Money Rules You NEED To BREAK To Retire Early
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- เผยแพร่เมื่อ 24 ก.ค. 2024
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#retireearly
I put in my notice this morning. Last day of work will be Aug 4th. I turn 58 in Oct.
Congrats!!!! 🎉
Congrats. I'll be 46 this month. I want to retire so bad already. Lol. Ughh.
I plan on retiring at 55, and I turned 55 on June 9. Six more months baby!
That's awesome! It's so close!
@@ErinTalksMoney we also closed on the sale of our house on June 9. We have absolutely no debt until I retire at the end of the year.
An early retirement is very possible IF you are willing to cut a lot of luxuries out while you are working. About 95% of people don't have the mindset to do it.
Yep, people are addicted to material possessions. Brainwashed by society to buy, buy, buy.
100%!!
They got a YOLO it.They need the newest car, fine clothing and the newest phones.
Folks watching Erin are at the opposite end of the spectrum from the majority. Most will have trouble saving for retirement, even on the traditional timeframe, never mind an accelerated one.
i retired early than the normal and I can tell you that I sure haven't cut back on anything. i really don't get the whole spending, luxury spending, etc bashing. Your investments and this economy rely on consumers spending, and spending, and spending.
The best video that you’ve ever done, truly an eye opener for me. Thank you!
Interesting thoughts. One variable not mentioned here is having children. With the trend to have children later, and the expenses associated with putting kids thru college and getting them established in life, savings and investments can fall by the wayside unless you have a very high income. Today is my first day of retirement at 65 after raising 4 kids.
Congratulations 🎊
Congratulations and welcome to the club!
First day of retirement!??! Congrats!!!!! 🎉
Congratulations!
I think this assumes that paying for your kid’s college is the default however. We know some doing this but the majority are only paying for a small portion. Enjoy retirement!
One of the best TH-cam accounts 🎉❤
Thanks!!!
Thanks! Love your videos. This one is especially valuable and timely for me.
Glad it was helpful! Thank you!!!
Good video Erin! I'm tracking toward a more semi-early retirement route (after 55 but before 62). I generally saved between 20 - 25% of my gross income, but also took time to enjoy experiences along the way. I do plan on focusing on hobbies after leaving my traditional job in 1 1/2 years. Some have potential to be income generating. In the end it really is up the individual if you have an income that can support necessary expenses, retirement savings, and some wants along the way.
Excellent video, Erin
Thank you!
Thanks for clearing up the question I had on the rule of 55 and working in another capacity when I retire from my current employer.
This is great Erin! You made me realize that I need to switch focus to my brokerage account now if I want to retire early in 10 years.
A brokerage account definitely comes in handy
EARLY RETIREMENT? Def watching this.
Don't forget the year you turn 50 you qualify for "catch up" contributions. These allow you to put more into your 401k and also Roth. I had to make a few phone calls to get my 401k sorted out. It seems very few people use this.
Erin are you planning on writing a book in the near future? Your video content and approach is excellent. A book would be amazing from you! Keep us posted. Steve🤞
The rule for collecting out of my 457b is merely to sever service with my employer. No penalty no age minimum.
Erin, there is one alternative that you didn’t talk about. The SEPP that is available using a 72T. Since 2020, you don’t have to use 120% of the annual midterm rate, you can use 5% for the calculation on the SEPP and pull your money out early. This allows you to make pre-tax IRA withdrawals with no penalties. It does require you to roll your 401k over to an IRA, but once that is done, you can pull funds down until you hit 59 1/2.
I retired at 53 and am using the 72T to pull funds down for the next 6 years. This might be a good topic for a future video.
Exactly! Although it would be a good to included IRA conversion ladders and pros/cons.
Future video for sure 😊
my traditional finance rules to break for early traditional retirement: #1 get a sugga momma or daddy; #2 inherit it; #3 get a sugga uncle or auntie; #4 become a politician.
I dislike paying off mortgage early, especially if you have a ridiculously low mortgage rate. Also, it really doesn't make any sense to accelerate your mortgage payment if you are basing on the home owner stat of being 33yo with 30yr fixed, because of how mortgages are amoritized. For me, I can't see a world where I could care that I'm paying a mortgage in retirement at 2.375%. I'm either going to have to pay rent or be sitting on equity doing nothing or less in appreciation than my mortgage rate. I hate the term "saddled" with mortgage. We don't say the same thing if you are going into retirement as a renter. We don't say retirees 65 and older are still "saddled" with rent. Rent may actually be better financially than owning a house, so that's another rule that can be broken.
if your plan doens't allow rule 55, then look at 72(t).
