Planning to Retire Early in 2027? Don’t Overlook These Two Essentials

Key Points

• You generally cannot enroll in Medicare until age 65.

• If you are under 59 1/2, withdrawals from retirement accounts usually trigger an early withdrawal penalty.

• Before retiring early, be sure you have a plan for healthcare coverage and cash flow.

Leaving the workforce early can be appealing. It can mean more time for the things you enjoy and less time spent on a traditional work schedule. But it also brings complications that are easy to underestimate until you are facing them directly.

Government rules on retirement withdrawals and benefits can make early retirement difficult if you do not have a clear strategy. Before stepping away from work, there are two major issues you should prepare for.

1. Healthcare

Medicare is the foundation of healthcare coverage for many retirees, but you cannot enroll until you turn 65. If you retire before then, you will need another source of insurance in the meantime.

You may be able to keep coverage through a former employer for a limited period, though that option is often much more expensive than it was while you were working. Another choice is to buy an individual policy through a health insurance marketplace. It is wise to research the cost ahead of time so you can tell whether your budget can handle it. Married couples may also be able to use a spouse's plan if that spouse is still employed.

Do not go without health insurance, even if you are in good health. One accident can easily lead to tens or even hundreds of thousands of dollars in medical bills and drain your savings.

2. Early retirement account withdrawals

In most cases, you must wait until age 59 1/2 before taking money from retirement accounts without facing the 10% early withdrawal penalty. That said, there are a few ways to access funds sooner.

If you have Roth savings, you can generally withdraw your own contributions at any age without taxes or penalties. Roth IRA conversions can also be withdrawn penalty-free after five years. However, any earnings need to stay in the account until you reach 59 1/2 if you want to avoid the penalty.

Another possibility is Substantially Equal Periodic Payments, or SEPPs. These are scheduled annual withdrawals that continue for the longer of five years or until you reach 59 1/2. There are several methods for calculating them, but once you begin, you must keep taking them as planned. If you stop too soon, you could owe early withdrawal penalties retroactively.

A taxable brokerage account can also serve as a useful source of money. Funds in this type of account can be withdrawn at any time, making it a practical bridge until you reach 59 1/2 and can tap the rest of your retirement savings without penalty.

You can combine more than one of these approaches as needed. The key is to have a plan that covers all of your expenses until you reach 59 1/2.