How to Retire at 55. 3 Crucial Steps to Optimize Early Retirement
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- เผยแพร่เมื่อ 12 มิ.ย. 2024
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Embarking on the journey towards early retirement is a compelling aspiration for many, offering the promise of newfound freedom and flexibility. Yet, the path to early retirement is laden with financial complexities and requires meticulous planning to navigate successfully. In this comprehensive guide, I explore the key strategies and considerations involved in crafting a robust financial plan for early retirement, drawing insights from a recent case study with Matthew and Sarah, a couple on the brink of realizing their early retirement dreams.
Setting Realistic Expectations: While the idea of retiring early may be enticing, it is essential to temper enthusiasm with a pragmatic assessment of potential challenges and uncertainties. During our consultations with Matthew and Sarah, I emphasized the importance of acknowledging the inherent unpredictability of market performance and investment returns. By conducting thorough analysis and stress testing, I provided a clear understanding of the range of potential outcomes, allowing them to make informed decisions about their financial future.
Assessing Probability of Success: Utilizing advanced Monte Carlo analysis, I quantified the likelihood of Matthew and Sarah's retirement plan achieving their desired objectives. This sophisticated modeling technique enabled me to simulate a wide range of scenarios, taking into account various market conditions and economic variables.
Exploring Trade-Offs and Adjustments: Throughout our consultations, I engaged Matthew and Sarah in a detailed examination of potential strategies, including cutting expenses, extending their working years, and adjusting their investment allocations.
Optimizing Investment Strategy: Recognizing the extended time horizon associated with early retirement, I recommended a more aggressive asset allocation for Matthew and Sarah, emphasizing the importance of long-term growth and capital appreciation. Through diversified portfolios and strategic risk management, we positioned them in front of sustained investment returns while mitigating the impact of market volatility.
Strategic Tax Planning: I devised a comprehensive tax strategy designed to minimize their tax liabilities and maximize their after-tax income. This included leveraging tax-advantaged retirement accounts, implementing Roth conversions, and strategically timing withdrawals to optimize tax efficiency. Proactively managed their tax obligations preserves their wealth and enhance the longevity of their retirement savings.
Avoiding Over-Conversion: An important caveat in tax planning is the risk of over-conversion, wherein you inadvertently accelerate their taxable income into higher tax brackets. To mitigate this risk, I cautioned Matthew and Sarah against excessive Roth conversions that could potentially erode their tax savings over time. Instead, I advocated for a balanced approach that optimized tax efficiency while maintaining flexibility and liquidity in their retirement accounts.
Early retirement planning requires a comprehensive and multifaceted approach, encompassing prudent investment strategies, strategic tax planning, and a realistic assessment of potential risks and trade-offs. By collaborating with a qualified financial advisor and leveraging advanced planning techniques, early retirement can be a tangible reality.
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⏱Timestamps:⏱
0:00 - Matthew and Sarah
2:40 - Retirement spending expectations
7:51 - Income in retirement
9:57 - Cash flows
13:57 - Portfolio projection
16:55 - Probability of success
18:23 - Possible adjustments
22:17 - Investment strategy
24:25 - Tax strategy
29:15 - Summary
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I retired at 55 in july 2019. Best decision ever made.
@retiredmco I'm working on retiring at 55 as well. If not,sooner would be even better. Congratulations and enjoy retirement,sir.
Congratulations.
James, keep doing this. You are on to something. Don't let haters distract you. Educating folks and enlightening them in this realm is the most rewarding job. I am certainly one who learned a lot, and I appreciate your efforts. I couldn't be more grateful to you. God bless you !!
James, Another great walk thru--you are the best retirement/personal finance presenter I found on TH-cam and have the heart of a Teacher. Thank you! Rich
Thanks James for another informative video! The way that you express the logic you use in optimizing the retirement planning is very helpful.
Thank you very much James. These kinds of in-depth examples are very helpful to understand what the different variables are and how they interact. I'm trying to model my own early retirement using some different software, but I can use your examples to see how they affect my specific plan. I appreciate your time in making these videos.
