With all of the dismal news about the economy lately, I’ve seen an uptick in what I call the “Financial Advisor Interview Process.” Basically, prospective clients calling me to discuss their situation and what it might be like for us to work on the same team. I often find that people initiate a call to me if they’ve become empty-nesters and see retirement on the horizon. Or perhaps, they’ve experienced some sort of financial windfall such as an inheritance that requires more advanced planning. Frequently folks tell me that they have an asset accumulation strategy that they’re happy with, but they realize that they also need a system to protect their money from loss as they draw closer to retirement. This usually happens after a period of significant volatility, like we’re experiencing now. But the pandemic and the uncertainty associated with it have me fielding calls from a different group – those that are thinking about retiring early.
For those thinking about possibly retiring early, the challenge is to see if we can create a plan that lines up with those desires. For example, I got a call last week from a gentleman named, let’s call him Jim. Jim’s in his middle 50’s, married for 29 years to his high-school sweetheart Nicole. They have kid’s in their 20’s and as Jim says, “…off the payroll.” He recently got laid off from his job and has no idea if or when he will be re-hired. For him, it seemed like a good time to consider retirement. He is also a woodworking enthusiast and loved spending his free time in his basement workshop building furniture for friends and family. An early retirement would allow him to spend more time on his hobby, and maybe even make a little money, too.
We talked through what an early retirement might look like for him financially. First, we reviewed their assets and discovered that they had already accumulated more than they initially planned to have on hand at Jim’s previous target retirement date. With this promising start, we took a look at their debt situation. They had recently paid off their mortgage, and other than a small balance on a credit card there were no other debt obligations. Once we covered their assets and debts, we started to drill down on the other key parts of a plan that could allow Jim to leave the workforce behind for good.
Jim needed to be aware that retiring early often means you must give extra care in how you distribute your assets, particularly those that are tax-qualified such as a 401k or an IRA. Because Jim had just passed his 55th birthday, if he retired, he would have to follow strict IRS guidelines to access his 401k penalty free. When you retire early, you have to review your access to any money in qualified retirement accounts, particularly your 401K. Jim had just passed his 55th birthday, which means that if he retires and follows strict guidelines from the IRS, often referred to as the “Rule of 55”, he can access his 401K funds from his last job penalty-free. He would owe just ordinary income taxes on any withdrawals.
We also discussd how Jim and Nicole planned to cover health insurance until they became eligible for Medicare at age 65. Private health insurance is expensive for anyone, and particularly costly for someone over the age of 50. If they didn’t want to front the high cost for private coverage from their savings, they could turn to some of the funds that Jim had accumulated in his HAS (Health Savings Account). While using an HAS to fund private health insurance can help at the beginning of an early retirement where there are funds to use, they are a finite resource and will run out, especially because you can no longer contribute to the HAS once you stop working. Because Jim mentioned that Nicole planned to keep working for a few more years, we took a look at spousal coverage for him. Good news for Jim – he can be added as a spouse to Nicole’s workplace coverage and significantly lessen their health insurance premiums until Nicole also retired.
Retiring early also meant they needed to account for any income gaps until they started collecting Social Security, as well as evaluate their filing options for when they did decide to turn on their benefits. Jim and Nicole are roughly the same age, so one strategy that may work for them is where one of them starts collecting earlier than the other. This allows the other spouse to collect a spousal benefit rather than their own since the other had lower lifetime earnings. This is certainly the case here. Lastly, we confirmed that they both had completed 35 years in the workforce paying social security taxes. If they had not had 35 years in the workforce, they would need to keep in mind that their benefit would look significantly different.
We made good progress, but we both still have homework to do. Jim and Nicole need to look at what their retirement lifestyle will look like and what it means in terms of budget and income. I need to work with the rest of my team at the office to make sure their income distribution plan accounts for current and future economic volatility, since any distribution plan without downside risk managaement would ultimately be flawed. Lastly, Jim and Nicole’s income plan needs to account for changes to their tax situation, since they will now need to consider the taxation issues that qualified retirement plans create.
I’ve never been retired; you know, with three daughters on my heels I will probably never retire . . . they’re expensive! Good thing that I love what I do. But, while I don’t have that firsthand experience, I do have the privledge to work with hundreds of folks, just like Jim and Nicole, as they approach retirement. We all may fantasize about being retired, but those living successfully in retirement have found vocations and new routines that result in fulfillment. So, if today’s job market has you considering early retirement, this might just be a golden opportunity to kick start the next phase of your financial life!
So as always – be vigilant and stay alert, because you deserve more!
Have a great week folks!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at firstname.lastname@example.org.
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