Challenges to an early retirement

0:00 Welcome to something more with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president, financial advisor at wealth enhancement group. One of the nation's largest registered investment advisors. We call it something more because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay. Christopher Boyd. Welcome to something more with Chris Boyd. I'm Chris Boyd here with Jeff Perry. We are both of the AMR team at wealth enhancement group and glad to have you with us listening for another segment of something more, um, today we're talking about early retirement.

0:46 You know, Jeff, every once in a while, I get these, um, Notifications of topics and articles that, um, reporters might be looking for comment from, um, an advisor to weigh in on, and, um, this one caught my eye. I don't know if we'll get, um, quoted or not, but I thought it was an interesting, uh, thought exercise that we might want to share with our listeners about some of the challenges. If you are going to think about retiring early, I know you, uh, probably as much as I do hear from people who say, yeah, one of my big goals is I want to be done. I want to retire, um, early and, you know, there may, some people are focused on it and really dedicated to that.

1:33 Right. And some people just have this sort of vague, yeah, I'm tired of working and I want to be done. You know, so, uh, I think it's a real high percentage of people who have that thought process, you know, like what if I, what do I need to do? Right. How can, could I pull it off? And they kind of go through the checklist in their head and, you know, it's the checklist might not include all the things they should, but I think a lot of people think about it, right? Yeah, absolutely. Um, now just as an aside, I mean, I, I have one client, excuse me. He's become one of our biggest clients. Uh, he came in, uh, I don't know if he was even in his forties, uh, when he started and said, you know, I want to be able to retire young, you know, um, in my fifties and, um, he's been just dedicated, vigilant.

2:32 Um, he has a good paying job and is able to save regularly, but puts a lot of money toward that goal and is, is at a point where he could, if he wants to, he just happens to like his work at this point in time and isn't, isn't desirous. But yeah, he's right. You know, uh, I guess that's the, the, the financial freedom, right? That notion of having the resources that work becomes optional. That's what we're trying to think about here. I always think about this in the context of the older radio show host. He's not on the radio anymore, but Bob Brinker. Yes. Um, and he had the term critical mass.

3:13 So it's when you reach that point that you have critical mass of assets, I guess, or income or not debt, or, you know, the picture you've reached that point where you can retire, doesn't mean you're retiring. It doesn't mean you're not working. You could be retiring from your full-time high stress, fast pace life to a still working, but not that right. Something that's less than that. That's more conducive to some travel or some leisure, but not, not going from a hundred miles an hour to zero. Right. Yeah. So the definition of, I want to retire early is not a single thing.

3:54 It could mean I just don't want to do this anymore. I'd like to do something else, but something that is more flexible and maybe more positive depending on one's given occupation. Right. Yeah. Yeah, exactly. Well, I think one of the challenges that this really present, there's a number of things that do come up as reasonable challenges to consider, but the first one that comes to my mind is that, you know, you really must be saving with abundance because if you do retire early and start drawing from your investments, you know, I mean, the thing about it is you, we, people tend to be living longer, so we need to be planning for the prospects of long life longevity.

4:50 Right. So if I retire, just say, for example, in my fifties, 55 instead of, or, you know, 50, you know, as an example, I want to, I want to retire well in advance of the traditional, you know, ages people retire, you know, that not only does that add 10 years, let's say, or 15 years of withdrawals. That could be a 40 year run rate, right? Yeah, we might have. So in that case, you could have it easily, right? 40, even more, right? Right. Let's say it was 50 and you said for age 50 and you said, okay, normally I'd plan to retire at 65 or somewhere thereabouts.

5:38 I think it's later from a lot of people, but so that's 15 or 20 years of additional withdrawals, right? Yep. But it's also now 15 or 20 years where I'm not getting the compounding impact that I would have from all the savings I'd be doing in that time, right? I'd be adding to the account instead of subtracting, and the money that's already there would be compounding for me. So it'd be growing, whereas now I'm probably drawing from it to some extent. So it's a big difference. So just that notion of the lack of compounding, earlier withdrawal, and the lack of addition over that period of time is impactful.