Since you asked, the long format with all the detail is great for me since the details touch on some of my own concerns. Great video, thanks!
Amazing content here. Thank you for the in depth analysis.
I really appreciate this real life scenario with walk through and parameter sensitivity testing on many of the variables at play. Well done!
Each video gets better and better. Great work!
Another high quality video. Thanks for covering a wide range of retirement ages and levels of wealth!
I really appreciate these in-depth explanations. Thanks!
Loved the detailed deep dive. We are planning to do Roth conversions between ages 60-65. Still trying to wrap my head around the topic completely, but this was very helpful - thank you!
My husband and I are evaluating in 2 years when we will be 57. We enjoyed this video and it gave us a number of things to think about. Thanks for doing these case study videos.
super helpful!!! great work!
Thanks for the deep dive video James. Love your channel
Thank you. This is very helpful for Gen X
Love this video topic scenario. EXACT questions I am asking myself.
Thank James. This is very helpful.
I love these videos! Thank you for sharing.
Great video!
I'd love to have these problems. Could we do some scenarios with like 600-800k 😂
Wholeheartedly agree. I don’t think rich people like the ones in this example need to worry about going hungry in retirement.
It's just Division.
Divide your Portfolio value by the Portfolio they're illustrating
With that level of assets early retirement would be very challenging.
Expenses would have to be minimalist type living.
These are really helpful James. Most of the dollar figures you demonstrate are much higher than my reality, but I am always learning something helpful.
I'm a little surprised that a retirement that begins with 5 million and ends with around 12.5 million only has a 60% chance of success. That suggests there are quite a few foreseeable scenarios in which their desired retirement fails, which, again, is surprising. I'd be interested to see some of the monte carlo scenarios in which this particular retirement fails and what kind of adjustments they'd have to make to account for those failure modes.
adjustments: earn more, spend less
Heritage Wealth Planning Josh Scanlon addresses this. cash is king. We want to look poor on paper in early retirement. Have cash. It gives you options. Live off cash. Perform roth conversions at 50 k a year. This is your reported income taxes at the lower tax brackets. You will now qualify for up to 1500 a month in Obama care for two filing jointly. People, you're being paid not to work!!!!!
Yes, 4% of $4.5 mil is $180,000 per year and that is a conservative portfolio with no social security and retiring in 1966 which was the worst year to retire due to sequence of returns. Try using New Retirement and forget these scare tactics!
Probably attributed to the length of time. A scenario with a lower return will have a bigger impact vs. A shorter term. I am assuming the MC analysis is not being iterated each year independently.
Try "FI Calculator."
You can go through each and every Historical year.
Also, with that amount of wealth, More can be allocated to Stable accounts for the inevitable down years.
Maxing out ones portfolio to suck every last dime from it is a recipe for disaster!
Ie: For 100% Success, you either have to take less or adjust your dispersments when the Portfolio takes a substantial downturn.
Solid planning scenario explanation with just the right amount of detail.
Wish we could find an advisor with similar expertise who did not have an AUM fee model. I fully understand all these concepts and am already using an excellent Monte Carlo planning tool. Looking for a second check of my decisions as well as a periodic relationship to more fully activate should I die before my less financially sophisticated spouse… or if my intellectual acuity deteriorates.
From other YT commenters, I know our scenario is not unusual- there appears to be an opportunity for planners. Looking for a hybrid/middle ground that flat fee planners don’t fully fill.
The fees of assets seems to just raise the amount needed to retire. On the other side, it’s a service for folks who choose not to learn.
I find these scenarios very educational.
Super helpful.
Sorry for my previous deleted comment, James. It was intended for the previous video in my queue. You are doing valuable work.
Another great video! Thanks James!
So helpful ❤
Hi, yes. This was very helpful. I like hearing your thought process and logic. I have several years until retirement but I think about it all the time. I have a pension at my job and I'm so grateful but also want to be prepared. I'm in Los Angeles and keep thinking I'll have to move eventually.
Awesome video.
