If you're thinking of retiring at 55, you want to be careful about
where you get your advice and guidance, and that's because most retirement
advice is geared toward those who retire quite a bit later,
in fact... Most people retire at 62, but things will be different for
you if you're going to retire at 55.
So that's what we'll talk about for the next couple of minutes here,
we'll go over where you can get the money from, and how that
works with taxes as well as healthcare, then we'll look at some actual
numbers and what it might look like for somebody who retires at age
55. We might also want to get philosophical just briefly and ask the
question, Why age 55? Yes, it's a nice round number. And there are
some interesting tax strategies that are available around that age, but
let's say you could retire a little bit earlier at 54,
would you want to make that happen? Or if you worked a few
more years... I know you'll think this is crazy, but if you worked
a couple of more years and you could not impact your finances,
but still take some of those dream vacations and spend time with loved
ones, would that be worth it to maybe work until 59,
for example? So we want to figure out exactly why
you are pursuing a particular goal and then we can improve the chances
of success for you, so let's start with health coverage, this is a
tricky one because you're retiring quite a bit earlier than most people
who might be near that Medicare age, so you have a number of
different options to continue being covered, and it is a good idea to
have real health insurance coverage just in case something happens. So a
couple of your choices include, number one, you can continue your current
benefits from a job if you have them for up to 18 months
in most cases, and that's under COBRA or your state's continuation program,
that can get quite expensive because you're going to pay the full price,
if you weren't already doing that, plus perhaps a teeny little bit extra
for administration, but it is a way to continue with the program that
you currently have, so that can be helpful if you are mid stream
in certain treatments or if it's going to be hard to get certain
benefits that you currently have on a different health care program,
unfortunately, that's not usually a long term solution because we need to
get you until age 65, which is when most people enroll in Medicare,
and you should see your costs go down quite a bit at that
point, maybe depending on what happens, so another solution that a lot of
people look at is buying their own coverage, and that happens typically
through a healthcare marketplace or an exchange, and that's where you just
by coverage through an insurance company. So you can go directly to the
insurers, but it's often a good idea to go through... Start at healthcare.gov,
and then go through the marketplace or the exchange, and that way you
can shop some plans and potentially, depending on your income, you can potentially
get some cost reductions that make it a lot more affordable,
I'll talk more about that in a second, but another option is to
switch to a spouse's plan, if you happen to be married and that
person has coverage that's going to continue for whatever reason, that might
also be a solution for you, when you leave your job,
it could be a qualifying event that allows you to get on that
person's program, but let's talk more about saving money on health care
expenses before age 65, most people are going to buy a policy based
on the factors that are most important to them, so that could be
the premium or the out of pocket maximum, the deductible, the co pays,
certain areas of coverage, all that kind of thing, you can select a
plan that fits your needs. Now, you might find that those tend to
be quite expensive, and so if your income is below certain levels,
you might be able to get effectively a reduction in the premium,
it might be in the form of a tax credit or a subsidy,
so here's just a preview of how things could look for you,
let's say your income is, let's say 50,000
in retirement, and you need to look at exactly what income means,
but there is no coverage available from a spouse, we've got one adult,
and let's say you are... As our video suggest age 55 here,
so you might get a benefit of roughly 422 a month,
meaning you could spend that much less each month, and that's going to make
it a lot easier to pay for coverage on these plans,
if we switch your income down to 25,000 per year, the help is
even bigger, so as you can see by varying or controlling your income,
and this is something you might have some control over if you retire
at 55, you can also control your healthcare costs, we'll talk about some
conflicting goals here, where you might not want to absolutely minimize
your income during these years, but this is important for you to know
if you're going to be paying for your own coverage, and if you're
experiencing sticker shock when you see the prices... By the way,
I'm going to have a link to this and a bunch of other
resources in the description below, so you can play with this same calculator
yourself. Now, once you're on Medicare, the cost should drop quite a bit,
this is a calculator from Fidelity where we can say, let's say you
are a female, and we're going to say you're eligible for Medicare at
this point, so we'll bring you up to age 65. It is going to be
quite a bit higher cost, if you look at it before age 65,
and that's because you are paying for those private policies from insurance
companies, let's say you're going to live until age 93, and so you
might expect to spend roughly 5800 6000 bucks per year, depending on your
health and your location and other factors, it could be more or less,
but this is an estimate of what somebody might spend, a single woman
each year in retirement, of course, that number is going to increase each
year with inflation and deteriorating health issues. But this is a ballpark
estimate of what you might be spending in the future, now we get
to the question of, do you have the financial resources to retire at
55? And that comes down to the income and the assets that you're
going to draw from to provide the resources you need to buy the
things you want and need, and one way to look at this is
to say We want to avoid early withdrawal penalties because again,
you are retiring at an age that's earlier than the typical retiree and
most retirement accounts are designed for you to take withdrawals at 59.5
or later, to avoid those penalties, fortunately, you have a couple of options,
so with individual and joint accounts, just taxable brokerage accounts,
you can typically withdraw from those without any penalties, but you may
have capital gains taxes when you sell something,
those taxes may be at a lower rate than you would pay if
you take big withdrawals from retirement accounts, but you just want to
double and triple check that, but that can be a liquid source of
funds. You. Can also typically withdraw from Roth accounts pretty easily.
