Key Planning Points to Consider When Retiring Before 65

Our topic on this episode of the Ready for Retirement podcast is about the key planning points to consider when retiring before age 65.

Questions answered: How can you make sure you’re on track to retire before age 65? What strategies can you implement to ensure you create your ideal retirement? What is the best strategy for your individual situation? 

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Key Points

• What expenses are in place today that won’t be here in the future?
  • This specific listener asked a question surrounding varying degrees of income and what we need to take into account is the varying degrees of expenses throughout retirement and how that impacts their retirement goals.
• Listener Assumptions
  • There is $2.8M of funds earmarked for retirement.
    • Based on their current savings rate, $3M can be safely assumed by the time they retire (always subject to market fluctuations).
  • Expenses are $130,000/year.
    • We do not know if this is including taxes or taking into account an inflation rate.
  • Income
    • Jill will continue working for 7 additional years after Jack retires.
      • $75,000 is coming from Jill’s work, meaning $55,000 is the amount required from the portfolio.
      • $55,000 / $3,000,000 = 2% withdrawal rate.
        • It seems reasonable this is a very safe withdrawal rate to create a secure retirement.
• Retirement Consideration (1) – Retirement Gap
  • Jill will have income for a set number of years throughout retirement.
    • Will the mortgage still be here in retirement? 
      • Depending on how soon they decide to pay down the mortgage, they may need varying amounts of income from their portfolio.
      • You will need more income from your portfolio today when there is a mortgage, and much less income needed from the portfolio once there is no longer a mortgage.
  • Example:
    • If $55,000 is needed to supplement Jill’s income to generate total living expenses of $130,000, but once the mortgage is paid off, perhaps only $25,000 is needed from the portfolio (sample).
      • This would mean $100,000 of living expenses would be needed once the mortgage is paid off.
        • $75,000 is coming from Jill’s income and $25,000 is needed from the portfolio.
• Retirement Consideration (2) – Jill’s Retirement & Social Security
  • The time between Jill’s retirement and Social Security beginning.
    • This is the timeframe you are fully dependent on your portfolio to maintain all of your expenses.
  • Assuming $130,000 of living expenses and a portfolio value of $3M.
    • $130,000 / $3,000,000 equals a withdrawal rate of 4%.
      • Jill is age 55 and the 4% rule was backtested to show 30 years of living expenses. 
  • What if the portfolio grows at 10%?
    • This is 8% net, because of the 2% used for living expenses.
    • $5.1M can be assumed if an 8% rate of return is achieved.
      • If we divide $130,000 / $5.1M = 2.5% withdrawal rate.
  • What if the portfolio loses 5%/year (extremely unrealistic)?
    • $3.1M would turn into ~$1.8M and $130,000 / $1.8M = 7.2% withdrawal rate.
  • Other Considerations
    • This does not take into account healthcare expenses / additional taxes.
• Retirement Consideration (3) – Social Security
  • Once Social Security begins, less stress is pushed on your portfolio to cover all of your retirement expenses.
• Retirement Guardrails
  • The way I view retirement planning is that you should live your life based on your retirement goals (and how your portfolio is performing).
    • For example, if things are going very well, spend more! 
      • Be sure to enjoy what your savings have done for you.
    • If things aren’t going well, can you cut spending temporarily?
      • This puts lets pressure on your portfolio and accelerates the recovery time.
• Monte Carlo Analysis
  • Monte Carlo analysis can be a great starting point, but here’s where it falls short:
    • You may have seen a Monte Carlo analysis showing you’re going to pass away with $50M or you’re going to run out of money.
      • There are so many variables that it’s impossible to take into account everything and these outcomes present unrealistic outcomes of if you’re going to be okay or not. 
• Pulling Funds In Retirement
  • If you have access to a 403(b) or 401(k) in retirement and retire at age 55 or later, you can access the funds without the 10% early withdrawal penalty (taxes still owed).
    • You must be employed until age 55.
• 72(T) Distribution
  • If you want to retire before 59.5 and you have funds in an IRA, you can’t pull funds without a penalty.
    • You can elect to take 72(t) distributions, but you have to take it for the longer of:
      •  5 years
      •  When you turn 59.5
  • This is a way of getting around the 10% withdrawal penalty.
  • Note: If you miss one year of payments, the entirety of your 72(t) distribution is hit with a 10% penalty.
    • Your full IRA balance must be used in the calculation of the 72(t) distribution.
  • Knowing the full balance of your IRA must be used, consider working backwards.
    • Understand how much you need from your IRA and determine what IRA balance is required to generate that need for however long you must need to take the 72(t) distribution for. 
      • Example: You would like $20,000/year and you determine you need $500,000 from your IRA to support this, but you have an IRA balance of $1M today.
        • Consider transferring $500,000 from a separate IRA, leaving $500,000 in your current IRA, and the 72(t) Distribution does not have to aggregate all IRAs.
        • A separate IRA can generate these distributions allowing the rest of your IRA to grow for you.
  • I’m not confident a 72(t) distribution makes most sense for Jack & Jill.
    • Although this is not specific advice, taking funds from a 403(b) or brokerage account may make most sense. 
• Home Equity Considerations
  • This is not something that always needs to be taken into consideration with retirement planning.
    • If you were to downsize or move, it would certainly want to be taken into consideration.
    • Perhaps the home could be viewed as Long-Term Care insurance.
• Additional Considerations
  • What’s your asset allocation?
  • What’s your tax strategy? Should you implement Roth Conversions?
  • What plan do you have for ongoing life changes?

Timestamps

1:30 – Kind Review

4:29 – Listener Assumptions

6:48 – Varying Retirement Expenses

9:30 – Mortgages In Retirement

11:59 – Retirement Withdrawal Overview

13:52 – Portfolio Returns

19:18 – Sustainable Withdrawal Rates

20:37 – Pulling Funds In Retirement

24:36 – 72(T) Distribution

26:49 – Home Equity Considerations

30:15 – Aligning Your Investments With Your Financial Goals

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