Great video James! I love the examples who retire early and need to utilize Roth conversions. It is amazing how much you can save in (future) taxes by taking a small tax hit today. My portfolio is 401k heavy and I started doing Roth conversions last year and will continue for the foreseeable future.
Very nice, I always enjoy these case studies. I'd like to see a "what if" health insurance is not available through employer, spouse or the ACA.
Great tax strategy and Roth conversion discussion. Since we're getting close to the TCJA sunsetting, love to see more of these or an in-depth analysis of several current asset scenarios and the sunsetting impact of future portfolio value.
Definitely continue the real life examples.
Great video as usual, James. Is excel required on computer to run the retirement software if bought through your retirement academy?
Great video as always James!. I’m curious as to why this couple at 55 did not consider getting healthcare through ACA with subsidies. I know that could potentially hinder their ability for Roth conversions at the 10% bracket or above. However, with a taxable account at that size and invested, we can assume that they are already getting enough dividends to fill up the standard deduction, so there is not much space left for Roth conversions if they also need to pull money with LTCGs to cover their expenses. It would be helpful to see this example where they use ACA and therefore need to control their MAGI for subsidies. Would in that case they still be able to convert to Roth up to the 10% bracket?. Thanks again for all your great content!
This is great! Thank you for sharing! I tried to find the medical cost calculator on Vanguard and can't seem to locate it. Would you please link to it?
This is very helpful, especially the tax strategy. Alternatively, one can build a giant excel sheet, and determine next year’s budget end of each year based on less speculative numbers.
Great video, thanks. It would have been interesting to see the Monte Carlo analysis after filling up the 10 and 12% brackets with Roth conversions. It seemed a little anti-climactic that a couple retiring at 55 with $4M in assets can't get to a 95%+ chance of success. If they can't do it, who could? But your example never got them higher than 76%.
You just need to either take less or be prepared to limit dispersments in down years
They’re only 55. If they wait another 2-3 years I’d bet they’d be at 95+
Love the software. Much more simpler than MGP.
Is this something I’d have to run through compliance in order to use at my firm?
James Conole is the smartest in the room and frequently the entire building.😀
Great video thanks for sharing. Quick question, you reference filling your tax bucket at 55 to offset longer term RMD income taxes but how do you pull from a IRA to a Roth before 59 1/2 without a penalty?
Very good one!! One of the best I have seen. Healthcare costs does that Obamacare subsidys ? Over conversion how can it make such big diff is not clear.Remember Also tax rates could go up in future.
Love this video. We are also DINKS and we are planning something very similar. The only difference is we plan to leave our high tax state and travel out of the USA to save on taxes, cost of living, and health insurance. Thank you!
I had to retire at 58. I'm partially paralyzed and can't work. Some savings. Now 16 years later, my NW is over $500k, mostly due to gains in my savings and investing in the last 16 years. I had to really suck it up, but now I believe I'll be ok. The only advice I have is to not give up, no matter how bleak your situation seems. Sacrifice is required though. I still live like I'm poor-$1000/month.. Breaking old habits you know. I could spend $2500/month now and wouldn't run out of $$$, but I want my kids/grandkids to gain something from my efforts too.
EXACTLY!
Thank you
Very helpful & informative although I would love to see an example as a single individual trying to retire early like this scenario versus a couple. Have you done a video with a scenario where an individual has a 401k and ESOP shares?
I enjoy your videos. That said, I take serious issue with both SS estimates and health insurance. My husband and I are applying for insurance through the open market and it is no where near these estimates. Especially if they can reduce their MAGI, which they can since they have so much in a brokerage account. Forgo some of the roth conversions before 65. Who is going to inherit their money anyway!
does the software run the montecarlo scenarios if you have access to it?
Can you please share the tax cheatsheet link? Thanks
James, would you consider running an analysis for retirement for a person/couple who does not have social security income but does have Medicare? Assume they have retirement income in a brokerage account of a few million dollars (you decide, 2-5 million) and want to retire at age 60. I'm wondering how you would structure retirement strategies WITHOUT social security or a pension. I work among a number of educators internationally (I also am an international educator) who are Americans but do not have access to traditional savings vehicles but do have access to a brokerage account they use as their main retirement "bucket." Many of these teachers will accrue the 40 quarter credits, but they will have very little social security income, if any. Curious to see how you would approach a situation like this.
