A Woman’s Guide to Early Retirement

In theory, retiring early sounds incredibly liberating. Unfortunately, for many women early retirement isn’t a choice, and doesn’t necessarily indicate financial independence. In a recent survey, 66% of women who retired early said it was a decision based on factors outside of their control. 

At Abacus, we want to encourage you to turn this idea on its head and take charge of your financial future. Whether you plan to retire early because it’s a personal goal of yours, or your health, family responsibilities, or a job loss result in the unexpected need to do so, you can make decisions that turn this next chapter into one where you truly thrive. 

Let’s explore the unique considerations that women should keep in mind as they embark on the journey to early retirement, including how to set achievable goals, assessing your current financial situation, and crafting a plan that aligns with your unique vision of financial independence.

Setting Your Retirement Goals

Before diving straight into the numbers, take time to envision your ideal retirement. What does it look and feel like? Understanding your goals can guide your financial decisions and help make the journey more rewarding. After all, early retirement isn’t just about the money. Your intentions should also reflect your desired lifestyle, which includes your values, how you want to spend your time, and how you want the big and small moments of daily life to take shape.

A well-defined plan is your compass, steering you toward financial independence. Setting goals helps you to turn your vision into a reality, and clarifies the “why” that will keep you motivated as you work toward the early retirement milestone. 

Here are a few questions to ask yourself as you start identifying your early retirement goals:

• Do I want to retire from something, or retire to something? Whether you’re simply complete with your current career, or you have ambitions of transitioning into a new venture (business ownership, volunteer work, etc.) knowing what is motivating you can be key.
• What’s my timeline? Are you thinking you want to retire in your 40s or 50s? Or maybe just a few years earlier than you had initially planned? Set a time-bound goal for yourself so that you can start reverse-engineering some rough estimates for how much you’ll need to save to make the transition possible.
• How do I want to spend my time? Start with the small, daily moments. What about early retirement is exciting to you? This might look like spending more time with your kids or grandkids, traveling, getting involved in volunteer work with organizations you love, or just having more time to pursue your hobbies and interests. 

• What are my “bucket list” items? Early retirement may mean you have more time to live a life you love, but it could also mean you have fewer years to build your nest egg. Clarify what “bucket list” items are an absolute must so that you can focus on what you’re really excited about, and budget accordingly. 

• Do I want to work in a different capacity? You might want to retire early from your current job or career path, but that doesn’t mean you need to stop working forever. Plenty of retirees go on to consult, start businesses, freelance, work part time, or pivot into entirely new careers. Decide if this is something you’re interested in, and research how this might unfold in your life.

Assessing Your Current Financial Situation

Once you have a few clear ideas about what early retirement means for you, you can take stock of where you are right now. Understanding your current financial situation is the best way to build a foundation for your early retirement strategy. Here’s what to consider:

1. Evaluate your current savings, investments, and assets. Where do you currently stand with your savings? If you feel confident about your nest egg, that’s great! Make sure you know exactly what you have saved or invested, and in what accounts. This can help you build a proactive plan that’s tax-efficient and tailored to your unique retirement income needs.
2. Understand income sources and expenses. Look at what you have, but account for your monthly or yearly cash flow as well. Being clear about what expenses you deal with annually and what type of income you have coming in to cover those expenses can help you get a better picture of what you’ll need to cover year-to-year in retirement.
3. Identify areas for improvement. Every financial journey has its obstacles. Don’t beat yourself up if you aren’t where you wanted to be by now. Knowing your financial “baseline” can help you make empowered decisions that move you closer to your early retirement goal. For example, you can increase savings, delay retirement by a few years, find alternative part-time work or sources of income in retirement, or cut expenses prior to the retirement transition.

The Importance of Saving and Investing

Regardless of your current financial status, proactively boosting your savings is a crucial step if you want to retire early. Luckily, there are a few practical strategies to increase your savings rate without sacrificing your existing lifestyle.

First, look into how much you’re putting away into tax-advantaged retirement accounts. This includes your 401k with a workplace match, IRA, etc. These tax-advantaged accounts can help you turbocharge your savings for early retirement, so consider making the maximum yearly contributions to them whenever you can.

Next, consider how you can diversify your investments for long-term growth. Confirming that your portfolio has a diversified asset allocation (stocks, bonds, and other investments) and asset location (pre-tax accounts and taxable accounts) can help you create a tax-efficient strategy that moves you to and through early retirement. 

You might also consider organizing a strategy that creates different “buckets” within your portfolio to use for different time horizons: one for the beginning of early retirement when you may not qualify for Social Security benefits or Medicare and will need more cash flow, one for mid-retirement, and one for later retirement. You’ll have different financial needs during each season of your retirement journey, and identifying specific investments to support them can help with your cash flow when you need it.

Additionally, it’s wise to consider investing outside of “traditional” methods if you want to retire early. Often, even maxing out your workplace 401k and an IRA just isn’t enough to get you where you want to be. Real estate investing, or even just opening a brokerage account to continue to build your nest egg with the help of a financial advisor, can get you closer to your goal.

