting retirement with only a single bucket of tax-deferred savings (such as a traditional IRA) may not be ideal for your clients. After all, taxes can take a big bite out of retirement income, and IRS penalties for early withdrawals can take even more. That’s why it may be advantageous for clients to save in — and withdraw from — multiple retirement accounts at different times. 

For example, withdrawals before age 59½ from tax-deferred retirement savings accounts such as traditional 401(k) or 403(b) plans may incur a tax penalty. If your clients are considering retiring before that age, they should avoid taking withdrawals from those accounts until age 59½.² Once they turn 59½, they could consider spending from tax-deferred accounts because those withdrawals will probably be taxed at lower rates after they stop working. Measured withdrawals between age 63 and filing for Social Security can be combined with Roth conversions to beef up future sources of tax-free income.

It’s important to note that your client’s income 2 years prior to beginning Medicare is used to assess whether Medicare surcharges will be assessed. For many, this means they should take a closer look at income levels at age 63 before they make any decisions. Earnings on investments held for at least 1 year in a brokerage account may also be a source of income that can be taken with minimal or no taxes owed. 

#4 Explore protected lifetime income opportunities

You can work with your clients to build a retirement paycheck that provides the income they need to cover essential expenses. Newer investment options possibly available in their employer's retirement plan, along with annuity options, may help provide a level of consistent income they can count on. Certain expenses — such as housing, food and health care — are obviously essential and need to be covered in retirement. And sources of protected lifetime income can help if Social Security alone isn’t enough. A guaranteed retirement paycheck can offer guardrails so they know how much they can spend each month. It can also offer protection from what’s called “sequence of returns risk.” This kind of risk involves events such as recession and poor investment performance draining savings early in retirement and could force clients into unretirement. 

#5 Review a personalized health care cost assessment

Creating a personalized health care cost assessment can help clients visualize how much they’ll need to cover health care costs in retirement, which is especially important when retiring before Medicare eligibility at 65. Out-of-pocket costs for insurance premiums and health care expenses not covered by insurance can add up, especially for clients who live in states with higher-than-average health care costs. For example, Florida, Texas and Arizona — 3 popular choices for retirees — are among the most expensive states for health care.³ You can also remind your clients that utilizing health savings accounts (HSAs) are a great option to stash additional funds for health care in retirement if they qualify. 

Retiring early, whether done out of choice or necessity, requires careful planning and attention. You can use these steps as a guide to help start the planning process with clients who want to retire early. Your expertise and foresight can help ensure a smooth and successful transition into early retirement.