6:30 So if that's something you think, I really want this, you really have to be extremely aggressive about your savings. The amount of your, we talk in generalities of, oh, what's a good amount to set aside? People have this question often, and it's a really kind of an arbitrary thing. What percentage should I set aside for savings and investment? And I think oftentimes we kind of answer that in different ways. Well, there's your emergency money. That's one thing. There's, well, there's vacations and new set of tires, delayed spending intentions.

7:14 That's another thing. But if we're really talking about savings and investment to accumulate resources, we try to encourage people to, if they can, from the very beginning, save 10%, they're going to be really well ready for any kind of financial challenges they may face over their lifetime or opportunities like this that they might say, oh, I have the opportunity for financial freedom earlier. So I want to add a couple more things. If you're thinking about retiring early, all the, you mentioned the big ones, but a couple other maybe secondary things that people don't consider if you're retiring early is you said you're not contributing to your retirement plan.

8:03 Certainly true, but you're also not contributing to social security. So if you're relying on, or if you're thinking about future social security benefits and you stop working, although you're probably vested certainly by age 50, you're going to have 15 years or 17 years of zeros on your highest 35. Yeah, how many of those are going to be without number? So that's a missed opportunity. And they also, I know it's implied in your comments, but I just want to highlight it because some people who do their own kind of spreadsheets and don't kind of DIY this, you have that 15 more years in this example of 50 to 65 of inflation.

8:46 And we certainly add in inflation for the work that we do, the modeling that we do. But I see that as one of the mistakes of people who are doing DIY. And they're saying, all right, how much money do I need? All right, I need $50,000 of income a year. And they kind of think that number is going to be stagnant, right? Because maybe they have their mortgage paid off. But as we've seen in the last few years, the impact of inflation, sometimes in a short period of time, but certainly over 40 years, you really have to account for that and not lower all that estimate of what future expenses are going to be.

9:26 Yeah, I remember an advisor who, I used to do these seminars when I first started out. And when I did, there was an advisor who had a video series to kind of show you what you talk about. And he talked about inflation and tried to explain that as much as people maybe do have some fixed costs, they also have lifelines to the community was the way he put it. And I think that's a good way to think about it. What are those lifelines? Well, I have real estate taxes. I have insurance.

10:07 I'm going to buy a car. The car has gasoline, you know, in repairs, etc, etc. I buy food. I like to go out to dinner once in a while too. You know, all of these things that we take for granted, all are subject to the risks of inflation over time. And, you know, there's a stereotype, right? I mean, have you ever been to your homeowner's association? If you're like me, it's all the older retirees complaining about the dues increase because they're not working anymore. And it's, you know, these are examples of inflation, you know, they're on a fixed income.

10:51 You know what they're voting against is maintenance. So over 40 years of life, if you own a home, if you own a brand new home today and you're retiring at 50, everything in that house is being replaced. Yeah, over that 40 years, at some point, there's going to be a lot of maintenance repairs that are going to be needed. So, you know, those are just things that will work into your inflation concern. Yeah, really good point. And, you know, as much as we might say, oh, inflation's two and a half percent or three percent or whatever it is, you know, rule of 72s, right?

11:34 If we divide that by three, 24 years, that's double. Everything doubles. Yeah. And, you know, if you're living 40 years, you know, you're close to double. You're probably going to get a double double, yeah. And if you don't believe that, if you're just like, yeah, kind of, that's not going to happen. Go back 20 or 40 years and say, how much was a car? How much, you know, you pick your item that you want to compare it to a basket of items and you'll see. Bread and milk and eggs these days, right? Taxes, insurances. You know, tax. Yeah, all of them. You can just say, oh, it's changed. It will continue to change. That's just the reality. So inflation is one of those things you have to be more mindful of.

