Episode 218: Preparing for an Early Retirement

Do you dream of retiring early? Planning carefully is an important part of ending full-time work ahead of schedule. The path to early retirement is different for everyone - you have to look at your unique situation and decide your own goals. Alternatively, some people need to retire earlier than they intended to, so it's smart to have a strong retirement plan in place in case something unexpected happens.

Melissa Joy discusses ways to access your retirement savings without penalties if you retire before the traditional retirement age and different options to consider for an early retirement strategy.  

With proactive planning and a good mindset, early retirement may be a possibility for you regardless of what inspires you to stop working. 

Listen and Learn:

• Why it's important to plan ahead for early retirement
• Strategies for accessing retirement funds early
• Ways to grow your savings and income for an early exit
• How to prepare for a fulfilling life without work

Resources:

• Register for our June Webinar: How to Prepare for an Early Retirement 
• Retirement Readiness Reports 
• Retirement Statistics by Gender 
• Pew Research Retirement Studies 
• Watch our 2023 Retirement Readiness Webinar Replay 
• Listen to Women’s Money Wisdom Episode 49: Visualizing Retirement 

Links are being provided for information purposes only. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Pearl Planning cannot guarantee that the information herein is accurate, complete, or timely. Pearl Planning makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. Pearl Planning financial advisors do not render advice on tax matters. You should discuss any tax matters with the appropriate professional.

Transcript

Melissa Joy: 0:01

Welcome to the Women's Money Wisdom Podcast. I'm Melissa Joy, a Certified Financial Planner and the founder of Pearl Planning. My goal is to help you streamline and organize your finances, navigate big money decisions with confidence and be strategic in order to grow your wealth. As a woman, you work hard for your money and I'm here to help you make the most of it. Now let's get into the show. Do you have the date of your retirement all planned out? That's what we're going to talk about in this episode, and I specifically want to talk to those of you who may not want to wait until you're 65, 70 or older in order to stop working and start living. We want to talk to those of you that may retire a little bit earlier. Now, as we get started, I'm going to be talking to you about how to plan for retirement, but as we get started, I want you to be aware that it's not always those that have a plan that end up retiring earlier. Sometimes you just don't have a choice, and so we're going to start by talking about groups who need to be thinking about retiring early, and then some good rules of thumb that I've found examples of, when I feel quite confident about retirement for people and then how to really get prepared. So I think this episode is going to be great. It's going to be a way to roll up your sleeves and really think about retirement, because so many of our listeners are millennials and Gen X who are right in the thick of it. I can't believe I'm saying this. I'm 49 years old, but my friends are going to start to think about retiring, and some of them actually will in their 50s. Now we are not talking about fire financial independence, retire early. We're not talking about a super austere like I don't want to work a day longer than I have to. This is more of hey, it would be nice to leave early or maybe even have the date planned. So just want to distinguish in terms of the groups of people that we're talking to. So who should think about early retirement?

Melissa Joy: 2:10

Well, first of all, I just know there's groups of people that they know the date. So I used to work with a client and I'll always remember them Very fond of this. But they were talking to me when their kid was in early elementary and they just said when he gets to high school, graduation, I'm going to put in my notice at the same time, and I loved that. I loved that mapping out. It was more than 10 years in advance, but they were really working toward a goal and anticipated they would have funded all their needs, paid off debt, things like that, so they just really had a target and knew what they wanted to plan for as a family.

Melissa Joy: 2:46

But also there's those people that just think, wouldn't it be nice to be able to retire earlier? Or I haven't really thought much about it, but if I did think about it, I don't necessarily want to wait until my mid-60s. Maybe you work really hard and perhaps your job isn't as satisfying as it once was, or you want it to be, and so you're looking for alternatives. I love talking to that group because maybe they haven't pondered the possibilities of retirement quite as much as those who have the date nailed on the calendar, and so we like to think about possibilities, and it doesn't always have to be you're going to quit working. It could be a career transition where you have a less pressure-filled or stressful job or a job you prefer more, perhaps even a career switch. Or it's always nice to know that you're working because you want to, not because you have to. But then I really also want to think about groups of people who may not know when they're going to retire but are over assuming that they'll be able to work later than is typical. So time and again and I'm going to have really great links and show notes to some longitudinal studies and some research surveys that really focus on American statistics about retirement but time and again people assume that they're going to end up working later than they actually do. Only about 10% of people between ages 45 and 54 think that they'll retire before age 60. But 33% of retirees end up retiring before age 60. When we actually look at the numbers of hey, when did you retire? So you know, it's important to not just be prepared because you have a plan, but also know that you may not have a choice and you may need to make a decision in the back of your mind to truly have a retirement game plan.