As we approach early retirement, we made paying off the mortgage a priority. There is great comfort in knowing we owe nothing as we start the transition from our careers.
Another great video. In my own retirement planning I was able to max out a 657 plan along with my normal retirement plan from my employer. That alone allowed me to retire early!
That is awesome!
@@ErinTalksMoney I now have Whats App..
Nice advise
Thanks
@@ErinTalksMoney I moved to Missouri and people here have no financial education!
I lived in St Louis for a year. I’m not sure about the financial education, but I miss the food, if you have kolaches near you, definitely go, they are amazing! Also IMO’s pizza!!
59 1/2! YEEEeeezzzzzzzz. Next year for me! Retired at 52 and have been anticipating that 59 1/2 date.
Best advice I can offer to retire early is start saving early, be consistent, stick to/have a budget and live below your income levels.
Out of curiosity, what is your plan for taking money from your retirement accounts? I assume you will pull from your IRA compatible accounts first and just let Roth continue to grow. I also assume that you will take social security early. If so, will it be at age 62?
@@KayKay0314 No. I have both traditional IRA and Roth IRA accounts. I will pull an amount from the traditional IRA until I will reach an AGI level that will start charging any amount of income tax. I will then pull the rest of the years needed money from a combination of Roth and after tax accounts thus effectively having a ZERO income tax rate. My goal is to pay ZERO income tax for as long as possible. Based on my projections I'll be almost 8 before I pay any more income tax. That's a couple decades for me. That is what I call effective tax planning and tax avoidance.
I retired at age 63 1/2 via a buyout with my employer of 38 1/2 years. Began taking SS immediately along with my company pension. My wife and I are the same age (9 days apart) and she retired at age 65. This way I could join her company medical insurance plan way cheaper than Cobra. My buyout gave me 12 months of pay (paid monthly) plus a bonus equal to 2 months pay plus another payment that I could use for health insurance or whatever I wanted to use it for. We do have a mortgage for another 13 years at 2.5% interest rate. We have no other debt. At age 72 we'll both begin taking withdrawals from our 401K's. We also have a healthy slush fund for unexpected expenses that will eventually come up.
Sounds like you are in a great position!
This is a good one Erin, not a simple matter. Two other tangential things I'd be interested in: 1) how people who retire early AND have kids do it (or does this ever happen?), and 2) what people do about health insurance. On the last item, I assume availing one's self of the ACA is the typical route, but would be interested in seeing how that looks as compared with health insurance while working.
Big sticking points for sure …perhaps another video!??
My kids were 30, 28, 20 when I retired.
Thankfully, our youngest is employed full-time with health insurance before we retired.
Health insurance is our biggest expense. We pay $1509.26/month for my husband and I. It is excellent insurance through BCBS. We did not go through ACA.
@@ErinTalksMoney Health Insurance is the thing people miss in planning retirement before Medicare.... even then the Co-pays for the various supplemental plans and co-pays for medication are usually missed..
There are people who retire and still have dependent kids, but they also have the means to support it. On health insurance: this is one area people don't really focus on when accepting a job, since most people just focus on salary rather than compensation. There are companies that do offer retiree medical benefits or group coverage, depending on how long you've been with the company when you retire and kicks in at retirement age. So, there can be merit to staying at the same company for a long time even though employment loyalty has waned. It's something to consider at your current company or looking at strategically. For public sector, for example like federal government, if you carry federal employee health insurance for at least the last five years of your employment before retirement, you are eligible to continue group coverage through retirement. Yes, public marketplace is one way or private insurance is another or self insure.
@@victormorrison441 you mean even with medicare, since medicare doesn't cover 100%.
Thanks, Erin. A sort of related topic I would love to see you do a video on would be how to prioritize distributions of Roth vs. Traditional/pre-tax funds during retirement. That is, is it better to withdraw Roth funds first, or allow them to grow longer, or some combination?
I’ll have to do a video on that!
I think most cfa’s agree that Roth dollars should be the very last dollars you touch. I certainly appreciate the estate planning benefits of Roth…tax free growth and tax free for my children up to 5 million I believe.