12:21 I think another one we should include in there is, you know, you got to think about health care, health insurance as one of those practical things. If you're retiring, you know, in your 50s and Medicare starts at 65. Right. Um, let's face it, health insurance costs are exorbitant today. So, you know, is that something you've planned for? If you're not employed, you're not getting any subsidy from the employer to help defray those costs. And usually an employer picks up some of that cost if you're working through an employer plan.

13:01 I mean, sometimes a lot of it. Even if it's 50 percent, it's big money over a year and decades. So, you know, that could add. Yeah. I mean, 20 years of 10, 10 years of those costs rather, you know, you could be looking at, I don't know, $250, $300, you know, more because of inflation. Right. The health care inflation is higher. Right. So, you know, another chunk of money that you got to have set aside with that in mind. And that's assuming you don't have any health problems. That's just for premiums, right? Not deductibles and all that kind of stuff. And uncovered dental and other vision and whatever it is, things that are not covered.

13:48 As you get older, you run into more of these non-covered optional things like teeth, for example. Yeah. We want to keep them. But, you know, generally, if you don't have an employer plan, you don't have dental insurance. You can buy it, but it costs money. I keep hearing this from people who are in retirement about the cost of implants and, you know, some of the dental expense. Just rough. It's a common conversation. In fact, we had people over last night and one of the ladies in the couple was sharing how much money she has spent in the last two months as her need for dental insurance has come up and she doesn't have any coverage.

14:33 So, you know, it's not inexpensive. I mean, even if you do, some things aren't covered enough, right? That's right. 50%, maybe. But, yeah. Yeah. Well, so, okay. That's on some of the expenses side of things. There's probably others too. I don't know. Before we move on from expenses, anything else that you wanted to think in terms of that I didn't think of? No, I would just add when you're projecting out long-term spending thing, you know, in addition to the cars and the vacations and the home maintenance that we mentioned, you have to really consider is in the next 30 years, am I likely to need to or want to help a family member?

15:20 Because this is something that sneaks into our financial planning discussions. Do you have a daughter who's getting married? Or do you have someone you want to help buy their first house or maybe a grandchild with college? Well, if you're at 50, you might be talking about your kids in college. That's what I mean. That's true. Yeah, that's a good point. So, consider not just your household expenses and even if you're doing a good job with all the things that we're talking about, kind of open up that field of vision and say, what am I going to do with my time if I retire? Oh, I'm going to buy a boat. OK, well, let's make sure that that's there or I'm going to travel more or I'd like to be more generous, family charities, or I'd like to do X, Y or Z hobbies or all these things have potential costs.

16:06 So, enlarge your vision and say, what is my life look like? What am I going to do? What might I do? And what is the cost associated with that item? Good points. Yeah, I think those are good examples of sometimes underestimated expenses. The money we spend on family needs, you know, come up. All right. Well, the next thing I want to talk about as it relates to this notion of if you're going to retire early, things you need to think about and this probably applies to everyone, but it comes to my mind, especially for people retiring early, and that's the notion of tax diversification.

16:53 You know, if you're retiring again at 50, 55, you don't have access to your IRAs, your 401ks. They're usually now there's some workaround to that, but by design, they're structured to be available to you at 59 and a half and thereafter. So, you know, you may want to make sure that you do have, one, other buckets of money, non-IRA, just, you know, joint account, individual trust, whatever it might be that non-qualified taxable, we'll call it kind of money. Meaning it, you know, pays income tax each year as opposed to something that's tax deferred like your IRA or your 401k and so forth.

17:36 And of course, Roth IRA money, you know, it's important to have some different buckets of money with different tax treatment. So the challenge is if you don't have sufficient resources in your non-IRA money, we see this throughout retirement anyway, that if people draw down on some of their investments outside of retirement plans, it becomes challenging when they have a big expense, like a purchase of a car, it's a common example. If I want to pay for that car and I don't have a non-IRA account to, you know, draw that from a taxable account, I have to take that out of an IRA.

