Early Retirement, doesn’t it sound great?
On last week’s show we began to lay out the 6 steps you should consider before pulling the trigger on early retirement. We also looked at some specific risks that will challenge your notion of retiring early, but if you prepare properly, you just might be able to pull it off!
So how do you do it? How do you bridge that income gap between your original retirement date and your NEWLY revised EARLY retirement date? Stick around because that is what we will be taking about on today’s podcast.
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you are a client, I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser………….right? that’s only common sense.
(0:55) Practical Planning segment: Continuing our discussion on income ideas for retiring early we need to find a way to bridge the gap between our original retirement date and our new, early retirement date.
Last week, we talked some specific risks we have to think about when confronting an early retirement, things like market risk, sequence of returns risk, inflation, and longevity. But when it comes right down to it… we need income! That is what it’s really all about whether you retire early, on time, or later! It all boils down to income, and where that will come from.
So, hopefully you have looked at those 6 steps that we discussed last week, and you calculated your retirement income needs. AKA, you did a budget! Click Here For a Link to the Budget Worksheet!
Maybe you discovered some areas where you can save quite a bit, you can cut some expenses and if retiring early you may actually need to cut some expenses in order to handle the longevity risk we talked about earlier.
So, you have completed a budget, you have calculated your net worth, listed those amounts by account type account type, and you've calculated your level of Social Security for both you and if married, your spouse.
(4:15) Example: If we're looking at an early retirement, let's say age 55, that is way earlier than you can start Social Security. The earliest you can start Social Security is age 62. We need to find a way to at least bridge an income gap until you can turn on your Social Security.
Now, I am not saying that it makes sense to turn on Social Security at age 62. That is a very individual decision that takes a lot of thought and calculations as to when is the best time to start Social Security.
In this example of retiring early at age 55 and you need income, what are the options to supply that income? Let's make a further assumption that you have no additional savings except tax deferred income. 401ks, T IRA’s, maybe a Roth IRA (tax free for qualified distributions)
(6:00) Options:
W/D and pay tax and penalty……. Obviously not a good idea but it is an option. So, what's a better option than that? Traditional IRA: 72t distribution. Withdraw from your IRA account without the 10% penalty! How do you do that? 401k Rule of 55.
Bear in mind that both of these tactics have eligibility requirements and limitations, income taxes are due on all withdrawals. You're only avoiding the early withdrawal penalty charged by the IRS of 10%.
If the pandemic is the reason that you are retiring early, another option we need to discuss is that the pandemic will not last forever. If you use one or more bridge income strategies now, you might consider going back to work in a few years to help reboot your nest egg. You can always retire again later on!
(11:15) Example: Now let's run through an example where your original retirement date might have been 65, 66, or 67. But let’s say you've decided to retire early at age 62, which means you are or may be eligible for Social Security.
There are a couple of lesser-known Social Security provisions that can help an early retiree who just needs to bridge some income to get the assets in order. This may be particularly useful if you're expecting an influx of money from let's say, an inheritance.
if you need to withdraw Social Security before your full retirement age, you can start receiving checks and then change your mind later. However, you have only up to one year to halt your benefits, at which point you must then repay all the monies received. You may do this only once in your lifetime, but the good news is, the benefit continues to accrue until you apply it again. Social Security start and suspend: if you don't qualify to stop benefits because you've been drawing on them for more than a year, there is another option. Once you reach full retirement age, you may voluntarily request to suspend Social Security payouts until up to age 70 many folks thought this provision was eliminated in 2015 however at full retirement age you can still suspend benefits and began collecting them later by doing this your benefits earn delayed retirement credits at the current level of 8% simple interest per year this might be a good option if your portfolio starts providing a high level of income that renders your Social Security benefits unnecessary. Be sure to keep paying your Medicare premiums, remember Medicare at age 65 is tide to Social Security regarding the Part B payments. So, if you suspend your Social Security payments don't forget to pay your Part B also be aware that if your spouse’s benefit is partly derived or fully derived from your benefit then suspending your benefit suspends all benefits
(16:20) A few other possible income sources:
(16:30) Pension income: the key factor to consider with a traditional pension is
does it stop or reduce benefits paid to your spouse in the event of your death? Whether married or not how important is control and leaving a legacy behind to loved ones If so, you may want to carefully weigh the value of a regular payouts from the pension versus a lump sum roll over to an IRA, if you have the choice. The benefit to the rollover option is you now have control of the funds and can set up beneficiary designations and pass on a legacy. You of course also have full control on investment options and income options as well
(18:10) Annuity income: a fixed annuity offers another guaranteed source of income it's actually an insurance contract that you purchase with a lump sum premium oftentimes, and all the guarantees for income and death benefits are backed by the issuing insurance company. Much like a life insurance policy this is often called income insurance.
(19:00) Variable Income sources: The earlier you retire, the greater you need for a growth component within your portfolio. Should you and or your spouse live for many decades, your income will be exposed to a variety of challenges that we discussed earlier. Fixed income will not keep pace with increases in the cost-of-living overtime: AKA inflation.
You may experience significant health and or long-term care expenses. You could simply run out of money and be stuck with nothing but Social Security.
The good news is that the longer you live, the longer your growth-oriented investments have time to earn more money and smooth out periods of market volatility. It's also important to recognize that after significant market drops such as the ones we experienced with COVID-19, the stock market has a strong history of recovery. If you retire early you don't want to be fully out of the market and miss out on those gains.
People who can consider retiring early, before they qualify for Social Security benefits, generally have significant assets accumulated in an investment portfolio. However, it may not be enough to last a retirement that will significantly be longer because they retired earlier
This means you need to be strategic and positioning invested assets to provide both income and capital appreciation. Financial independence generally indicates that you have enough assets to produce income that meets or exceeds the amount of income you earned while working. Therefore, even if you are ready to retire with $1,000,000 portfolio, you don't want to take all that money out of the market and stick it in a bank account. By taking small distributions to cover your needs the rest has a chance to keep growing.
The key is to minimize the risk exposure of those invested assets!
(22:00) Coachable Segment: If retiring early is still going to be exceedingly difficult, then the real solution is to pare back your lifestyle!
You may want to consider downsizing to a smaller house or condominium to reduce ongoing utility, tax, maintenance, and insurance expenses.
You might consider combining households with an adult child, using your assets to build on a ‘mother-in-law suite’ to his or her house or at a granny flat in the backyard. While you may not be able to leave your child a large inheritance, this could help add to the real estate value of his or her home
If you have plenty of assets now but worry about running out in the future, you may want to consider moving to a life plan community. This would enable you to consolidate expenses such as living, utilities, dining, household maintenance, health, and long-term care all under one fee. This can help you estimate your lifetime expenses from the outset
Here is the key principle to remember: most people draw retirement income from several different sources.
By diversifying your portfolio across fixed income sources, guaranteed income sources, and long-term growth opportunities, within your comfort level for risk, you may be able to retire early while still growing your nest egg for latter stages of retirement.
Just as it's a good idea to diversify your investments, it's equally important to diversify your retirement income sources. This may help reduce your tax liability and the risk of your income source is drying up.
Remember retirement may last for 20 years or more, so spend a lot of time up front working with an advisor to develop your plan. This is even more critical if you decide to retire early.
Final Disclaimer:
“We appreciate you joining us today for this episode of The Fiscal Blueprint.
Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.
Remember it’s not about the money but about your life!
Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!
“Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”