This is such a great video Erin! I really love part where you go into detail about the specific accounts used to save, which is very important for those of us who want to retire early. I think I'll be able to retire around 50 and I won't be able to get to my 401(k) for nearly a decade, so putting too much there could hurt me. My strategy is:
1. Contribute 5% of my pay to my Roth 401(k) to get my employer's match.
2. Max out my Roth IRA every year.
3. Save everything else in index funds via an individual brokerage.
It would absolutely suck to have enough money to retire, but to not be able to access the money due to the 59 ½ age rule!
I’m facing this scenario as well! I THINK I’ll have enough in a 401k to retire by 50, but can’t touch it until 59.5. Sooo… my large cash position has been paying great in TBills and ibonds between 4-5%! I know I COULD possibly miss some market returns, but it’s nice to have that cash buffer with easy access if and when I decide to retire! I’m open to suggestions and ideas!! (Which is why I follow these type videos! 👍👍
You can get to your 401k money by transferring it to an IRA then using a 72T to make penalty free withdrawals. Google it.
I was "retirement rich" too and did exactly what you did until I calculated that I would have enough to fill the money gap until age 59 1/2. Then I modified my Roth 401k contribution to 15%. I'm not maxing out my 401k because the more I continue to save in my individual brokerage, the more I can adjust how much I can safely spend each year. Right now, that number is a tiny bit too frugal for me at $40,000 of expected expenses per year. If I had to retire this instant, I'd spend as little as possible for the first year or two to give me room to spend more in the remaining years before age 59 1/2.
@@michaelcollins4468 thanks. I have been reading with this 72t. It’s not exactly easy to calculate the SEPP but I have a few years to figure it out!
@@brandon8531 Bankrate has a calculator. I can’t post link because TH-cam strips it away.
I'm retiring the day I turn 59 and a 1/2 years of age. Not one day later.
Another thoughtful video! I do disagree with the belief that you need to up the 15 - 20% savings rate. I probably averaged 20% but also paid ~$250k in child support. Still retired at 56-1/2 with a mortgage and truck payment. I withdrew 8% for five years before being debt free and dropping to 4%. Once I take Social Security at 70, I won't need any supplemental income. If you had good jobs (high Social Security benefit) and live a moderate lifestyle, you don't need much in retirement savings. Although, things can change in the future and I wouldn't plan on that.
My wife and I retired at 55 but would not have been able to if it were not for the ACA (Obamacare) If we had to buy it on the open market it would have cost thousands per month and would have killed the early retirement plans. But with the ACA and a modest post retirement income, we both got good coverage that has ranged from free to 50 bucks a month. Also what helped me was a little known IRS rule called the rule of "72t" (also called SEPP which stands for Substantially Equal Periodic Payments) In short, if you are at least 55 and agree to take a fixed amount each month for 5 years minimum, they let you withdraw from your traditional IRA with NO 10% penalty. Yes I had to claim it as income but NO penalty and that was a game changer. Very few people even know about this rule but it was key to us being able to both quit work and live on IRA withdrawals until 62 when social security kicked in. Thanks Erin for all you do and keep up the good work!
I like the fact that you emphasized driversified assets like ETFs in brokerage accounts. People just assume that brokerage accounts have to be risky and not for retirement planning, and underestimate the value of the ability to withdraw the money any time you wish. Also, you can have a Roth brokerage account and still trade in it and take out your contributions (not gains though) tax and penalty free any time while letting the gains grow tax free for withdrawal after you are 59.5 years of age and the account has been open for 5 yrs.
Another way to access retirement accounts early is through the Substantially Equal Periodic Payments exception that the Mad Fientist describes well in an old article of his called "How to Access Retirement Funds Early." For some reason most finance youtubers seem to ignore this important exception that seems like a no-brainer to people planning to FIRE.
Thanks for sharing
I am 62 today and became a millionaire last week
Congrats Darrell!!!! 🎉
Great video! I am retiring next month at age 60. I have full access to my IRAs, 401K, and brokerage accounts. I will take 5% withdrawal rate until I turn 62 and have access to SS. We have zero debt and feel pretty comfortable with the retirement decision. Hoping the bear market is over (or almost over)...😬
Excellent!