18:25 I have to, you know, I want to spend $30,000 on a car, $40,000 on a car, whatever it is, right? I have to end up spending $50,000 to get that money or, you know, fill in the blank, whatever the tax. And that's if you're after 59 and a half, generally. And that's if you're 59 and a half. Now, there is actually a workaround for people who are pre-59 and a half, but are definitely going to be in a position where they need to draw from their retirement money in a retired status. But prior to being eligible to access that money, there's a Rule 72T that relates to the Internal Revenue Code.

19:16 And it does allow for some substantially equal periodic payments. Now, the rules around this are very precise, and you need to know them before you undertake this process. So this is why you're better served if you can avoid it altogether, you know, have other resources available to you to draw from. And if you're going to be retired early, you probably should make sure you do have those additional resources. But if you find circumstances change and you must, you know, be in a new circumstance, this separate equal periodic payments is an approach that can allow you to get access to your retirement plan and not be penalized the 10 percent penalty.

20:09 You'll still have income taxes the way you would from your retirement account, but not have the 10 percent penalty for withdrawals prior to 59 and a half. And it's worth mentioning there are other instances where you can access if there's a disability or, you know, certain kinds of circumstances that might allow for earlier withdrawal. But in this case, the rules are somewhat involved in, you know, I wasn't planning to spend the whole show on this, but just the notion that it is available. The challenge becomes if your circumstances change, let's say, as an example, you start down this path of a 70 to 50, you know, you're going to withdraw some money and not be penalized by doing it, you know, do it in this appropriate fashion.

20:56 But then you decide maybe I'm going to get a part time job and I don't need to draw from this. I'm going to stop doing it. You violated the rules of the separate equal period. Periodic and violated the periodic component. Right. So essentially there's different methods of whether how it's calculated. One that I think of as a common one is, you know, related to that R &D kind of notion. You know, you look at a table to come up with an amount and that it's permissible to withdraw from and that allows you an amount. Now, is that the right amount to meet your needs or not?

21:37 You know, this is why you look at these. There's a few different ways to calculate what the amount of these periodic payments can be. But you are required to do it. Let's say you're 55. You have to do it at least until you're 59 and a half and not less than for five years. So in that case, you'd have to do it for five years, even if you said, oh, circumstances change. I don't need this anymore. So it's an oddity and it's complex. And I would consult an advisor, probably both a financial advisor and a tax advisor in reviewing this to make sure you follow through on doing it properly.

22:23 Should you feel that this is a necessity that you might have to deal with. Yeah. On the opposite of the technical comments that you shared, I have to say that this, not the 72T, but this frequency of people who retire at before 50, after 50, after 60 or 70 with the intention of not working and then wanting to go back to work or finding something that they want to do or being bored is super common. So you can think that you're retiring at 55 and you're done working. But I suspect that most people are going to want to do something productive, something.

23:06 Yeah. You may just be done with what you used to do and not want to do that anymore. But that doesn't mean you may not want to do something for compensation along the way. I just had a conversation the other night. I was at Home Depot picking up something at the tool rental thing and I had a police shirt on. So the gentleman who had long hair and a beard, by the way, he said, oh, you're retired. I said, yeah, because me too, LAPD. And so he was talking, he goes, I retired for like five years and then I had to do something. I started part time. Now I'm working 60 hours a week. Yeah. But that's not the exception.

23:47 That's kind of what develops into the norm. You can only play pickleball so many days or go to the beach so many days or whatever you're retiring for and then you can say, well, I'd like a few bucks. I need to do something productive. I want to meet some new people and a part time. Well, sometimes it's, yeah, there's a whole range of reasons. But sometimes it could be just to help you afford some of the things you want to do. That's right. And that's what this retired LAPD officer is. That was just getting a part time job to get out of the house and have some pocket money. And then they creeped, you know, like they offered him a position to manage the tool rental and he likes dealing with all the customers and contractors.

