How to Retire at 60: A Complete Case Study for Early Retirement Planning
Recently, I met with a couple in their early 50s hoping to retire in the next few years, and their number one concern about retiring before 65 was how to pay for health insurance. Looking at costs on the marketplace, they’re expecting to pay somewhere in the neighborhood of $2,000 a month for a high deductible plan, which frankly just makes them sick to think about.
So what we did is we looked at planning strategies to help them overcome this hurdle, as well as smart planning strategies they can do today to set them up for the rest of their retirement. In this case study, I’m going to walk through the situation for some people in their 50s hoping to retire at age 60 and getting them set up on the right path.
The Challenge: Health Insurance Before Medicare
Like I said in my intro, today I met with a couple looking to retire in the next few years. They’re in their early 50s and they have a lot of challenges thinking about how to invest their money in the meantime and how much they can really have for retirement. He worked for a company with a 401(k) plan that gives him projections when he logs in. The 401(k) plan he uses is through Empower and so he’s got this little calculator with projections giving him an idea of how much he can have if he retires at 65 or at 60. And he’s asking himself, “Is that realistic? How close is that to reality?”
But obviously he has other investments and other things going on that Empower doesn’t know about. So he really wants a good overview and holistic view of what’s realistic for his retirement.
The number one concern for somebody retiring before age 65 is often health insurance. If you go from being covered by your employer to all of a sudden looking at paying a couple thousand dollars a month for often a high deductible plan, it’s not very exciting for most people.
The Game-Changing Health Insurance Strategy
So what I did is I put together a case study that goes through somebody who is 50 years old, has about $500,000 already saved for retirement, and they’re looking at what to do now so that they’re set up in the best place possible to retire at 60.
The first thing I want to share with you is some health insurance projections because before we get into any other projections of where they’re at in retirement, let’s just look at the possibilities for health insurance and what’s realistic, what they could save with some smart planning.
Health Insurance Without Subsidies vs. With Subsidies
I looked at health insurance projections for somebody who lives in the Nashville, Tennessee area for two 60-year-olds, husband and wife. We want to look at what regular health insurance would cost without any subsidy.
Going to healthcare.gov (depending on where you live, the state you live in, you might have your own state website), I found that a high deductible plan without any subsidy would cost $1,810 a month for the husband and wife at age 60. Even if you are able to save up enough money to afford to pay that, it’s just unpalatable to think about paying that much for health insurance, especially a high deductible plan.
But here’s where it gets interesting. What if we were able to provide the cash flow they need for the income they want in retirement, but from a tax standpoint, we’re able to get their income low enough that they can qualify for subsidies?
For this couple, we’re looking at them having a modified adjusted gross income of $80,000 a year, which gets them just below the line for the Affordable Care Act. That line is 400% of the federal poverty line. Right now in 2025, it’s like $83,000 and change, so $80,000 gets just below that.
With that income level, they would qualify for a total health insurance premium tax credit of $1,781 a month, which takes this $1,810 a month plan down to $29 a month.
Suddenly retiring before age 65 starts to look like a real possibility, which is awesome! If you don’t have to work until age 65 because you’re done working, or you think you’ve got enough saved, or you want to be able to do more things while your health is at its best, then this is really a crucial part of the planning.
This amounts to saving $20,000 a year on health insurance, which from age 60 to 65, we’re talking over $100,000 of health insurance paid for by the government instead of coming out of your retirement savings.
Meet Our Case Study Couple: Candace and Tucker Olson
Our retired couple here, Candace and Tucker Olson, are 50 years old, and we’re looking at them retiring in 10 years at age 60. Today, where are their assets? Well, they’ve got about $500,000 saved in a 401k plan. And good news, they just paid off their house. So they’re looking at maybe maxing out their 401k at this point, or doing something else – what’s the best thing to do to get set up for retirement?
Because health insurance is at the center of their early retirement plan, we’ve got to figure out a way to be able to get that affordably.
The Strategic Investment Approach
Option 1: The Traditional Route (Not Optimal)
Option number one: they could go from just their regular contributions now to maxing their 401k. They’re going to build up a lot more savings, and it’s going to be great. But that doesn’t solve the issue of affordable health insurance at retirement, because when you pull money out of a 401k, even though they’re going to be over 59 and a half so they’re not going to have to pay tax penalties, every dollar they pull out of that 401k account is going to count as income and it’s going to eat away or eliminate that health insurance subsidy that they could be entitled to.
Option 2: The Smart Tax Strategy (Recommended)
What we looked at doing with this couple is instead of adding that extra money to the 401k plan, they would instead take the money that they were spending on their mortgage and they would take that money and invest it into a brokerage account. So we’re talking about an investment account – this could be anything, this could be simply adding the money into a money market account through a high yield savings or through a brokerage account, where maybe you can invest in some safe stuff like short-term bonds or maybe even other investments.
