How to Protect Your Finances If You Need to Retire Early

Key Takeaways

• We’ve found that people oftentimes will be forced to retire earlier than they expected.
• For anyone who’s past the age of 60, it’s time to start thinking about building out extra cash to protect yourself against needing to withdraw from your portfolio sooner than you expected.
• One to two years’ worth of portfolio spending is enough to have in cash, which people should consider holding in high-quality short-term bonds.
• A home equity line of credit can serve as a backup if you’ve exhausted your cash reserves.
• Once you hit age 50, it’s time to start thinking about bringing more high-quality fixed income into your portfolio.
• Tightening up a household budget can be worthwhile to reduce costs in retirement.
• If you have portfolio assets that you can potentially pull from, you should try to delay claiming Social Security.

Margaret Giles: Hi. I’m Margaret Giles from Morningstar. The data suggests that people often retire earlier than they expected. Joining me to discuss how to protect your money in that situation is Christine Benz. She’s Morningstar’s director of personal finance and retirement planning. Christine, thanks for being here.

Christine Benz: Margaret, it’s good to see you.

Why People Often Retire Earlier Than Planned

Giles: So, let’s talk about this disconnect that retirement researchers have found. People often retire earlier than they planned. What are the key reasons?

Benz: Right. This is a persistent finding, Margaret, and there can be happy reasons that people retired earlier. We’ve seen the market perform really well for several years running. People probably are seeing their portfolio balances elevated, so there are good reasons that people retire earlier. And then there are just things that come out of nowhere, whether someone’s own health issues or spousal health issues. You’ve got a lot of older adults who have elderly parents who need a lot of help. People may have a job that is physically difficult to do as they age. That can be another dimension of it.

And then you might have people who want to stay in the workforce, but for whatever reason are forced out of their jobs earlier than they expected. We know that ageism is a thing in our culture. People who expected to work longer or wanted to work longer may not be able to. And we also know that older workers are often higher-paid workers, so they’re often vulnerable if the company’s doing some broader cutbacks. Their salaries might look like low-hanging fruit. So, a lot of reasons, but the finding is that generally people, if they have an expectation that they’ll retire on X date, they may not be able to, and oftentimes it’s earlier than they expected.

Giles: Right. And a number of those catalysts for early retirement can be hard to predict.

Benz: Yes.

How Cash Reserves Can Protect Your Financial Plan in an Earlier Than Expected Retirement

Giles: So, how can people protect their financial plans if they have to leave the workforce earlier than they expect? Let’s start with the building out cash reserves. Why is that important, and when should people start?

Benz: Yeah. That’s an obvious place to start when you’re thinking about protecting yourself against some unexpected early retirement, and so you would want to probably edge past the kind of three to six months that you learn about in the CFP coursework. You maybe want to think about a year’s worth of liquid reserves, and I would say for anyone who’s sort of past the age of 60, that’s a good time to start thinking about building out a little bit of extra cash to protect yourself against needing to withdraw from your portfolio sooner than you expected. Any sooner than that, well, there’s an opportunity cost, and we had that very long-running period where cash was earning next to nothing, so you don’t want to overdo it by holding cash too early. But I think the kind of age 60 mark is a good real-life sort of line of demarcation.

How Much Is Enough for Retirees to Hold in Cash?

Giles: Right. And so you mentioned building up those reserves toward that one-year span. How much is enough to hold in cash?

Benz: Well, I wouldn’t want anyone to overdo it, again because of that opportunity cost. So, in all of my model portfolios that are geared toward people in retirement, I typically say one to two years’ worth of portfolio spending. So, it doesn’t need to be your all-in spending because you may have income from other sources, but whatever you’re spending from your portfolio, you’d want to allocate roughly one to two years’ worth of liquidity.

How Bonds and Home Equity Can Help Cover Cash Flow Needs in Retirement

Giles: Right. You think that people should also line up next-line reserves in addition to cash. What do you mean by that?

Benz: Well, within the portfolio, I like the idea of an allocation to short-term, high-quality bonds, which do have the potential for a little bit of volatility in terms of your principal value, but not a lot. So, even in a year like 2022, which was a big shock to bonds, high-quality short-term bonds had pretty minimal losses. So, I would hold an allocation of maybe a couple of years’ worth of portfolio cash flows in that high-quality short-term bond portfolio, and then you might also think about other sources of emergency reserves in your household financial capital.