It would be super helpful to show the impact of their RMD for how much money is coming in because of that in comparison to their projected expenses are they over because of it?
James, I purchased your client version of your Right Capital software. It is great. Unfortunately the assumptions you have set for trying different things to improve chance of success such as the guardrail assumptions and asset allocation for moderate or aggressive portfolios are hidden. Can you expose them, enable the report generation which contains them, or document them on your university page? Thanks!
Please do an episode just on medical, ie why this couple would not buy a LTC policy , LTC /life hybrid v self insuring?
I would love for you to address how much to actually spend in retirement. What would be a good goal for age 95?
If you used any kind of annuity, you probably would have reached a 90+% chance of success. Either a FIA with a buffer income strategy (taking 10 years of income at a time) or a guaranteed income annuity for essential expenses would basically eliminate their sequence of returns risk. They would probably have a lower portfolio value, but a lot more predictable income. It would potentially require more tax planning, but I think it would have helped this plan.
Hi James, where is the link to the tax cheat sheet pdf file you mentioned at 27:00? Thanks.
Find it here! rootfinancialpartners.com/important-numbers
@RootFP No mention of the "Rule of 55" to gain early access to retirement accounts such as 401(k)?
My mind is blown. I consider myself very educated for a layman and I had no idea this Rule of 55 existed!🤯
Nice video James. Only issue I have with this is that from 55-66, the income assumes or shows not ordinary dividend/interest (and possibly capital gain) income. At their level, I would think it is $25k-$100k. Any comment?
he said they were in tech stocks which typically don't pay much of a dividend.
my question exactly. how do they not have any DIV or INT to claim at the end of the year that would eat into their Std Deduction and 10% bracket? are they tax loss harvesting to keep income at 0?
Seems like “core monthly expenses” MUST include healthcare and taxes. How can you survive without both?
Like it! :)
If you have both a traditional 401k and a Roth 401k with separate balances. Can you rule of 55 keep just the traditional 401k with the employer and withdrawal, and take the Roth 401k and roll it into an Roth IRA? I know you have to keep it at your employer, but if I'm not withdrawing from Roth 401k can I roll that out and just withdraw from the normal traditional 401k kept at my employer? Anyone know?
Retired on my 55th birthday. It takes focus at age 45 to get this done in 10 years. I have 2 girls.
Quite surprising that with $5M only 60% chance to make it. Even with 0 growth forever and no SS they could 100k/year for 50 years (yes super-simplified). I’d say the model being utilized has some way too conservative assumptions.
Yup. To increase AUM which means more fees!!
I don’t understand that IRA over conversion concept. Seems the more one conveys to a Roth the better. How can it end up costing millions to convert? Either way the gains will be there but doing it sooner while it’s a lower amount should be less taxes than later when it’s a larger amount, plus the fact that taxes are currently as low as they are going to get and will likely be much higher in the future. I’m not sure what I’m missing here.
Never seen a video assuming social security and Medicare aren’t around (which is my base case).
Does anyone know of a creator that does similar content but for Canada?
This is fantastic
Noticed from my parents once they hit mid 70s, they started spending a lot less per mo.
The fear you have of social security viability is interesting despite that its track record is perfect. unlike dividends, bonds, stock market, or... anything else I can think of. Add to that, the revolt that would transpire if it was substantially reduced. There's a reason social security and Medicare are a " third rail."
It’s posted on the social security website that they will be unable to cover all of the promised payments by 2030-2034 unless there are changes made. Increased taxes, reduced entitlement spending, or money printing. Either way, he is right to mention it because if you do get your full amount, the dollars you are getting are going to be worth a lot less relative to your expenses because our politicians are too scared to raise taxes or cut entitlements.
www.ssa.gov/policy/trust-funds-summary.html#:~:text=The%20Trustees%20will%20continue%20to,3.42%20percent%20reported%20last%20year.
