Early retirement sounds like a dream, doesn’t it? More time for the people and things you love, and a lot less time spent answering emails at 7:00 a.m. But here’s the thing nobody tells you when you’re daydreaming about it: the years between when you stop working and when Social Security actually starts sending you checks can be some of the trickiest to plan for financially. Oh, and don’t forget that Medicare isn’t available until you reach 65!
So what exactly is this “gap” everyone talks about?
If you retire before you’re eligible for Social Security (62 at the earliest, 66 or 67 for your full benefit), you’ve got a stretch of time where the paycheck has stopped but the benefit hasn’t started yet. And if you’re one of the many people who chooses to wait until 70 to claim, which locks in a bigger monthly check for life, that gap gets even longer. And again, Medicare doesn’t start until you reach you age 65, so how are you going to pay for health insurance until you’re Medicare eligible?
None of this means early retirement is a bad idea. It just means it takes real planning to make the math work.
How do you actually pay the bills during those years?
Mostly, this comes down to being thoughtful about where your withdrawals come from. During the gap years, it’s common to lean more heavily on taxable investment accounts, then once you hit 59½, your IRAs and other retirement accounts become available to cover everyday expenses.
But this only works if your portfolio is designed correctly. You need enough money saved, spread across the right mix of investments, so that pulling a bit more out during these years doesn’t stunt its ability to keep growing. And yes, growth still matters a lot! People are routinely living 30+ years into retirement now, which means part of your money needs to keep outpacing inflation, or you risk your future dollars simply not stretching as far as they do today.
Here’s a possible silver lining: Roth conversions
Believe it or not, this awkward-feeling gap period can actually work in your favor when it comes to taxes. Specifically, it can be a great window for Roth conversions.
Let’s say for instance, you spent years running your own business, and you’ve become used to a stack of deductions. Well, many of those tax deductions will likely disappear the moment you retire. That will mean your taxable income, and your tax bracket, will look different in retirement than it did while you were working. If you expect to be in a higher bracket down the road, converting some of your traditional retirement funds to Roth now, while you might be in a lower bracket, could pay off significantly later. You pay the tax today, and from then on that money grows and comes out completely tax free. No RMDs to worry about either, so you can even choose to leave it alone entirely if you don’t need it.
Timing matters here too. Generally, you’ll have the most room to convert in the years right after you retire and before you file for Social Security. Once benefits start, there’s still some opportunity, just a bit less, and that window stays open until Required Minimum Distributions kick in, somewhere between age 72 and 75, depending on when you were born.
One more benefit people often miss: lowering your future tax bracket through smart conversions can also help reduce the IRMAA surcharge: that’s the extra amount high earners get tacked onto their Medicare premiums.
Now, a word of caution. Roth conversions aren’t something to just eyeball. Every dollar you convert counts as ordinary income for that year, and if it’s enough to bump you into a higher bracket, you can end up giving back a good chunk of the benefit you were trying to capture. This is why careful, personalized math really matters.
You also need to remember that Roth conversion outcomes depend on many factors that are subject to change, such as future tax law, and they may not be suitable for all investors. You may take nontaxable withdrawals from a Roth IRA if you are at least 59 ½ and the account has been held at least 5 years. Otherwise, earnings withdrawn may be subject to ordinary income tax and a 10% penalty.
This is exactly what we’re here for
If early retirement is on your radar, your Mathis Wealth advisor can help you build a withdrawal strategy tailored to your goals, one designed to get you comfortably from your last paycheck to your first Social Security deposit, without unnecessary stress or guesswork along the way. Reach out anytime, we’re happy to talk it through with you.