Melissa Joy: 4:32

Now, when we work with people, we always kind of target or aim for their ideal. They may say, hey, I know, I want kind of a standard retirement age. A lot of us have age 65 kind of locked in our mind. One thing kind of gets checked off the list at that point because you can receive Medicare at that point in time and that takes care of a big early retirement cost in terms of medical care. It doesn't make it free, but it certainly controls the cost of premiums. So, anyway, I just want you to be thinking that for this episode, what is a what if Like? What if I retired at 52? What if I retired at 55? Or what if I retired at 60?

Melissa Joy: 5:11

So the next section I really wanted to talk to you about is as a financial planner, as someone who sees tens if not hundreds of retirement kind of case studies, in essence, as I work with families and individuals, what are some good rules of thumb that we like to see when people come to us and say I really wanted to retire earlier? There are certain things that we put in the plus column, certain things that we put in the minus column, and I guess I'll focus on the positive and give you some good rules of thumb of what we'd like to see. The first is to have more than one bucket of where you've put money away for retirement. So, for example, it tells me a lot if you just have, for example, one big 401k account and you don't have, like an outside Roth account you've been contributing to, or any taxable investments or big cash savings and emergency reserves. What that tells me is you're used to spending just about all of your paycheck except for taxes and retirement and whatever benefits you need to pay for. So, just as a rule of thumb, if you've been able to add some additional buckets some examples that I really love to see are, like I said, cash on hand just you. You know you've built up a bigger emergency reserves and you know $5,000 from each paycheck.

Melissa Joy: 6:29

Also, roth IRAs we love to see health savings accounts. Perhaps you know two 401ks, one for each spouse and then investment accounts, brokerage accounts or after-tax accounts. Those can be exceptionally valuable when you plan to retire before age 59 and a half, because that's the traditional age where you get to access your retirement plans. There are some ways to get into them earlier without penalty. One example would be if you retire from your employer at age 55, you can take money from your 401k before then, before 59 and a half. It has to be after 55, though, and that's from the 401k. And then there's also something called a substantially equal payment, a 72T plan, where you can take some money out over time same amount each year from a retirement plan or actually an IRA, and then that would avoid a 10% penalty for early distribution and there's some other exceptions as well. But we love to see additional buckets and it can feel intimidating to think about how to invest for brokerage accounts. We actually did a great episode about where to invest when you have cash building up and I'll include a link to that episode in show notes because we talk about how to get started investing in after-tax or taxable accounts. But this can be a really great bucket. It tells me something when I see that bucket for retirees Another good example a group of people that are less and less in terms of our population, but if you have a pension so, for example, you have a corporate pension, which are fewer and fewer or you're a government worker or teacher you work for the government.

Melissa Joy: 8:10

If you have a pension, that's an extra stream of income that you have that can really look good to a financial planner in terms of your retirement readiness or the ability to retire early. If you get your years of service in, even if you do a transitional job that has less pressure, and maybe that has less pressure and maybe a little less income, but you still have some supplements from your pension, your extra stream of income, typically on top of Social Security. Now, I know not every pensioner also receives Social Security. My mother is one example who's a Texas teacher, and they just Teachers in Texas aren't able to contribute to Social Security, so she's only living off that pension, so it just depends. But that extra stream of income can be quite valuable. Do a 401k or something like that. Have high contribution rates, really maximizing their contributions and really know where the money's going.

Melissa Joy: 9:13

It's not just flying around and kind of amping up your lifestyle creep, so to speak. That's a great cohort. That shows me some readiness for earlier retirement. Now keep in mind the reason that a financial planner is thinking that a little bit more cautious spending group is a great fit for earlier retirement is that then you have more years that you need to be prepared to kind of use your money over, and so it can be really difficult if you're a spender and you both save less and are used to spending more. It makes it easier on the financial planner, I should say, if you wait to retire till after 65 or maybe even after 70, because then if we assume a life expectancy, for example, of age 95, which is kind of our standard, then we just have 25 years to take care of, versus if you retired at 55, there's 40 years that you need to make sure your money isn't running out. So that's an important kind of consideration.

Melissa Joy: 10:13

It can also be a little bit more complex when you retire. Before you start taking Social Security, before you turn on Medicare, there's some really terrific kind of tax planning opportunities that I love to talk about with earlier retirees. When you haven't turned on your social security, it's before you're age 59 and a half. In some cases you can really get some money out of different buckets, different accounts, at a lower tax bracket if you have some extra room and time. But it does require a little bit more complexity, a little bit more sophistication.