Retirement Cash Flow Strategies: Know Your Withdrawal Rules

It’s worth noting that if you plan to retire early there are certain withdrawal rules and penalties on retirement accounts you need to keep in mind. Here are a few key points:

1. Age Restrictions: Most retirement accounts have a minimum age requirement for penalty-free withdrawals. For example, 59½ is a common age for penalty-free withdrawals from 401(k) and Traditional IRA accounts.
2. Substantially Equal Periodic Payments (SEPP): Under IRS Rule 72(t), you can take substantially equal periodic payments from your retirement accounts before the age of 59½ without incurring the 10% early withdrawal penalty.
3. Roth IRA Contributions: While contributions to a Roth IRA can be withdrawn at any time without penalties, earnings on those contributions may be subject to penalties unless certain conditions are met – namely, that you have had the account open for at least five years, and are 59½ or older. Leveraging a tool like a Roth IRA conversion ladder can help you to navigate around these age limits and potentially withdraw the funds tax-free. However, to ensure you’re setting up your strategy correctly and avoid penalties, it’s worth speaking with a financial advisor.
4. Early Withdrawal Penalties: Traditional IRAs and 401(k)s typically impose a 10% penalty on early withdrawals before the specified age limit. Understanding these penalties can help you plan for the financial impact. There are a few exceptions such as medical premiums while unemployed. 

Debt Management

Debt can be a roadblock to your retirement dreams. Take time to think about how you want to navigate your existing debt, and mitigate the impact of future debt on your early retirement goals. 

For example, you may decide to knock out high-interest debt prior to retirement to accelerate your ability to save in the near term. You might also set a goal to pay off your mortgage, or sell your home in order to downsize and perhaps pay cash for a smaller, more manageable living space. 

Mitigating Risk

Retiring early can be a risky financial decision, but having a few safety nets in place can help insulate you from the unexpected. First and foremost, make sure you build an adequate emergency fund for expenses that you don’t see coming. After all, life is unpredictable, and if you plan to retire early you want to have a large enough emergency fund to fall back on if you’re faced with a worst-case scenario. 

Often, pre-retirees who are still working aim to keep 6-12 months of expenses in cash in case of an emergency. However, you may want to up your emergency savings goal to make sure you can handle hefty expenses if they happen in early retirement. Some retirees keep a few years of cash on hand, or invested in high-yield savings accounts to protect themselves against unpleasant financial surprises.

You can also leverage insurance to mitigate financial risk if you plan to retire early. Insurance is your financial shield. Here are a few types of policies you might consider if you’re exploring early retirement:

• Health insurance – You may not qualify for Medicare right away, so it’s a good idea to have a game plan for what type of coverage you’ll need. Working your premium costs into your cash flow strategy will be key.
• Long-term care insurance – Long-term care is expensive, and studies show that the majority of Americans will need it at some point in their lives. Consider a policy that makes sense for you given your family’s health history, your current health, and your budget.
• Home, auto, or umbrella insurance – Make sure that you’re protected in the event of an emergency with your standard home and auto policies. If you are a high-earner, or have a significant asset level, umbrella insurance may help to protect you beyond what standard policies will cover. 

Maximize Your Earnings Potential

Your income is a powerful tool, and increasing your earnings while you’re still employed can positively impact the amount you’re able to save for a future early retirement. For women, this is especially critical due to the gender wage gap. Women earned 17% less than men in 2022, and often this discrepancy means that women are able to put less toward their future retirement. 

To combat this, you can negotiate for salary increases at your current employer, or look to advance in your career. Increasing your earning potential will directly influence the available cash flow you have to set yourself up for a strong future retirement.  

You can also increase your cash flow by diversifying your income prior to retirement. Picking up an additional side job, or exploring new money-making opportunities (rental properties, drop shipping, etc.) can help propel you toward your goals and provide other potentially long-lasting income streams as you move to and through retirement. 

Social Security and Other Income Sources

Social Security is a valuable resource, but it may not be available to you right away if you choose to retire early. You’ll need to decide whether you want to:

• Take a reduced benefit as early as age 62.
• Take your full benefit when you reach full retirement age (this is dependent on the year you were born).
• Increase your monthly benefit by delaying Social Security until you’re older than your full retirement age. 

If you have a significant nest egg set aside, or are on track to have one before making the retirement leap, it may make sense to hold off on collecting your benefits. However, if early retirement is important to you, and you need the cash flow, a reduced benefit sooner may help support your lifestyle. 

There is no right or wrong answer when it comes to Social Security benefits. It’s important to evaluate your unique circumstances, and make a decision that makes the most sense for your needs.

Although it is not as common in the private sector, many public sector employees could be eligible for pension benefits in retirement. It is important to understand the impact of working history and future payment options. You should receive benefit summary information regularly and evaluate timing as it relates to taking monthly income. If you leave your employer there could be opportunities to roll the asset out to a Rollover IRA. 

Finding Empowerment in Your Finances

When you’re hoping to retire early, expert advice can make a huge difference in setting you up for success. Working with a financial advisor is a great way to fine-tune your strategy and connect with someone who will motivate you to stay on track. 

Meanwhile, an advisor who is excited to help you build a life you love will celebrate your achievements and milestones on the journey, boost your confidence, and act as a sounding board as you make key decisions that influence your money and your lifestyle. 

Remember: the power to retire early – and make it exactly what you want it to be – is in your hands. With a proactive financial advisor in your corner, you’re one big step closer to achieving it.

Disclosure: This material is not intended to serve as personalized tax, legal, and/or investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners, LLC is not an accounting firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.