But the key factor is that we want this money going into an account that it’s after-tax, where when they eventually pull money out of it, they have less of a tax liability because that money has already been taxed. Now, of course, we want to have some earnings in the meantime. So there’s going to be interest and dividends and that sort of thing that are going to have some tax liability, but overall, this is going to create the most tax efficient plan for them and really unlock affordable health insurance.
Don’t Forget the 401k Match
With their 401k, we don’t want to just discard this and not contribute to it at all. In this case, Tucker actually has a match. So we’re still going to have him contribute so that he can get the maximum match from his employer. It’s essentially free money. For him, that’s 5%. He’ll keep contributing 5%, get that 5% match from his employer, but then the extra money that would have gone to the 401k, he’s going to put it into a brokerage account.
The 10-Year Projection Results
What does that look like for projections? Just using some very conservative investment returns between now and age 60, where does that put them at retirement?
It’s pretty incredible, but within 10 years with some pretty conservative assumptions, we’re looking at them having a balance of just over $2 million combined between the 401k plan and this brokerage account. In the beginning, we started with only $500,000, but now they’re going to be adding to it in earnest since they were paying about $2,000 a month on their mortgage. That’s taken care of now, so all of that money is going to go into this savings account.
Strategic Investment Allocation by Timeline
When it comes to investing into your different accounts, we have to think about timeline. When are you going to spend the money?
For example, the money that I need to pay my Netflix subscription next month, I don’t want to have that money invested. It needs to be totally safe and is going to be sitting in my checking account. If we expand this analogy, money that you’re going to be spending in the next couple of years needs to be invested very conservatively. On the other hand, money that you know you’re not going to touch for decades can take a more long-term view and be invested more aggressively, with a growth mindset.
Brokerage Account: Conservative Approach
In their case, we know that in early retirement, most of their cashflow where they’re going to be pulling from to meet their spending needs is going to be coming from this brokerage account. So what that says to me as their investment advisor or financial planner is that money needs to be invested very conservatively.
401(k): More Aggressive Approach
On the flip side, the 401(k) money is not really going to be tapped into for several years down the road. We already have 10 years between today and when they’re going to officially retire, but then it’s going to be several more years before they start needing to tap into that 401(k) plan to generate money for cashflow. That means that we can take their 401(k) plan and tilt it maybe a little more aggressively, maybe beyond what the traditional 50-year-old would invest in. Within the 401(k), we can have a little more geared towards stocks instead of more of a balanced portfolio.
The Retirement Income Picture
Now that they have this projected balance of about $2 million when they retire, how much income can they realistically have based on that plan? We’re looking at a retirement paycheck of about $9,600 a month net (after taxes).
If you’re looking at this, you might be thinking that seems kind of high based on their portfolio value, but let’s look at the cash flows because their retirement is not just made up of their portfolio. Of course, they have social security, and in their case, both Tucker and Candace have a social security benefit.
Social Security Strategy and Cash Flow Timeline
We want to look at the way to claim their social security benefit that’s going to:
- Maximize their social security income
- Maximize their overall plan
- Accommodate this strategy of affordable health insurance for early retirement
The Cash Flow Breakdown Over Time
Ages 60-62: All of the money is coming from the portfolio. We’re pulling money out of the brokerage account and this is after-tax money. There’s going to be a little bit of dividend, some interest, a little bit of capital gain recognition, depending on how it’s invested in the meantime.
Age 62: We actually have Candace pulling social security. She’s been working and has a benefit. Once she claims social security, now all of a sudden we don’t have to draw on the portfolio as heavily. This begins to make the portfolio more sustainable over time. There’s less of a drag. Every dollar we get from social security is one less dollar they have to pull from their retirement account, which is going to help the portfolio over the long term.
The early benefit for her looks maybe a little bit on the high side at $2,800 a month, but this is factoring in cost of living adjustments between now and then. We have to plan for cost of living adjustments. Social security has been providing cost of living adjustments, guaranteed every single year automatically since the 1980s.
Age 70: Tucker’s benefit kicks in at $6,700 a month. Again, we’re factoring in cost of living adjustments since this is a long time in the future.
Once Tucker and Candace are both on social security benefits, they’re only needing to pull out about $4,000 from the portfolio to hit their target monthly income, which based on a $2 million portfolio, this is a very sustainable withdrawal rate. It’s going to really allow for their plan and their assets to grow over time to build up a nice nest egg for if they ever need money for long-term care or they want to help out their kids or grandkids.