So those regular contributions come out first, in other words, you can pull
out your regular contributions at any time with no taxes and no penalties,
what that means is that's the annual limit contributions you might have
been making her by year, so the 7000 per year, for example.
That money would be easily accessible, but if you have other money types
like Roth conversions, for example, you're going to be very careful and
check with your CPA and find out what all of that could look
like. There. Are other ways to get at funds that are inside of
pre tax retirement accounts, and it might actually make sense to draw on
those to some extent, we'll talk more about that in a minute,
but these are some of the tricks you can use to avoid an
early withdrawal penalty yet still draw on those assets before age 59.5.
The first one is the so called rule of 55,
so this applies if you work at a job with, let's say a
401K, and you stop working at that employer at age 55 or later,
if you meet certain criteria, then you can withdraw those funds from the
401k so they go directly from the 401k to you. They don't go
over to an IRA, you could withdraw those funds without an early withdrawal
penalty. A complication here is that not every employer allows you to do
that, so 401k plans can set a bunch of their own rules, and
one of them might be that they don't let you just call them
up and take money whenever you want, they might make you...
Withdraw the entire amount, so if that's the case, this isn't going to work,
so be sure to triple check with your employer and the plan vendors
and find out exactly how this would work logistically or if it will
even work. Next, we have SEPP that stands for substantially equal periodic
payments or rule 72. This is an opportunity to draw funds from,
let's say your IRA or a certain IRA that you choose,
but before age 59 and a half without getting early withdrawal penalties.
Now, this is not my favorite choice. I don't necessarily recommend this
very often at all, and the reason is because it's easy to slip
up and end up paying tax penalties. The reason for that is in
part that it's really rigid, so when you establish this, You calculate an
amount that you have to take out every year, and it has to
be the same amount every year, and you have to make sure you
do that for the longer of when you turn age 59 1/2 or
for five years. And even that sounds kind of simple, but it's still
easy to trip up, and you also have to avoid making any kind
of changes to your accounts, so it's just really rigid and can be
difficult to stick to you, so... Not my favorite choice, but it could
be an option. Those of you who work for governmental bodies,
maybe a city organization or something like that, you might have a 457b
plan, and those plans do not have early withdrawal penalties before 59 and
a half, so you could withdraw money from that and
use some income, pre pay some taxes, and have some money to spend
fairly easily, this by the way, is an argument for leaving money in
your employer's 457 versus rolling it over to an IRA, because once it
goes over to an IRA, you are subject to those 59 1/2 rules
and a potential early withdrawal penalty. So that could end up
leaving you with 72 to work with, for example, which again is not
ideal. So you might be asking, well shouldn't I just minimize taxes and
hold off on paying taxes for as long as possible? And the answer
is not necessarily. So it could make sense to go ahead and
pre pay some taxes by getting strategic, the reason for that is that
you will eventually have to pay taxes on your pre tax money and
it might happen in a big lump, and that can bump you up
into the highest tax brackets, so it could be better to smooth out
the rate at which you draw from those accounts and hopefully keep yourself
in lower tax bracket, at least relatively speaking. So when your RMDs or
your required minimum distributions kick in after age 72 under current law,
that could possibly bump you up into the highest tax brackets,
maybe you want to smooth things out and take some income early.
