Building a Runway to Retirement

9/10/2026

Use your early retirement years to strengthen your long-term plan.

The time between your last paycheck and the start of retirement income is a critical transition that can shape the rest of your retirement. Rather than viewing it as a gap to endure, use these planning strategies to help lay a strong foundation for the years ahead.

Funding the Gap

One of the biggest questions people face when retiring early is how they'll replace a steady paycheck until other retirement income sources begin. Several strategies can help fund this transition while preserving flexibility for the years ahead.

You may first consider gradually reducing your work hours or taking on part-time work that you find personally meaningful. Whether you work at a yoga studio, library or pet shelter, even modest supplemental income can help reduce pressure on your retirement savings while providing greater flexibility during the transition.

It's also important to reassess your expenses, including housing, travel and discretionary spending. You may find opportunities to downsize, simplify your lifestyle or reduce expenses that no longer align with your priorities. Be sure to consider whether you could fund necessary home or lifestyle modifications if your health or mobility needs change during this period.

For many retirees, withdrawals from savings and investment accounts will play an important role in funding this transition. However, were the market to experience a downturn during this early retirement period, it could have a profound impact on your portfolio's ability to support a long retirement. This challenge, known as sequence-of-returns risk, occurs when market losses and portfolio withdrawals happen early in retirement, reducing a portfolio's ability to recover over time. In some cases, drawing first from taxable accounts, cash reserves and other liquid assets may help reduce the need to sell investments when markets are down.

Optimizing the Gap

The years between retirement and required minimum distributions (RMDs) may be some of the most valuable tax-planning years of retirement. Without a paycheck and before RMDs begin, you may find yourself in a lower tax bracket, giving you greater control over how and when income is recognized before taxable income potentially increases later in retirement.

This can be an ideal time to consider strategies such as converting a traditional IRA to a Roth IRA. Because withdrawals from a Roth IRA are generally tax-free, converting during lower-income years may help reduce your future tax burden. You may also have opportunities to realize capital gains during years when your taxable income is lower. In some cases, lower income may even allow you to take advantage of the 0% capital gains tax rate.

As you evaluate these decisions, keep future tax implications in mind. RMDs generally begin at age 73, or age 75 for those born in 1960 or later, and can increase taxable income later in retirement. By making the most of these lower-income years through strategies such as Roth conversions and thoughtful income planning, you may be able to reduce the impact of future income thresholds and create greater tax flexibility throughout retirement.

Stretching the Gap

While the “retirement gap” is often viewed as a hurdle to overcome, extending the gap can sometimes strengthen your long-term retirement plan. Delaying Social Security benefits creates additional years between retirement and the start of a guaranteed income stream, which may provide greater planning flexibility while increasing future monthly benefits. Delaying Social Security beyond full retirement age can increase your benefit by 8% per year until age 70.  Because people are living longer, many retirees need their assets to support 30 years or more of retirement – and potentially 40 or even 50 years for those who retire early. That makes thoughtful decisions about Social Security and other sources of guaranteed income especially important.

Before deciding when to claim Social Security benefits, review your earnings record and benefit estimate to ensure they accurately reflect your work history. Social Security benefits are based on your highest 35 years of earnings. If you have fewer than 35 earning years, years with little or no income will be included in the calculation, which can reduce your future benefit amount. Additional years of work may replace those lower-earning years and increase your future benefit. Even for those with 35 years already established, additional high-earning years may replace lower-earning years from earlier in their careers.

Whether delaying benefits makes sense depends on your personal circumstances, including your health, family history and overall life expectancy. If you expect a longer retirement, a larger guaranteed income stream may become increasingly valuable as other resources are drawn down over time.

Protecting the Gap

Healthcare is often one of the most overlooked aspects of early retirement. If you retire before age 65, you'll need a strategy to bridge the gap until Medicare eligibility – and unlike many other retirement expenses, healthcare costs can be difficult to predict and may increase over time, making planning in advance essential.

Your options may include COBRA, coverage through a spouse's employer-sponsored plan, the health insurance marketplace or a combination of these approaches. For example, it may make sense to use COBRA through the end of the year before transitioning to a new plan. Depending on your household income, you may also qualify for premium tax credits through the marketplace, potentially reducing healthcare costs even if you have significant retirement assets. Whatever route you choose, make sure it aligns with your retirement lifestyle. For example, if travel is part of your plans, review how your coverage works outside your local area and whether additional protection may be needed while you're away from home.

As you leave the workforce, consider which employer-provided benefits you'll be giving up and whether they need to be replaced. This may include life insurance or other workplace coverage you've relied on during your career. It's also important to review your liability and long-term care insurance needs to ensure they still align with your goals and circumstances. Long-term care planning is often most effective when addressed before health concerns arise, when more options may be available and costs may be lower.

Securing the Gap

Before retiring, consider establishing adequate emergency reserves and identifying other sources of readily available cash that could help cover unexpected expenses. For some, that may include establishing a home equity line of credit (HELOC), which allows homeowners to borrow against the available equity in their home, while still employed, as qualifying may become more difficult after retirement. In certain situations, a securities-backed line of credit (SBLOC) may also provide access to short-term cash without immediately selling investments, though it's important to understand the risks and requirements associated with each option.

It's also a good time to review your estate plan. As your family and financial circumstances evolve, beneficiary designations, wills, powers of attorney and healthcare directives should evolve as well. Keep in mind that many assets pass directly through beneficiary designations rather than a will or trust, making regular reviews especially crucial.

If a move is part of your retirement plans, confirm that your estate and financial planning documents remain aligned with the laws of your new state. Taking these steps can help create greater flexibility today while helping protect your legacy for the future.

The retirement gap can present unique challenges, but it also offers an opportunity to be intentional about the future you want to build. Many people approach retirement with a savings goal in mind, but not a clear strategy for turning those assets into sustainable income. Thoughtful planning today can help create greater flexibility, confidence and financial security throughout retirement. Talk with our team about whether your financial plan is ready for this next phase of your life.

This information has been developed by a member of Baird Wealth Solutions Group, a team of wealth management specialists who provide support to Baird Financial Advisor teams. The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action. The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.