24:28 And so he's enjoying it. So he's enjoying it. And let's, let's turn our attention, sorry, let's turn our attention to social security part of this for a minute or two, though, because I think that's something we should also talk about before we wrap up. And the whole notion of working, even if you turn on social security early, it has its own complexities. Right, right. So you want to let me set the stage on this. Yeah, really related to my comments of people who retire, say they retire at 62 and they say my social security money is there. I'm going to take it right there. It is. I know I'd get more later, but I'm going to take it. And then I want to start now.

25:10 I got who knows how long I'm going to live. I'd rather get started. And then you fall into that scenario I described or something like it, and you decide to work. And so since you're not of full retirement age, which would be 66 or 67, where you'd have a higher number, right? Yeah. I think it's 20 some odd thousand dollars is your limited amount. That I'm planning to find. But yeah. So if you make more than. Twenty three thousand four hundred dollars in 2025. I'm pretty sure that retired LAPD officer working full time managing the tool rental center is making more than that. So yeah. So you wouldn't want to keep receiving social security if you turned it on at 62, as an example, retiring early if you're going to be working part time.

26:00 So an important consideration. And it is good that you can suspend your payments if it turns out that you have this circumstance. You thought you wanted it early and then you change your mind, even though you filed for it, you could suspend and that would still help that new wages would count toward your recalculation. So if they, you know, add some money in and took off the zero somewhere, you know, for your 35 years that you were talking about earlier, you know, I think that's worth keeping in mind. But twenty three thousand four hundred dollars, if you if you make more than that and you're receiving social security, you're penalized.

26:47 It's it's very unattractive. So you don't want to do that. No, I don't want to do that. So think about it. And we don't have time for this segment to add commentary on it. But I'll just say it may even be financially prudent to wait and draw from other assets that you have because of the, you know, the ultimate benefit that you would get if you retire at a later date or maybe even 70 because of the. Yeah, the increases in social security have a long lifetime projected and all that. We talk about it once in a while. We'll go back to it. But there's a lot of things to talk to your advisor about on these. It depends on like the spouse is who's the higher earning if their spouses, you know, all that kind of stuff to help you think about how to strategize around that.

27:34 But, yeah, it's a good point. If you're trying to retire early, not that we're we sound kind of negative on this, Jeff, I think we just want to be careful. Yeah, I'm not negative about it. I just want people if they can do it and if they want to do it, just go into it with your eyes wide open and talk to a fiduciary financial advisor who has not trying to sell anything, just has your best interest at heart and go through all these oddities or scenarios or what ifs to make sure that you're fully aware of what an early retirement might look for you. And if we can be a resource to you in the process, we're happy to help.

28:14 We talk with people with initially with a consultation that's complimentary. We go through a little bit, learn about you. We then do some analysis and then have a follow up meeting where we can explain to you our observations and make some recommendations and elaborate on if we were to work together over time, how we work together. So if that could be a resource to you'd like to take advantage of, don't hesitate to reach out to us. Until next time, everybody keeps driving for something. Thank you for listening to something more with Chris Boyd. Call us for help, whether it's for financial planning or portfolio management, insurance concerns, or those quality of life issues that make the money matters matter.

28:59 Whatever's on your mind, visit us at somethingmorewithchrisboyd .com or call us toll free at 866 -771-8901 or send us your questions to amr-info at wealthenhancement.com. You're listening to something more with Chris Boyd Financial Talk Show. Wealth Enhancement Advisory Services and Jay Christopher Boyd provide investment advice on an individual basis to clients only. Proper advice depends on a complete analysis of all facts and circumstances. The information given on this program is general financial comments and cannot be relied upon as pertaining to your specific situation. Wealth Enhancement Group cannot guarantee that using the information from this show will generate profits or ensure freedom from loss. Listeners should consult their own financial advisors or conduct their own due diligence before making any financial decisions.