Your Early Retirement Checklist

The path to early retirement can be simple:  spend considerably less than you earn, invest wisely and let the magic of compounding do the hard work for you.  But what happens once you reach your own financial independence (FI) goal?

Over the past 13 years, I’ve been reading books and blogs on retiring early, listening to podcasts, connecting with like-minded individuals, and helping clients retire (early, late, and even the “normal” age of 65).  From these experiences, I’ve built the following checklist for early retirees to consider before they fully leave paid employment.

How do I know it works?  Because I considered many of these options before launching my own firm, which for me was a lifestyle decision to do what I love, without having the same stress and time commitment that I had become accustomed to while working for someone else.  And because of these careful considerations prior to making a large life change, my own experience has been a dream come true.  Hopefully yours will, too.

Financial

• Do you have a good idea of your retirement budget? Have you accounted for travel, health insurance, potential educational expenses, auto replacements, and at least thought about long-term care?

• Where is your retirement income going to come from? If pulling from investments, what is your portfolio withdrawal rate?  Is that sustainable over a 40, 50 or 60+ year time horizon?  And which accounts should you pull from if you’re not yet age 59 ½?  Should you consider leaving the money in your 401(k) so you can access it at age 55?  Should you consider a Roth conversion ladder?  What backups are available if one of your income sources dries up, such as not being able to find a tenant for a rental property?  Have you thoroughly reviewed your pension and/or social security collection strategy options?

• Have you considered a dynamic spending plan? This is a budget that has some variables if your investments do really well or really poorly.  For example, if your investments are down 30%, if there are ways you can reduce your living expenses and/or earn additional income, it will greatly increase your probability of retirement success.

• Do you have a healthy cash cushion / emergency fund? Life happens.  Giving yourself a cushion for unexpected expenses can be very powerful when you’re retired.  That way you’re not necessarily forced to sell during a down market.
  

• Have you considered working part-time? If you’re able to make some income in retirement, especially in the early years, this can make a huge difference.  For example, if you’re planning to use a 4% withdrawal strategy and you’re $1 million short of your retirement goal, you may be able to retire today if you’re able to earn at least $40,000 per year on a part-time or consulting basis until another income source kicks in (for example, a pension or Social Security.)  This may also help boost your future Social Security benefits, as it uses a 35-year average of your highest earnings history, so replacing zeros with something positive can make a difference.
  

• Have you refinanced your mortgage? If you still have mortgage debt, it is much easier to qualify for refinancing while you’re still working.  So if current interest rates are lower than your mortgage rate, consider refinancing while you still can to lock in a low rate and help hedge against future inflation.

• Do you have a good estate plan in place? Consider drafting a will, trust(s), advanced medical directive, power of attorney, etc. with a qualified estate planning attorney, especially if you plan to travel in the early years of your retirement.  And be sure your account titling and beneficiary designations match your wishes and estate planning documents, as beneficiary designations bypass any estate planning documents if not properly addressed.

• Are your investments properly diversified? If you’re all equities (stocks), are you mentally prepared for a potential market pullback?  This is much harder to stomach when you’re living off the portfolio than it is during the accumulation phase.
  

• If this is expected to be the last big income year or you’re approaching a liquidity event and you are charitably inclined, have you considered gifting to a donor advised fund (DAF)? Gifting to a DAF can be a great way to get a charitable deduction upfront and gift the money to charity in the future as you see fit.

• Do you have accurate cost basis information for all of your non-qualified (taxable) holdings? This is especially important when you go to sell securities to help fund your living expenses.  If cost basis is missing, it could cost you more in taxes than necessary.

Insurance

• What are you going to do for health insurance? (The biggest question for almost all early retirees.) If COBRA is available, what is the cost?  Will your income be low enough to qualify for ACA premium tax credits and/or subsidies of your out-of-pocket expenses?  If not, have you considered accelerating or deferring income in various years to help you qualify?  For example, could you take out more income this year and less next year?

• Is there still any need for your life and/or disability insurance policies? Hopefully if you’re financially independent you will no longer have a need for them, but if you’re still planning to work part time to help cover your living expenses and are going to lose group coverage, consider getting new individual policies before you leave your old employer in case there are any issues with underwriting.

• Do you have sufficient liability insurance coverage? Consider both personal and business (if applicable).  Unfortunately, since we live in such a litigious society it is wise to protect the resources you have worked so hard to build.

Lifestyle (just as important as the above items)

• What are you going to do with all of that free time? For many people, they’ve spent 40+ hours per week working, commuting, getting ready in the mornings, etc.  This is a lot of time to fill if you don’t have a plan and many people get bored without some kind of meaningful activity.

• How will you replace lost work connections? This one can be big, especially if your peer group is all still working full time.  Consider joining exercise groups, volunteering, going to meet-ups, connecting with your local early retirement groups, activities around current or potential hobbies, or even meeting up with old coworkers who have also retired.  And be sure to make a list of important contacts (subject to potential employer agreements) that you may want to connect with once your retired and no longer have access to your work email, phone, etc.

• What will motivate you to get out of bed in the morning? There is not a lot of value in retiring early if it doesn’t bring you more happiness or life fulfillment.  Think about what truly brings you joy.  Are there ways you can help your family, friends or community that will give your life a sense of purpose?
  

• How do you deal with your loss of identity? Many people’s identity is at least somewhat tied to their career.  Going from “software engineer” to “retired” when you’re age 40 and meeting someone new is much harder than you think.  If you’re struggling with this, maybe you can rephrase this to “stay at home mom / dad”, “entrepreneur”, “volunteer”, “blogger”, “author”, “tennis coach”, etc.  Or if you’re still working part-time or consulting, you can easily keep your old identity and potentially even social groups.  There is an endless list of things you can identify with – you just need to see what feels right and what your interests might be once you’re no longer working full time.

• How much notice do you need to give your employer? Take a look at your contract.  Consider the time it will take to transition your workload to someone else, and/or whether your company will need to hire to replace you.  Do your best to help out the rest of your team and not burn any bridges, and be prepared for the day of your notice to potentially be your last day of employment.

• Have you tried retirement out, from both a financial and lifestyle perspective? If you’re able to take a sabbatical or extended leave of absence, this is a perfect way to see how you may want to spend your time.  During the sabbatical, try to live off your investments, just like you would in retirement.

• Have you discussed your plans in depth with your significant other? Having your partner on board is important.  Your plans may impact their current lifestyle, standard of living, and their own emotional health.

• Have you considered how hard the mental shift may be when you switch from the accumulation stage to the decumulation stage? For many early retirees, some of their identity is connected to their net worth / investment portfolio.  Hopefully your investments will continue to grow or at least remain level, but be prepared for years of withdrawing from your portfolio while the market is also down.  I’ve even heard of some people consulting with a therapist to help them with the transition.

• Does your retirement date coordinate well with the weather? Retiring in January if you live in Chicago might be depressing if you don’t have any travel plans.

Your answers don’t have to be perfect.  And life is full of surprises, so it’s very unlikely that you’re going to truly know how your early retirement will look until you actually get to experience it.  But hopefully this list gives you some things to think about before making the decision to move on to the next chapter in your life.

Want to see if you’re ready to retire or make a life change?  Reach out to see how.