Erin, great channel you have. I was watching this episode the hardest and the most investing milestone, you were mentioning about getting into a 100k using 10k a year. What bank or financial brokerage that would give you 8% compound interest?
A brokerage account is very tax advantages .
Keep in mind that the long term capital gain tax rate is 0% on gains up to the 12% bracket and 15% on gains up to 500k(mfj)
Good video Erin. Are rollovers from a Roth 401k (the amount previously subject to tax) considered to be contributions that are able to be withdrawn early?
Once you pay taxes you would be fine - generally you pay taxes during the rollover
Nice video. Just one thing I noticed, the Roth IRA income limits shown in the video are for 2022 not 2023 🙂
Being mortgage free by early retirement can make it easier, but I still would rather stick some money in steady income assets like T-bills instead of paying off my mortgage aggressively when getting close to retirement at, say, 50. I include mortgage costs in my FI number.
This is assuming I started investing aggressively in my 30s, and my investment contributions don't calculate that much into investment interest growth anymore.
But if I'm owning a house in retirement, eventually I will need the funds to replace major items or renovate it to keep it livable. It doesn't matter if you paid off your mortgage if the city looks at your caving roof and declares your house uninhabitable. So I'll start saving up funds for that in a safe, interest bearing account before sticking it in the house.
53 and debt free with retirement planned for both of us at 57 years old. We have a 401k, 403b, IRA, brokerage account and two Roth IRAs. The traditional IRA is by far the largest account since all my previous employer 401ks were rolled into it.
We bought a couple rental homes 30 years ago, and the proceed of those homes will give us the cash to live off of. I retired at 53 and my wife at 55.
For me, my brokerage accounts are the "gold standard". By the end of the year, I will have enough money to fill the gap from now until age 59/1/2 (Yay finally!)
Mortgages are only "good" debt when the interest rate is low, fixed and you can pay it off even if you retire. Otherwise, it's bad.
Savings rate all depends on when you start. The earlier you start, the less you need to save. Start at 20% for your very first job and then increase as you receive raises.
If you retire early and also plan to take social security before your full retirement age, make sure any wage earnings from any kind of job doesn't exceed the earnings limit for the year. Otherwise, you will pay back some or all your social security benefit (depending on your earnings) and kick yourself for not waiting.
I retired at 63 and financed my retirement until FRA with a mix of 401k withdrawals, brokerage accounts and EE bond redemption. EE interest is very poor now - but in the 80s, it was at 6% and then 4% until I cashed them. They and I bonds are tax deferred - you don't pay the tax until you redeem them.
My grandma was a fan of those EE bonds in the 80s and early 90s as well!
We retired early using the rule of 55.
We also have a brokerage account and cash to live on in the early years of retirement. After 59.5 we'll have access to our IRAs without penalty.
Most likely our initial 401k will last until 62. We plan to take our ss at 62 and will begin to take a reduced amount from our IRAs.
That’s awesome!!
Please be careful with the "pay off your mortgage" advice. We bought our current home in 2017, which was the year I retired. We got a 2.5% rate on our mortgage. I could have taken the money out of my IRA, but I could get more than a 2.5% ROR on that money by leaving it in the IRA so it made sense to finance the house. You always need to evaluate what that money can do for you by leaving it where it is and borrowing for a big purchase vs taking it out and paying cash.
You are absolutely correct- I have a video planned along the lines of, ‘even if you can buy a home in all cash, should you?’ Because it is a layered question. But I do think As guide for the general population - paying off that home before retirement is a good plan. Because most Americans don’t have that money otherwise simply sitting at the ready in an investment account.
I maxed out my TSP, an IRA and taxable brokerage. Bought SPIA SEPP annuities that will last for life, no early withdrawal penalty. And retired at 46 as a millionaire. Some luck, but mostly discipline. Buy and hold the S&P 500, dollar cost averaging, just like Warren Buffett says. 4:06
Mr Buffett gives darn good advice!
We bought home at my age 33. Ok, married no children but we were not high income,just average. I paid monthly house payment and added to principal any extra I could afford, still putting into retirement fund. At time of purchase rate for loan was 9%! That was my main reason to pay off loan asap. Retired at 50, job allowed me early retirement at that age. Home paid off was biggest plan.
When home loan was paid off, all payments for house was then put into investment, paying self was my thinking.
Nice! Congrats on getting that paid off. And what a high rate!
the key is making good income, saving a high % in good investments, and living within your means.