This came out 4 days ago. I turned 55 4 years ago. This is problematic for me.
BTW, 6:10 $15k per year for travel isn't much. While working, taking 5 weeks of vacation annually, we easily spend $25k a year. Heck, we spent $19k on ski trips alone winter 2022-2023.
6:30 fixed it with "Extra Travel".
My goal is to retire early, not as early as 55 but a few years after. When assessing my retirement portfolio to determine if I am on track, I have only assessed it as an individual even though I have a lifelong partner. My partner is getting ready to retire and they have positioned themselves to retire early, is my approach a conservative approach knowing that there is another household member or is there something I am overlooking that is giving me a false sense that I am able to retire early? Both of us have only performed retirement assessments as individuals…never as a household. Does that make sense?
no
Calculate it both ways.
A Lifeling partner is NOT a spouse and you could find yourself threading water should said partner leave or pass.
Consider Wills and Life Insurance if necessary.
The projected health care costs for a 55 year old couple with Gold Standard seems rather high.
In your example, the couple currently has over $1million in a taxable account. If I understand you correctly, you explain that they can "fill up" to the 10% tax threshold by converting a portion of their 401ks to a non-taxable account like a Roth IRA during their first several years of retirement. Isn't it more likely than not that the taxable account will generate $22k in interest and dividends income on its own in a tax year? Wouldn't this make the "fill up" impossible (for the 10% threshold)?
great observation....also, withdrawing money from the taxable account is going to cause a taxable event which doesn't appear to be modeled. sloppy.
He mentioned that their standard deduction should cover the qualified dividends and interest. That leaves the 0-10% Tax threshold available for the conversions.
Also, please explain why you wouldn’t fund a Roth IRA or Roth 401k while working v just funding IRA , regular 401 and later doing conversions to Roth?
They are high income earners paying high taxes now.
Is this analysis assuming they never run out of money? How does this planning change if they want to “die with zero”?
Aiming for Zero is foolish.
We don't know what the market will do and we don't know how long we have left
@@timsans1170 It’s not literally zero. I’m asking about the concepts Bill Perkins explores in his book Die with Zero. His idea is that people can get the most from their money by using it strategically instead of delaying spending to retirement or building up a legacy. For example, the average age of recipients of inheritances is around 60. That money could have been more impactful when they were 25 or 30. Your health is often better in the years before retirement, so it might make sense to travel more before retirement, when your health and mobility is greater.
This was one of the best videos I've seen from James. But I am confused about one thing. I probably missed it, and James probably took it into account, but I didn't hear about taking a 10% penalty from withdrawing from IRA/401K/403B/ROTH prior to age 59.5? Unless the example couple's joint account was all in cash? And if so seems like you would want to have that money aggressively invested. And I'm hoping for a Republican congress where our tax situation stays where it is and no sunset!
You can always remove your principal from a Roth with no penalty. Also many 401k plans allow for rule of 55 withdrawals. There are certain rules but generally you can access your 401k at 55.
19:04 this example makes no sense to me. Why in the world would a fresh retiree take so little from their nest egg while in the youngest, most healthy years of their retirement?
Shouldn't we assume they're taking much more from their brokerage or something while they wait for SS to kick in?
I absolutely HATE how their $1M+ of home equity is given absolutely no consideration and no mention in the analysis. My mom sold her home to move into a senior community and can live off the proceeds for 10 years. My inlaws downsized to a townhome that cost half as much as their old home. Other people take out reverse mortgages. For most people, their home is by far their most valuable asset. When Conole excludes that from the assets to draw upon later in life, he does his clients a huge disservice. Instead of a 60% success rate, Matthew and Sarah should have a near 100% success rate if some or all of their home equity can be tapped.
I agree with you, to many people home equity is one of the most important assets after retirement.
One thing that a lot of those videos keep getting wrong is the first of healthcare. A good silver ACA plan is around 100 dollars a month. In the original scenario the couple loves of cash/pay tax money while waiting for social security. That means they will qualify for 100% subsidy. But he still estimates about 1000 dollars a month for healthcare. That's extra 22000 a year compared to what they actually will be paying.
