“In the last few years, plenty of clients who retire early have health insurance expenses to deal with, and if they don’t have retiree health insurance available to them maybe this cash flow and tax planning revolves around getting maximum subsidies from the Affordable Care Act,” says Salmon.

It’s an expense no one likes to bring up, but there’s a huge gap in care awaiting those who retire early without reaching Medicare age (where you get relief from costs). “If you’re retired now and you’re 58, you’re having to spend $15,000 or $20,000 a year on health insurance,” Salmon says. It could be higher or lower, depending on your health and plan. But if you can’t handle such costs for five to 10 years, you probably aren’t in the position to retire in the first place.

In some cases, clients will have to cut back on discretionary items like travel. Sometimes they’ll have to do some job part time to help with health insurance. This is where spending becomes key. How can you cut your expenses? Hike instead of joining a gym? Get an airstream and camp free on Bureau of Land Management areas?

Stress-Test Spending

It’s important to stress-test the spending, says Salmon. “Maybe the client is spending $50,000 or $80,000 a year … on all expenses and taxes. We’ll be able to model: Can you do $12,000 more than that per year? And if you’re still in our comfort zone, then we’ll kind of put a band around expenses. … We’ll throw in a bear market or recession and if your assets go down 15% or 20% or 25% tomorrow, how much that will eat into this extra spending that you might be considering? Does that eat through all of it and dip into what you’re currently projected to have in normal retirement expenses?”

Sometimes, Salmon says, it’s even better to take Social Security benefits as soon as they are available, at age 62, say, if you have retired earlier—he reasons that a bird in the hand is worth two in the bush. It helps a client keep money at work in the market, maybe $20,000 a year, where it would perform better than it would if stuck in a government program. “If everything works out in the markets, then you would expect there to be more assets in the end, even though you’ve begun collecting a lower [Social Security] benefit,” he says. On the other hand, you might not want to do that when a spouse will depend on extended program benefits in the future. 

If clients have a lot in an IRA, on the other hand, they might get caught in a higher tax bracket with required minimum distributions, which means they have to analyze which funds they pull from first. “Some of that could be Roth converting, so we’re just creating income on the tax return and saving it for later, or meeting cash needs but also potential cap gain harvesting,” Salmon says.

Getting Antsy

Eric Furey at RegentAtlantic in Jersey City, N.J., had a client in Massachusetts who worked as a middle man between health insurance agents and private health insurance companies. The client sold his business to a major corporation at age 55 and retired two years later with about $3.5 million in net worth. He had taxable assets, a traditional IRA and a Roth. “He and his wife thought they were going to go into retirement; they were going to remodel their vacation home [on the Cape] and they were going to split time between their vacation home and their retirement home.”

But the client couldn’t stay retired; six months later, “he got really antsy and he basically started up a similar business to what he just sold.” Furey had anticipated this and set aside a part of the portfolio, $300,000 or $400,000—carved out of taxable assets, invested conservatively—that would go toward a new business. The couple’s IRA was to be delayed for as long as possible, and the couple’s Roth IRA would ideally never be touched at all. The kids would inherit it, Furey says.