I have a high-paying job, low stress, working from home, saving rate of 30% + company matching, and living in no state income tax state. I invested in Real estate rentals, S&P 500 index, and dividend paying stocks. I did not retire early but became financially independent. I still work FROM HOME, and I can work from ANYWHERE in the world. I love what I do. I take lots of vacation...
I 100% agree with that - and having a low stress work from home job is INCREDIBLE! I am in a similar boat and I love it!
The only debt I have is a home equity loan for home renovations. I HATE that debt, and I've become obsessed with paying it off. I plan on paying it over in two years.
I get that!
So on the retirement calculator do you use net annual income or gross annual?
Or you can do what I did and retire from an employer, at age 55, that offers a generous pension benefit. In my case, the University of California.
A pension makes a big difference
For your 2023 Roth Income Limits table, I think that the Income column should be MAGI - not Income. For example, if you contribute to a 401k, that drops your MAGI and you may then be able to qualify for a ROTH even though your income is above the income limits.
I just want to point out that in your example of retiring at 50 and waiting to 55 to take from the 401(k) would still result in penalties. To use the rule of 55, you have to retire in the year you turn 55 or older to get that money penalty free. And then it's only the 401 at the job you retire from, not any previous employer's 401.
What if you are public safety? Can I leave at age 50, and withdraw penalty free? My employee says no, but the IRS rules say otherwise so idk?? 🤷♂️🤷♂️
I was thinking the same as you. If you are an public sector employee, you don't have to wait until 55, you can withdraw your 401k earlier. I have multiple 401Ks, but at 54, I will roll them all over into my current employer's so I could take my money out if need be.
@@littlejoe1778 I'm 55 and have been considering a reverse rollover from my IRA into my current 401k.
🤦♀️ true! The example would have worked better if I said it was a public service worker who retired at 50 but then delayed collecting until 55 😂 can we pretend I said that? (Good catch by the way!)
@@ErinTalksMoney Erin! My employer (public service) still says if I sever or “resign” one day before age 55, I can’t touch my 401k until I am 59.5. Even though the IRS says I can access my 401 without penalty if I leave the year I turn 50! Who over-rules who?!? 🤷♂️ it’s tricky…but does the IRS have final say or has my employer locked my 401 down until I am 55 or 59.5?! Any suggestions here? 🤷♂️
I’m 52 and I plan to retire at 59&1/2!😉
Nice! What a convenient age!! 😊 and not too far off!
If you retire at 50, does that qualify you to use your 401k at 55? I thought the rule of 55 is if you separate from your company the calendar year, you turn 55 or after?
That example would work better had I said this was a public service worker! (In a non-public position, you would have to continue working until 55 and leave the job at 55 or later)
Right now I plan on retiring at 55 if all goes to plan and living off personal investments until 60. I am currently saving 27% of my pay (33% if you count my company match) between my 401k, Roth 401 and buying company stock at a discount.
I hope all goes according to plan!!
@@ErinTalksMoney me too but you never know what the future will bring.
it's not the wisest to have a large portion tied up in one company, so any espp should be culled, so you don't have to much in one basket relying on the company you depend on for a paycheck, 401k match, espp, and anything else.
@@hanwagu9967 I agree no one should put a lot one company and that is why I believe is why they have a cap. The discount is very nice and free money is free money.
What are your thoughts on annuities?
Run from them. Run
Outside of a mortgage other debt should be avoided at all costs.
I like that!
I agree. Debt is bondage. At least in my purview. Many don’t agree with us.
Inflation must be factored into this. Your buying power goes down over time as your money devalues. Money spent at 50 must be compensated by a larger amount of money at 55, 60, 65, etc. If you are living off your investment, make sure their yields keep up.
The amounts are given in today's dollars but it's assumed that you'll actually be spending in the inflation adjusted amount of dollars when you retire. People will use backward-looking inflation calculators to determine that like we can do now.
I plan to retire at 60 and use my 403b to pay for my living expenses until I am 70 and then claim Social Security. I also plan to claim my pension at 65. Obviously the 4 percent rule isn't meant for someone relying on their retirement account fully for 5 years and partially for another 5 years and then relying primarily on a pension and Social Security. It would be nice if you made a video on Social Security bridge strategies for people like myself.