They may not quite get 100% subsidy because they will have some income at least from DIV/INT and capital gain if they have to sell stocks, plus whatever $ they convert to Roth IRA
Also, the estimate includes potential health related costs like deductibles/copays and other out of pocket health related expenses. It's not just the premiums you need to anticipate
Additionally, the extra health insurance costs by converting to Roth will be outweighed by the tax savings they will eventually benefit from in their RMD years.
Maybe you can come up with more realistic scenarios that are not limited to the top 2% of the population?
Maybe you can just divide to make it appropriate for you
I agree to an extent but the reality is that they’re the only ones that can afford to retire at 55. And Tim has a good point as well for the income piece. For healthcare you’re sort of back to why only top percentage of wealth can afford to retire so early. Some FIRE people do it in much less but there are other content providers for that and it’s risky to have no insurance or hyper high deductible bare bones coverage
I don’t get why their housing and health care is separate from their 7500 monthly expenses. Doesn’t make sense.
My assumption was home would be paid off so no mortgage. Not sure why exclude healthcare though
Different increase rates. Healthcare has jumped by an average of 5%, other by average of 3%. Also healthcare will change at 65 with Medicare.
Is it only possible to retire early if you're working at a tech company or CEO?
I wish these financial people analyzed realistic scenarios. This is a 1% problem that can’t genuinely translate to the rest of us.
Boy would be nice to have those problems. Going to have to work till they slam the lid.
Start watching Dave Ramsey
So how much money exactly do 2 people without children need to have when they die?
Or are they also going to live to be 150yrs old?
Isn't that subjective?
Do you want to leave a legacy?
Do you want to die penniless?
Depends on the people. I would like to have enough that it generates enough to live forever. That level of security is what defines “enough” for many.
Imagine going from grossing $30k a month to spending $7.5k a month…
There are many income focused funds they could invest in. Even with just 2 million in these they could make 200k+ per year in income and then let the rest grow and continue accumulating.
What are some examples of IFF?
So $7,500 was just the core expense per month and not the total expense per month? What's the total expense per month? $7,500 a month, with a 5 million dollar portfolio, is just 1.8% per year. $8,500 per month works out to 2% a year. This is way short of the 4% rule which has lasted 30 years given the worst moments in history. The 60% success rate is puzzling me. I guess their travel is the issue. $25,000 every 3 years. That's a lot of money to have some temporary fun with. To each their own I guess. I, personally, could find much more substantial joy for far less money. We're as rich as our wants are small.
All the numbers go out the window when you retire outside of the USA
importint
If you are living in a house, then don't add that towards retirement. It is in essence a liability and not investment. Investment of 2M is not enough to retire. That equates to 80K at 4%. I would advise Matthew and Sarah to accumulate another 1M (at least) before they should retire (especially now with inflation out of control).
If they don’t have kids, it absolutely should be enough. They have over $2.5 M and will get Social Security at some point as well. Also, people can always adjust their expenses. Also, just growth on their assets might currently be almost that extra $1 M. However, each person should do what’s comfortable to them.
Agreed.
Unless of course if they downsize
Have you looked at the long term chart of the S&P 500? If that looks normal to you, then sure...go ahead and retire at 55. Apparently the modeling software doesn't consider a starting point where the markets had previously risen so precipitously. There are about three prior points in history it could use.
Actually all planning software do account for volatile markets. What you are suggesting is what happens if someone retires right before a volatile market… the redemption %
Is 55 early?
Is to late 😂
Mont Carlo on probability simulation is not convincing. If 4 million does not guarantee a 90-100% retirement, most of Americans would go broke. The rest of the video has pretty good analysis.
DINKS
I’m a SITKCOM… single income, two kids, oppressive mortgage.
Speaking from personal experience or obsevation?
Hey, here's how you win a marathon. Or go do it and get back to us.
it is raining outside..
Wow sell the house today and move to a lower cost region and retire at 50.