Financial Planning for Early Retirement Before 65

Financial planning for early retirement is building a plan for the years between leaving work and Medicare at 65. It covers how you will pay for health coverage, when to claim Social Security, which accounts to draw from first, how taxes change without a paycheck, and what family responsibilities come with you.

Most guides on retiring early are written for people chasing financial independence in their 40s. This one is for the families we meet in and around Parkville and Baltimore County: people in their late 50s or early 60s who may be ready to stop, or who may be nudged out by a layoff, a buyout or a health event, and who often have a spouse, a child or a parent depending on them. The gap years between work and Medicare are short, but the decisions made in them can last a long time.

How do I cover health insurance until Medicare?

For most people this is the largest unknown, so it comes first. Medicare generally starts at 65, and the Medicare enrollment window is a hard deadline with permanent consequences if you miss it. Until then, you have a few routes, and each one has a trade-off.

• COBRA. It typically lets you keep your employer plan for up to 18 months after you leave, so your doctors and coverage stay familiar. The trade-off is that you usually pay the full premium yourself, and 18 months may not reach 65.
• The state marketplace. In Maryland, that is Maryland Health Connection. Losing job-based coverage generally opens a 60-day special enrollment period. The trade-off is that plans, networks and costs can differ from what you had at work, and any financial help depends on your household income.
• A spouse's plan. If your spouse is still working and has coverage that includes you, it may be the simplest bridge. The trade-off is that your timeline is now tied to theirs.

One planning point that surprises people: the income you choose to draw in these years can affect what you pay for marketplace coverage, and, two years later, what you pay for Medicare through IRMAA. Health coverage and income planning are one decision, not two. Check current rules and options directly with HealthCare.gov, Maryland Health Connection and the U.S. Department of Labor.

When should I claim Social Security if I stop working early?

Stopping work early does not mean you have to claim early. Many people can first claim at 62, but the Social Security Administration says that for anyone born in 1960 or later, with a full retirement age of 67, claiming at 62 reduces the monthly benefit by 30%, and the reduction generally lasts for life. Waiting can raise the monthly amount, but it means funding more years from other sources, and it only helps if you are around long enough to benefit from it.

For couples, the decision is rarely one person's alone. The higher earner's claiming age can shape the survivor benefit the other spouse may live on for decades. That is why we look at both spouses together, along with health, family longevity and how long the other savings need to last. Our page on Social Security timing walks through the pieces. Figures from the SSA's full retirement age chart and early retirement reduction page, checked October 9, 2026.

How do I fund the gap years?

The gap years are the stretch between your last paycheck and the point where Social Security and other income begin. The question is not just how much you have, but which dollars you spend first and what each choice costs you in taxes and flexibility.

• Cash and taxable accounts are often the most flexible to draw from, but selling investments may create capital gains.
• Pre-tax accounts such as a 401(k) or traditional IRA are taxed as ordinary income when withdrawn, and taking money before age 59½ may add a 10% additional tax unless an exception applies.
• Roth accounts may offer tax-free withdrawals in retirement if the rules are met, but many households leave them for later years, which is a trade-off against using them sooner.

The IRS recognizes a few exceptions to the 10% additional tax, including leaving an employer in or after the year you turn 55 (which applies to that employer's plan, not generally to IRAs) and a schedule of substantially equal periodic payments. Both come with strict conditions, and a mistake can be costly, so they are worth reviewing before you act rather than after. See the IRS explanation in Topic 558 and its guidance on substantially equal periodic payments, checked October 9, 2026. We cover how the pieces fit together on our retirement income page.

How do taxes change when the paychecks stop?

Your income may drop sharply in the gap years, which can open a window to plan around. With lower taxable income, some households consider converting part of a pre-tax account to Roth while their bracket is lower. The trade-off is real: a conversion adds to taxable income in the year it happens, which can affect marketplace coverage costs and Medicare premiums later, and it cannot be undone.

Other things change too. You stop having taxes withheld from a paycheck, so estimated payments or withholding from withdrawals may be needed. Social Security benefits may become partly taxable once they start. Because these pieces interact, we prefer to map a few years at a time rather than decide each one alone. More on this is on our tax planning page. We do not provide tax or legal advice, so we coordinate with your tax professional.

What about a child with special needs or a parent who needs care?

This is where our families differ most from the standard early-retirement story. If you support a child with special needs, leaving work early can affect more than your own budget. Employer-provided health and life insurance, the timing of benefits for your child, and the plan for ABLE accounts and a special needs trust all deserve a second look before you give up a steady paycheck. A plan that works for you may not work for the person who relies on you.

The same is true if a parent may soon need help. Long-term care costs can arrive suddenly, and an early retiree is often the one who becomes the caregiver, with fewer income sources to draw on. It helps to decide in advance how much support you can offer, what each sibling will contribute, and what the cost may be if the care needs grow. Results depend on each family's circumstances, and some questions are better answered by an attorney, whom we are glad to coordinate with.

What should I settle before I give notice?

Before you hand in a resignation letter, it can help to have clear answers to a handful of questions:

1. How will each person in the household be covered by health insurance until Medicare, and what is the backup if the first plan falls through?
2. What is the monthly spending target for the gap years, and where will each month of it come from?
3. Which accounts will you draw from first, and what are the tax effects of that order?
4. When will each spouse claim Social Security, and what does that mean for the survivor?
5. Have you checked what you may give up by leaving now, such as employer benefits, a pension option or a vesting date?
6. If a child with special needs or an aging parent relies on you, is there a written plan that does not depend on your paycheck?
7. When does your Medicare enrollment window open, and who is keeping track of it?

Sources checked October 9, 2026: Social Security Administration, HealthCare.gov, Maryland Health Connection, U.S. Department of Labor and the IRS. Rules change, and your situation may differ.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

This material is for general information and educational purposes only and is not intended to provide specific advice or recommendations for any individual. Investing involves risk including the loss of principal.