So, for a lot of people who are older adults, they have home equity in their homes. It may be worth lining up a home equity line of credit just so it’s there to serve as a backup if you’ve exhausted your cash reserves. You might also have some sort of permanent life insurance policy that’s building up a cash value. That can be another source of liquidity. So, just kind of think about your total household financial picture. You may have other sources of liquidity beyond the true cash reserves.

Why Investors Closer to Retirement Should Add More Fixed Income

Giles: Now, let’s talk a little bit more about portfolio asset allocation. How should people’s long-term portfolios address the possibility of an early retirement?

Benz: Yeah. I would say pre-age 50, you probably don’t need to worry about having too much in fixed-income investments. You might want a little bit to kind of take the edge off a portfolio that’s mainly equities, but once you hit age 50, I think it’s time to start thinking about bringing more fixed income, more high-quality fixed income into the picture. So, you’d want to have intermediate-term high-quality bonds, and then within the equity portfolio, it’s really important to have diversification there as well because we know that equities don’t all move in lockstep.

In fact, we’re seeing that a little bit in 2025 where international stocks are outperforming US stocks. Both are performing pretty well, but international is really performing super well. So, you want, um, global diversification. You want style box and sector diversification. You wouldn’t want your whole equity portfolio to be huddled in the large growth square of the U.S. style box. You’d need allocations to other parts of the equity universe.

How Lifestyle Changes Can Help With Retirement Costs

Giles: Absolutely. So, you also think that, in this context, tightening up a household budget can be worthwhile. What are some of the easiest ways to do that?

Benz: Yeah. This is something worthwhile at any life stage, obviously, but you want to look through your budget, line item by line item. Certainly, if you are unexpectedly ejected from the workforce, you want to take a look at any discretionary spending. Subscriptions are a low-hanging fruit for a lot of households. We might forget we have subscriptions, so tighten that up, and then you may also want to contemplate bigger-ticket changes in how your household is spending. So, for older adults, downsizing can be a compelling way to save a lot of funds in the monthly budget if you’re willing to move to a smaller home that has fewer ongoing maintenance obligations, or even relocating to a cheaper part of the country. There are obviously lots of lifestyle considerations wrapped up there, but if you are in the situation where you’re really taking a fresh look at your life and what retirement might be like, it’s a really good time to contemplate whether you’re up for changes like that.

How Gradually Transitioning From Work to Retirement Can Help Your Retirement Portfolio’s Longevity

Giles: Right. Now, you’ve also said that it can be helpful to think about working and retirement really not as a binary choice.

Benz: Right.

Giles: What do you mean by that?

Benz: Exactly. I’ve come to think of the healthy retirement as being one where it’s much more porous, where you’re gradually moving into retirement just versus sort of that on-off switch that a lot of people used to think about. And the beauty of being able to kind of transition gradually into retirement from a financial standpoint is that if you can earn some income, that makes everything about your portfolio’s longevity easier. If you are forestalling those portfolio withdrawals or maybe just taking less from the portfolio, it really helps your portfolio extend its life over a long time horizon.

So, I would urge people who are in good physical health, who maybe didn’t want to move out of the workforce entirely to explore some creative ideas about what they might do to earn income and not beat yourself up too much if it means that you can’t save as much, because contributions later in life have less of an impact, they just have fewer years to compound, they have fewer years of tax deferral. So, even if you can’t continue to save at the pace that you were doing, if you can just not take much from your portfolio, that’s the greater good in this situation and that’s what earning an income can help you do.

Why You Shouldn’t Claim Social Security Before You Have To

Giles: Finally, in the category of what not to do, why do you caution against tapping Social Security early if people are able to afford to do so? Why is that something to avoid?

Benz: Yeah, this is a big one, and obviously some households are not able to forgo Social Security, they need that income, which is a big reason why people take it early. But the key reason why, if you do have portfolio assets that you can potentially pull from instead, the big benefit is that you can enlarge your benefit for when you eventually do claim Social Security, and that benefit will be larger for your whole life, as well as your spouse if he or she will be reliant on your benefits. I think sometimes people forget that side benefit. If your spouse is going to be taking a spousal benefit versus using their own Social Security benefit, the value can really be there even if you think your life expectancy might not be that great. If your spouse may live longer than you, the value could be there in delaying. So, don’t automatically go to tap Social Security, think about delaying if you possibly can.

Giles: Certainly helpful to think about. Christine, thanks for taking the time.

Benz: Thanks so much, Margaret.

Giles: I’m Margaret Giles with Morningstar. Thanks for watching!

Watch Take These Steps to Make Your Money Last in Retirement for more from Christine Benz and Margaret Giles.