So let's look at the question of, Do you have enough with some
specific numbers, and before we glance at those numbers, just want to mention
that I am Justin Pritchard. I help people plan for retirement and invest
for the future. I've got some good resources, I think, in the description
below, some of the things that we've been talking about here today,
as well as some general retirement planning information. So if this is on
your mind, I think a lot of that is going to be really
helpful for you. Please take a look at that and let me know
what you think of what you find. It's also a good time for
a friendly reminder, This is just a short video, I can't possibly cover
everything. So please triple and quadruple check with some professionals
like a CPA or a financial advisor before you make any decisions,
so let's get back into these questions, Do you have enough?
As we always need to mention, it depends on where you are and
how much you spend and how things work for you. Are you lucky
to retire into a good market, or are you unlucky and retiring into
a bad market? All of these different aspects are going to affect your
success, but let's jump over to my financial planning tool and take a
look at an example. This is just a hypothetical example, it's the world's
most over simplified example, so please keep that in mind, with a real
person, we've got a lot more going on. The world is a complicated
place and things get messier, but we're keeping it very simple here,
just to talk about an example of how things might look,
so this person has one million in pre tax assets and 350,000 in
a brokerage account, and if we just quickly glance at their dashboard here,
pretty high probability of success, so let's make it a little bit more
interesting and say... Maybe that IRA has, let's say, 700,000 in it.
What is that going to do? And by the way, this is still
a lot more than a lot of people have, but again,
if you're going to be retiring at 55, you typically have quite low
expenses and/or a lot of assets. So let's keep in mind here that
retirees don't necessarily spend at a flat inflation adjusted level, and
I'll get into the assumptions here in a second, but let's just look
at if this person spends at inflation minus 1%
using the retirement spending "smile," that dramatically improves their
chances, and I've got videos on why you might consider that as a
potential reality, so you can look into that later at your leisure,
but as far as the assumptions, we assume they
spend about 50,000 a year, retire at age 55.
The returns are 5.5% per year, and inflation is 3%
per year. Wouldn't that be refreshing if we got 3%...
So we glance at their income here age 55, nothing,
and then Social Security kicks in at 70. They're doing a Social Security
bridge strategy. I've got videos on that as well, or at least one
video, the full year kicks in here later, and then their Social Security
adjust for inflation, looking at their taxes, we have zero taxes in these
earlier years because they are just not pulling from those pre tax accounts.
Maybe not getting much, if anything, in terms of capital gains,
maybe their deduction is wiping that out, so we may have an opportunity
here to actually do something and again, pre pay some taxes and pull
some taxable income forward. In fact, if we glance at their federal income
tax bracket, you can see that it's fairly low from 55 on,
maybe they want to pull some of this income forward so that later
in life, they are drawing everything out of the pre tax accounts all
at once. It just depends on what's important to you and what you
want to try to do, and that brings us to some tips for
doing calculations, whether you are doing this with somebody, a financial
planner or on your own, you want to look at that gap between
when you stop working and when your income benefits begin from,
let's say, Social Security, there's also that gap between when you stop
working and when Medicare starts, and that's another important thing to
look at, but what are your strategies available there? Should you take some
income, and exactly how much? That's going to be an area where you
might have some control, so it's worth doing some good planning.
We also want to look closely at the inflation and investment returns,
and what are the assumptions in any software that you're using,
for example? These are really important inputs and they can dramatically
change what happens... You saw what happened when we switched from a flat
inflation adjusted increase each year to the retirement spending smile,
just a subtle little adjustment has a big difference on how things unfold,
and in that scenario, by the way, we would typically have healthcare increasing
at a faster rate. But like I said, we use an over simplified
example and didn't necessarily include that in this case, but you do want
to click through or ask questions on what exactly are the assumptions and
are you on board with those assumptions? You may also need to make
some adjustments, and this is just the reality of retiring at an early
age when you may have 30 plus years of retirement left,
a lot can happen, and there really is a lot of benefit to
making slight adjustments, especially during market crashes, for example,
so. If things are not necessarily going great, some little tweaks could
potentially improve the chances of success substantially, that might mean
something as simple as skipping an inflation adjustment for a year or two,
or maybe dialing back some vacation spending. These are things you don't
want to do, that's for sure, but with those little adjustments,
you can potentially keep things on track, and that way you don't have
to go back to work or make bigger sacrifices. And so I hope
you found that helpful. If you did, please leave a quick thumbs up,
thank you and take care.