Why bridge strategies matter

Retiring before age 65 creates two large challenges: covering healthcare costs until Medicare starts and drawing income without depleting savings too early. Left unplanned, this window can erode nest eggs, increase lifetime taxes, or trigger higher Medicare premiums later. In my 15 years advising clients, the most successful early-retirees use a repeatable, documented bridge plan that handles healthcare coverage, tax-efficient withdrawals, and contingency liquidity.

Authoritative sources you should consult include Medicare.gov for eligibility and enrollment rules, the IRS for Health Savings Account (HSA) and IRA rules, and the Social Security Administration (SSA) for early benefit impacts (see links below). These rules affect timing, taxes, and penalties and should be modeled when building a plan.

Sources: Medicare (https://www.medicare.gov), IRS HSA rules (https://www.irs.gov), SSA (https://www.ssa.gov).

The core components of bridge strategies

  1. Withdrawal sequencing and tax planning
  • Taxable accounts first: Many planners recommend drawing from taxable (brokerage) accounts early so tax-deferred accounts (401(k), traditional IRA) keep compounding tax-deferred. That preserves future tax-advantaged growth and may reduce required minimum distributions (RMD) risk later.
  • Roth conversions in low-income years: Converting portions of tax-deferred balances to a Roth IRA during lower-income years can reduce future RMDs and create tax-free income for later. Note: conversions increase modified adjusted gross income (MAGI) for the year they occur and can affect Medicare premiums (IRMAA) two years later—model conversions against that tradeoff.
  • Avoid blanket rules: The right sequence depends on your tax bracket today, state taxes, expected future income, and Social Security timing. Run multiple scenarios or work with an advisor.
  1. Health Savings Accounts (HSA)
  • HSAs are uniquely powerful for early-retirees: contributions are pre-tax or tax-deductible, earnings grow tax-free, and withdrawals are tax-free when used for qualified medical expenses. They require enrollment in a qualifying high-deductible health plan (HDHP) while contributing.
  • Use strategy: Max out HSA while working and pay current medical bills from other accounts to let the HSA investments grow tax-free; later you can reimburse qualified expenses tax-free (track receipts). See IRS HSA guidance for rules and eligible expenses (IRS HSA rules).
  1. Health coverage options before Medicare
  • Options include continuing coverage through COBRA (temporary, often expensive), ACA Marketplace plans (subsidies may be available depending on income), employer retiree plans (if offered), or short-term/limited-duration policies (coverage gaps and exclusions vary). Compare premiums, deductibles, networks, and out-of-pocket maximums.
  • For health coverage strategy details see FinHelp’s guide on Bridging to Medicare: Health Coverage Strategies Pre-65.
  1. Partial work, part-time income, and side gigs
  • Part-time work reduces withdrawals, keeps skills active, and may preserve employer benefits longer. Even modest earnings can materially change tax brackets and eligibility for marketplace subsidies—include projected wages in your retirement model.
  1. Annuities and guaranteed income products
  • Deferred or immediate annuities can create a predictable income floor that begins at or before Medicare eligibility. They reduce longevity risk but often come with complexity, surrender charges, and opportunity costs—shop carefully and prioritize refundable or inflation-protected features if longevity protection is your objective.
  1. Emergency and flexibility funds
  • Keep a 1–3 year cash buffer or liquid taxable investments to avoid forced withdrawals after market downturns (sequence-of-returns risk). This buffer also helps with unexpected medical bills and early retirement transitions.

Tax and Medicare interactions to watch closely

  • IRMAA and Roth conversions: Medicare Part B and Part D premiums may increase based on your MAGI from two years prior. A large Roth conversion can raise MAGI and temporarily raise Medicare premiums—test scenarios for unintended premium increases. (See Medicare.gov and SSA guidance on IRMAA.)

  • Social Security timing: Claiming Social Security at 62 reduces lifetime monthly benefits vs. waiting; many early-retirees delay benefits and bridge income from other sources. Model how delaying Social Security affects both cash flow needs and taxes.

  • Penalty-free withdrawals: Withdrawals from retirement accounts are generally penalty-free after age 59½. Before that age, exceptions exist (substantially equal periodic payments, separation from service at certain ages, and other IRS exceptions) but are complex—consult the IRS or a tax pro before using them.

Practical roadmap: a step-by-step checklist

  1. Run a multi-scenario cash-flow model: include healthcare costs, market volatility, Social Security timing, and Medicare premium sensitivity. Use conservative assumptions on health cost inflation.
  2. Build a health coverage plan: compare COBRA vs. ACA marketplace vs. employer retiree plans vs. short-term policies. Identify enrollment windows to avoid gaps. (See FinHelp’s Bridging to Medicare: Health Coverage Strategies Pre-65.)
  3. Create a withdrawal sequence: project income and taxes year-by-year; plan Roth conversions in years with low MAGI; prioritize HSA distributions for qualified expenses.
  4. Fund a liquidity buffer: maintain 12–36 months of cash or low-volatility investments to cover near-term spending.
  5. Consider partial annuitization for longevity risk: if an annuity is used, model it alongside investments to see effects on portfolio risk.
  6. Revisit annually: tax law, IRS rules for HSAs/IRAs, and health-care markets change—update models and insurance choices each year.

Common mistakes I see in practice

  • Underestimating pre-65 medical costs and not tracking medical receipts for HSA reimbursements.
  • Performing Roth conversions without modeling the IRMAA/Medicare premium effect two years later.
  • Lacking a liquidity buffer and having to sell investments after a market drop, accelerating portfolio exhaustion.
  • Ignoring means-tested subsidies (ACA or Medicare Savings Programs) that could materially change strategy.

Examples (illustrative)

  • Scenario A — Taxable-first approach: A retiree with large brokerage accounts and a modest traditional IRA draws from brokerage accounts for the first three years while keeping the IRA invested, reducing taxable income and preserving tax-deferred growth.
  • Scenario B — Roth conversion in a low-income year: A retiree with low realized income in year X converts a modest portion of IRA to Roth to lock in a low tax rate, but only after running an IRMAA sensitivity to ensure Medicare premiums don’t spike two years later.

These examples are illustrative; your best approach depends on detailed modeling.

Useful internal resources

Frequently asked operational questions

  • When should I start Roth conversions? Consider years with unusually low MAGI (job loss, reduced wages, large deductible medical bills) but model both tax and Medicare premium impacts.
  • Can I use HSA funds for premiums? Generally, HSA funds are tax-free for qualified medical expenses; however, they don’t cover most premiums except specific situations (e.g., long-term care premiums, COBRA premium rules, or Medicare premiums after age 65)—check current IRS guidance for details.
  • Will working part-time break my bridge strategy? Not usually—income helps, but it can affect eligibility for ACA subsidies or MAGI-based calculations; include projected earnings in planning.

Professional disclaimer

This article is educational and does not constitute individualized tax, legal, or investment advice. Tax rules, HSA limits, and Medicare policies change—consult the IRS, Medicare.gov, SSA, and a qualified financial planner or tax advisor before implementing bridge strategies.

Additional authoritative sources