Very similar situation. 403b from 62 to 65 then a combination of pension and 403b to 70. Then ss and pension til 75 when the RMDs kick in. I would love to see a video on managing taxes using this approach
i'd take social security at 62 instead of 70, since you have a pension and 403b. USA male life expectancy is around 77yo. You could be spending ss for 8 years while you are still wiley now or 7 years on the back end. Since there's a 10.4year break even point between taking at 62 or 70, you aren't even breaking even until you turned 80yo. now if your family has a history of males living into their 90s, then maybe 70 for ss would be ok. i'd rather supplement my 403b and pension with ss than actuarily short myself. Retirement is for spending not saving, and seems that people who who go into retirement still have the saving for retirement in retirement mentality. Yes, your money needs to outlast or equal your life expectancy, which is different than saving in retirement for retirement.
With your example “retire at 50”, you had “have a 401k you can access at 55”. Pretty much all 401k require you to be working until age 55 to access the funds using rule of 55 don’t they? How can I still access at 55 if I retire before that? Current situation I have to wait until 55 to retire or else I can’t access until 59.5.
I want to retire at around the normal retirement age 62, but I am 38 and my husband is 48 and we are just starting to invest. How can we ‘catch up’ to be on target to retire on time?
There is no magical way, you need to pay off debt and invest a ton of money every year, I started investing 60k a year when i turn 40 and hopefully i will have enough to retire when i turn 55
There are calculators which will show you how much wealth you can create based on your age. Just look on the net.
One of the best moves is employer based 401k especially if there are matching funds. Put in 6% and the employer puts in their match. Free money. Start this today
backward plan to see how much you need to save by 62. The formula is pretty simple: time, income, saving, spending, or a combination. You will have to push retire by 62, earn more, spend less, save more, or a combination. By 62 for you or your husband, since your husband is 10 years older? Your husband is 2 years shy of eligiblity for catch up contributions, where he'll be able to contribute more to 401k and ira at 50yo, if eligible. If you both are just now starting to invest, at least your husband is probably not going to make retire by 62 unless you rake in tons of money and are saving most of it.
What age do you want to retire Erin?
Hummm…idk a sometimes I think 55, some times I think just move to part time work in my late 50s and continue working into my 70s. I really enjoy what I do. 😊
I think it’s the “year” in which you turn 55 to utilize the “rule of 55”. You don’t actually have to be 55 yet. E.g If your birthday is August 1, and you turn 55 on that day, you could quit your job on January 1 and utilize the rule.
I will retire at 58 or 59
Nice!
Why not just pay the 10% early withdrawal penalty
The fed tax bill on a 100k pre tax withdrawal is $8500 add the 10% penalty and your total tax bill with penalty will be $18500/ 18.50% effective tax rate
This is better than a 22/34% marginal you will pay to contribute into an after tax account.
$8500 on $100k?? I could be totally wrong.. but I thought it was closer to a 20% tax rate, or closer to a current marginal rate. Where do you get 8.5% on $100k?🤷♂️
@@brandon8531
100k - 27k(standard deduction)=73k taxable income (mfj)
Total fed tax $8450 (rounding numbers).
Thank you I should had clarified further
22/34% pay to contribute into an after tax is rather confusing, since your actual average tax rate on after tax account is lower than your marginal rate. not to meniton after tax is going to either be far more tax efficient because of no tax on gains or taxed at long term cap gains.
@@hanwagu9967 keep in mind that the effective tax rate is applied to your total gross income and the marginal tax rate is applied to the portion of your income that falls within the last marginal tax bracket, after you use your standard deduction and the lower tax brackets.
An after tax contribution will always come from money that is left after you use your standard deduction and the lower marginal tax brackets hence the marginal tax bracket gets applied to all after tax contributions
@@sergiosantana4658 this is why i said effective and not marginal like you did. you wrote 22/34% marginal. stop saying the marginal tax bracket, because even by your own words marginal is based on the last dollar. again, after tax is more efficient than the penalty hit.
🥰🥰🥰🥰🥰🥰
I am not one to quibble, but in my opinion, taxable accounts are tax advantaged. You pay long term capital gains tax on equities held for more than a year and on qualified dividends, which beats ordinary income tax on traditional 401 Ks and traditional IRA’s.
Fair argument!