The Roth Conversion Strategy
You might be asking, “How is it possible to build up a large tax-free portfolio?” Because all they have in the beginning is a brokerage account that they’re going to build up and spend down in early retirement, and then the only thing that’s left is 401(k). Where’s the tax-free piece coming in?
That comes in with Roth conversions early in retirement.
The 12% Roth Conversion Strategy
The strategy that’s going to make the most sense for them is actually doing a 12% Roth conversion strategy. Essentially what’s happening is that once they retire, they’re going to begin living on the brokerage account. Then simultaneously, every single year, we’re going to be doing Roth conversions, shifting some of that 401(k) money over to Roth.
Now that gets recognized as income, they have to pay taxes on it, but we have to do it just really making sure that we stay below that income line to qualify for affordable health insurance. The 12% brackets are pretty good – it’s not exactly on, but it’s pretty close to what that would need to be.
Why Not More Aggressive Conversions?
If we did larger Roth conversions early in retirement to have the most efficient tax projection over their life, it would mean more taxable income early in retirement, and they would not qualify for those subsidies. They’d have an extra $20,000 a year of expenses based on our projections from looking at the healthcare marketplace, which is going to further erode their portfolio, which means we have to take out more money. That would just not be good overall – that’s less money they have to spend and do the things that are important to them.
The Tax Savings Impact
If they do this 12% Roth conversion strategy compared to just pulling money out sequentially from their brokerage and then from their tax deferred accounts, it’s going to save them about 10% in average taxes over their lifetime, which is saving about $300,000 in taxes.
When it comes to tax planning and projections, most software won’t factor in affordable health insurance – you have to often do it separately in a spreadsheet to make sure that you’re finding the strategy that’s actually going to work for your situation.
Managing Risk: The Guardrails Approach
Another concern that these retirees have is how they’re going to manage risk once they retire. The last thing they want to do is retire early and then feel foolish like, “Oh my goodness, we got to go back to work.” If the market tanks, how are we going to manage risk and make sure that the plan can stay on track over retirement?
What Are Guardrails?
The guardrail approach gives us a framework for managing risk over your retirement. We’re going to start with your beginning portfolio (in their case about $2 million), and that corresponds with about $10,900 gross income.
Now we’re driving down the road. How do we know if we’re on track and we’re good, or how do we know if we need to slow down and make an adjustment? That’s where the guardrails come in.
Lower Guardrail: Market Downturn Protection
Let’s say the portfolio drops from about $2 million down to $1.3 million. That’s a drop of 37%, which is pretty huge but definitely possible. Based on projections looking at their numbers mapped against the last 155 years back to 1870 of market data, what would they need to do to keep their plan on track?
If their portfolio dropped by about 37%, they don’t need to go back to work, they don’t need to just call it quits and blow up the plan. We need to adjust their income by about 5%. So if they’re willing to take about a 5% haircut in their spending, then that keeps the plan on track.
Upper Guardrail: Market Success Bonus
Most often in my experience, we plan for the worst, but a lot of times things go better than you’re expecting. So what if the market’s doing really well? Is it possible to increase our income? That’s where the upper end of the guardrail comes into play.
Let’s say the portfolio goes up by 20%. In that case, Candace and Tucker could realistically decide to increase their gross income by about 20% or $2,200 a month going forward.
Using this guardrail approach framework keeps them on track with a method of knowing how they’re in good shape and that they’re not just kidding themselves and driving off a metaphorical cliff financially. This is the way to keep it on track over the life of their retirement.
Investment Strategy Considerations
From an investment standpoint, an important note is that because they’re gonna be spending from this brokerage account early in retirement, that means that money needs to be invested more conservatively because we’re gonna tap into it sooner. The last thing we want is that they’re getting right up to the point of retirement and the brokerage account has a drop of 40%. We really want to have it very conservatively set up so that we’re taking that risk off the table.
On the flip side, the 401(k) money that we know has a longer runway before it needs to be tapped into for income can correspondingly be invested a little bit more aggressively. Overall, that’s how we’re gonna find a balanced approach to keep them on track from an investment standpoint.
Key Takeaways
This case study shows how it’s realistically possible for somebody who’s 50 years old, wanting to retire by 60, to make that possible given all of the challenges that somebody who wants to retire at 60 is gonna face, namely:
- Affordable health insurance through strategic income management
- Managing investments to take care of risk appropriately
- Setting themselves up to have a legacy to pass on or to take care of them later in life
- Tax optimization through strategic account allocation and Roth conversions
- Risk management through guardrails approach
The combination of after-tax savings for early retirement years, strategic social security claiming, Roth conversions within income limits, and proper risk management creates a comprehensive plan that makes early retirement at 60 not just a dream, but a realistic and sustainable goal.
If this case study has been helpful or you’d like some help looking at your own situation, feel free to reach out to discuss your specific retirement planning needs.