Melissa Joy: 10:49

So I'm always looking for people who have good financial literacy. Now, frankly, those of you listening are probably, more you know, leaning toward that group. So give yourself a pat on the back for boning up on financial and money matters. But you know, if you don't have that good sense of how things work, it's going to take more time to understand, and either you might be too naive, just assuming everything's okay. Of course, then it's great to work with a financial professional like a certified financial planner to help to educate you, but also I just would be worried about kind of executing on all of the little things that can help you out. So I love financial literacy. That's why we love our listeners who are really taking their personal financial life seriously.

Melissa Joy: 11:36

So then the question becomes how do you get prepared, how do you get ready for an earlier retirement? And, like I said, this is both for people that are just so ready to retire they cannot wait for that day, it's it's started on the calendar but it's also for all of us who don't know what our health will be like or personal circumstances, and don't know if we will be able to hold down full time jobs throughout all of the things that life throws at us. Well, you know, shameless plug, but one of the first things that we always think you should do is engage with a professional, especially when it comes to retirement readiness. This isn't something we suggest. You wait until you've kind of had your retirement party and then you call the financial planner the next day. There's some really terrific things that you can do in those years leading up to retirement and if you're like, well, I'm retiring next year, maybe it's too late. No, it's not too late. There's no time like the present. But if you do have a longer runway, there's just more kind of prep work that can help to have a really solid foundation. That prep work is both mindset as well as dollars and cents. So it's how you're putting money into accounts, how you're thinking about things. But there's a lot of explaining that I often end up doing and kind of layers of learning that I do with people who are getting ready to retire. So more time is always quite valuable.

Melissa Joy: 12:57

You also need to recognize that there's a difference between accumulating money and what we call decumulation, spending money and one of the ways that I like to visualize it this was always something one of my mentors told me is, if you're working, money is a river, so the river comes through your life all the time you get your paychecks in, the money goes out, the water's always flowing, and when you're retired it turns into a pond or lake. It's one amount of money or water that's non-replenishable, and so you need to kind of tend to that lake, make sure that it doesn't dry up. And there are different strategies when it comes to accumulation. Where people are more financially literate, people understand, for example, the power of compounding. They understand returns. They understand, when I put money in a 401k, if I choose a traditional option, that I can potentially save on taxes and also have a very solid retirement account.

Melissa Joy: 14:03

But when it comes to, oh, how am I going to get that paycheck retirement account? But when it comes to, oh, how am I going to get that paycheck? What percent can I withdraw? Can you just tell me a number for how much money I need in order to have the right amount to be able to retire? Well, that's a little more complicated, complex, and it's just not what we focus on for the first half of our working lives. And so you do need a little time for catch up, and I always help to when working with a family like this or an individual, we're really helping to educate about. Here's what to expect, here's what you may see, and so you know you need to be able to switch gears, which can feel more complicated than that accumulation phase which so many of our kind of financial literacy phase, which so many of our kind of financial literacy education and specifics, are focusing on. And so you know there are a lot of great opportunities, as I mentioned, when it comes to tax planning.

Melissa Joy: 14:56

In some cases, the number of like well, just tell me how much I need isn't as simple as, like the average American needs $1.5 million. It's really specific to you of American needs $1.5 million, it's really specific to you. So, giving you an example of how we think about people, and I'll just like kind of run down a financial plan, some of the inputs that I would be assuming for a family that may plan to, let's say they're 50 and they want to retire at 55. Well, I'm going to spend time understanding who in the family is going to be a dependent in the family at age 55. Like, do we still have kids in school? Are we going to need to be paying for college for anyone? I'm going to be thinking about what saving you're going to be making over the next five years perhaps. Perhaps you come to me and say well, I feel pretty confident that I'm going to no longer get my W-2 income. I'm not going to work for the corporation, but I could still do some consulting work for a couple of years. So why don't we include an assumption that you have a couple of years of a lower income where I'm self-employed? Okay, we could think about some kind of step down, kind of transitional employment or streams of income. I'm also going to be thinking about what you're spending, so I'm going to have budget worksheets, if you want them, or really talk through like, okay, how much money is left over at the end of the year?

Melissa Joy: 16:12

Based on what you're making, we would potentially have a much lower tax bracket in the earlier years of retirement, especially at age 55. That means that you have probably between eight and 15 years that you can be potentially waiting to turn on social security, depending on your circumstances. You also have a few years, again depending on your circumstances, before you may be able to take from your traditional retirement accounts, but, of course, you might have a Roth lane that's wide open or be able to take from taxable accounts. All of these specifics about what kind of account do you have? How would it be taxed when we take money out? Perhaps? What's your cost basis? How tax aware are the accounts you're managing all of these are inputs we're going to be talking to you about.

Melissa Joy: 17:01

Okay, what do you want to do in retirement? Maybe you've just had your nose to the grindstone, as you've been working and it's really important for you to travel. Well, what's the travel budget. Are we talking $5,000 vacations or $25,000 vacations? We've heard both from clients, so we need to know what your expectations are. Both can be realistic.