No mortgage in retirement = less expenses in retirement = less income needed to cover expenses = less taxes and less risk ✅
Not having a mortgage could result in the net effect of $10K+ of additional spending power every year for many early retirees.
not true. if you don't have a mortgage, you are either paying rent or sitting on home equity that is doing nothing; equity that is more costly to tap into than your mortgage rate; or more difficult to tap into because of credit requirements; or you have to sell the house. not having a mortgage has a net effect of $xx in equity that is untappable, difficult to tap into, or cost a lot to tap into.
@@hanwagu9967 let me try to explain with a little more detail. A $300K property 100% financed at a 7% interest rate would have a mortgage payment of roughly $2K per month in principle and interest. $24K annually.
If you own your house outright, that’s $24K of cash outflows you don’t have. And therefore $24K of retirement income that doesn’t need to be generated in addition to the income needed to cover all your other expenses. And consequently, $24K of income you won’t have to pay taxes on. $3,600 of tax savings at a 15% tax rate.
Additionally, having $300K of “trapped equity” in your home allows you to not have to pay 7% interest to a bank, a savings of roughly $21K per year in interest expenses. Many consider this effectively a 7% bond.
You still have property taxes, insurance and maintenance to cover, but those costs are going to be less than what it would cost to rent a similar property.
You could potentially improve your situation further by downsizing and/or moving to a cheaper city/state/country, but you’d have to consider the net effect on net worth and cash flows after incorporating the transaction costs of selling your home, the cost of moving, etc. A great example of this recently is people who sold their massively inflated homes in California, a high tax state, and moved to a state with (at the time) a much lower cost of living and tax burden for a similarly appointed property in Texas, Florida, Arizona, Tennessee, etc. They were able to use hundreds of thousands of dollars of equity to invest and increase usable cash flow while actually improving their quality of life. ✅
@@CalmerThanYouAre1 Since we're just making up numbers, then calculate $300k property 100% financed at 2.4%. many can consider home equity effectively a bond, but it isn't. I consider myself to be smart, but I'm not. there are far too many people who are house rich, who cannot afford to sell or move, can't tap equity, or tapping equity costs far more than if they didn't payoff. Trapped equity in a home does zero if you cannot access it. Although we probably won't see another 2008 for another 20 years, we are going into tighter credit market headwinds. With interest rates continuing to rise, even if we use your 7% scenario, to tap equity currently is 8.3%, and you can't tap 100% of your equity or enough of your equity to live off of for retirement or to bridge the gap during retirement.
@@hanwagu9967 that changed the mortgage interest you’re paying vs. principle in your mortgage payment, but it in no way negates anything I laid out in my example or original comment.
You’re ignoring the affects of taxation on the income you need to generate to pay the mortgage payment in retirement (both principle and interest).
@@CalmerThanYouAre1 it very much does negate, because it's opportunity cost. I can invest the difference to far outpace the mortgage interest. The 7% interest rate you mentioned is fictional. the past three decades home appreciation has averaged around 4%. I'm not ignoring the affects of taxation. You don't need to earn more to generate the mortgage payment either while actively working or in retirement. Your retirement is based on you being able to afford x% of expenses, which the olden days rule was around 80% of active working years.
245 days but whos counting???
So close!!
You used MMM's material but didnt give him credit? Not nice of you
There's plenty of overlap in these financial advice channels, and plenty of inadvertent recycling too. Erin doesn't look like the kind to claim someone else's idea, imo.
You can set up a 72(t), but I wasn't a fan of the selections of my 401k so I just did enough for matching (which my employer didn't do until later years of my employment). 401k is great to borrow and invest yourself, since you pay yourself back interest, but I wanted liquid assets and I planned to retire early (which I did at 48 and rolled over to a Traditional IRA which gave me total freedom). The penalty really isn't so bad if you are making enough in dividends, and another way to dodge the penalty is to pay into a kid's college education, which I was borrowing to my kids anyways. This way I get my money back from my kids (eventually...) and I get my money out with no penalty. Now this will only work for the next 5 years they are in college, but by then hopefully I will have gotten enough out or moved to a Roth so it is a non-issue. But yeah, if you have a healthy IRA, the penalty isn't a big deal, but I do expect to do a 72(t) once the kids are out of college. MadFientist has more info on this www.madfientist.com/how-to-access-retirement-funds-early/ Love the channel, keep up the good work!
Thanks for sharing!