Melissa Joy: 17:22

I always love to tell people you can do anything, just not everything. But we need to know those expectations. A lot of people really gear up to try to make sure that they, you know, anticipated every need and done big spending before that last day of work so they may do all the remodel projects, house projects, replace the roof, things like that. But I can assure you that your last big expense whether it's for your house or a vehicle, like you haven't bought your last car if you retire at 55. So we need to get a realistic sense of how often you're expecting to replace a vehicle. How much work are you going to do on a house or things like that? Those are all considerations that we want to talk through and in some cases people just want like tell me how much of a bucket I can get each month and we would take into consideration your property taxes or healthcare costs earlier in retirement, etc. But other people really want to say, okay, I'm going to replace a car every five years and I want to do these big trips and we are going to be making these gifts to grandkids or pay for a kid's wedding. Well, we can map all of those things out.

Melissa Joy: 18:33

So we don't like to be very like, just generalized about what you could be prepared for, which is what I find in retirement calculators that are kind of on the web and things like that. We get much more specific and granular when we get closer to the date. So we are going to get into all of those specifics. And then we're also thinking about your approach to risk. We're thinking about how you invest your money so that we can get a reasonable expectation of what returns might be over long periods of time. It's much more difficult to anticipate investment returns over shorter periods. And then what we're looking for is a mix of stocks and bonds and a savings rate and a spending rate that's going to be a fit to have high probability of success with adjustments, or how likely are you to need to adjust your plan? So we have a lot of experience kind of showing you those visuals and how things work over time to help you have a good understanding. That's how we're going to look at the specifics.

Melissa Joy: 19:37

What I just described to you is kind of financial planning work that we do, which we think is such a beneficial tool to being very accurate in terms of what is realistic for retirement expectations. It doesn't have a crystal ball that knows exactly what everything is going to look like, necessarily, but what it does do is creates a plan that is built for surprises, and so that is something that we think is quite valuable, whether you're in that accumulation phase or, as I just described, getting ready to spend the money that you've been saving, because, after all, the goal in retirement is not to end up with the most money at the end of your life, at least for most people Now, I won't say everyone, because some people really are motivated to save, either for the next generation or charitable gifts or things like that but for us, the motivation is to have an extraordinary life and retirement and high quality of life, and in fact, that's a segue to my last point. As you think about being ready to retire, what I want you to be thinking about at the same time is building a life outside of work. For some of us, our identity is very intertwined with the work that we do. I can say that personally, that I just love what I do and it's a big part of my life and so in order to be ready for that retirement date, then you need to be thinking about how you will spend your time outside of retirement. If you're in a relationship, how will you spend time with each other and you know, in certain cases one of you may retire and the other will wait to retire how do you feel a sense of kind of an equitable household or team environment relationship? Will that change the dynamics of your relationship? All of that kind of inner thought is important and certainly not solely the work of a financial planner. But I encourage you to be thoughtful, to interview people who have retired themselves, to be reading about life of a retiree, so that you have kind of increased or consistent quality of life and you don't feel kind of let down where there's a moment of depression during retirement, because that's certainly something you know.

Melissa Joy: 21:55

Much like baby blues, like a retirement blues, can set in for people, especially if they haven't spent the time to understand how they will live their life, what they'll do, what will be meaningful and important to them. That can be a really big deal. So what do you think as you think about what retirement might look like for you. Would it be a beneficial discussion to bring up with your friends. Say, how do you envision retirement? Are you starting to get to that age where you do have friends who are thinking about retiring or have kind of set off through the retirement party into a new phase of life? And if it's something that you can't visualize but you know you'd like to, I'd encourage you to start having the discussions. Work on a plan. It can always be adjusted, but do be thinking about what things may look like for retirement.

Melissa Joy: 22:50

We will include more conversations on retirement in our show notes. And just one shout out we're gonna be having a webinar in June of 2024. That's all about how to prepare for retiring early. So we'll get into some visuals that I can't show you in an audio only conversation, as well as some case studies to show you how you may decide to prepare. I think that's a great companion to this episode, along with other episodes that we've done in the past and a video replay of the webinar we did last year.

Melissa Joy: 23:23

So keep up the great work everyone. Keep those conversations going and if you have episode ideas that you think we need to touch in this Women's Money Wisdom space, please let me know. Don't hesitate to email me at melissa@pearlplan. com. Have a great day. Thank you for listening to the Women's Money Wisdom Podcast. If you found value in this episode, the best way you can support the podcast is to forward an episode to a friend or leave a review. Podcast is to forward an episode to a friend or leave a review. Go to pearlplan. com and the podcast link to get all the resources and links mentioned.