55 and Ready to Retire? You’ll Wish You Knew About This!
In this video I go through the options and levers available to you before you decide to retire at 55!
55 and Ready to Retire? You’ll Wish You Knew About This!
Are you 55 and feeling ready to retire? Before you take that big step, there are some crucial things you need to understand. Ignoring these often-overlooked aspects can lead to financial stress or even force you back to work. Let’s dive into a case study to explore your options and the levers available to you.
Meet Steve and Sally
Steve and Sally, both 55, came to me feeling ready to retire with over $3 million saved. Despite their diligent saving habits, they faced what I call “endless delayed gratification.” This occurs when lifelong savers struggle to adjust their habits and enjoy their retirement.
Financial Picture
Steve and Sally’s financial picture includes:
– $200,000 in cash (from a recent inheritance)
– $700,000 invested in individual stocks
– $1.9 million in pre-tax accounts (e.g., IRA, 401(k)s)
– $90,000 in a Roth IRA
– A $1.4 million home with a $270,000 mortgage
They plan to retire with $2.9 million in total investment assets and cash, with Social Security being their only other income source down the line.
Key Steps Before You Retire
Understanding Healthcare Costs
One major expense to consider is healthcare. Retiring before Medicare eligibility at 65 can result in high healthcare costs. Options include:
- Short-term health insurance**: Temporary coverage with limited benefits.
- Faith-based sharing programs**: Lower monthly contributions but not actual insurance.
- COBRA coverage**: Continued employer insurance, but expensive.
- Marketplace plans (Obamacare)**: Guaranteed coverage but based on modified adjusted gross income (MAGI).
Roth conversions and capital gains harvesting are popular strategies but can increase your MAGI and healthcare premiums significantly. For instance, if Steve and Sally’s MAGI increases from $90,000 to $150,000 due to a Roth conversion, their premiums could go up significantly.
Structuring Your Investments
Investing for early retirement differs from traditional retirement investing. Inflation is a silent killer, eroding purchasing power over time. A diversified portfolio, for example, including global markets, small caps, and emerging markets, can help spread risk and maintain purchasing power.
Steve and Sally need about 30% of their nest egg in conservative investments as a buffer for bear markets, ensuring they have 4-5 years of income during downturns. The remaining 70% can focus on growth to combat inflation.
Tax Efficiency
Tax efficiency is crucial. Placing conservative investments in taxable accounts and growth investments in retirement accounts can optimize withdrawals and minimize taxes. Steve and Sally, for example, can spend up to $135,000 from taxable accounts initially, preserving their pre-tax accounts for later.
Dynamic Withdrawal Strategy
A static 4% withdrawal rate may not be ideal for early retirees. Instead, a dynamic approach allows for adjustments based on market performance. If the market drops, reduce withdrawals; if it rises, take more income. This flexibility can help ensure your portfolio lasts through a 45-year retirement.
Steve and Sally, aiming to spend $11,000 per month, need to adjust withdrawals based on market conditions. For example, a 49% market drop might require a 3% reduction in income, while a 28% rise allows for increased withdrawals.
Conclusion
Retiring at 55 requires careful planning and flexibility. By understanding healthcare costs, structuring investments wisely, ensuring tax efficiency, and adopting a dynamic withdrawal strategy, you can maximize your chances of a successful early retirement. Remember, regular monitoring and adjustments are key to navigating your financial journey effectively.
For more detailed guidance tailored to your specific situation, consider consulting with a financial advisor. If you’d like to talk to me or someone on my team about your financial plan, click the link in the description.
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This does not constitute an investment recommendation. Investing involves risk. Past performance is no guarantee of future results. Consult your financial advisor for what is appropriate for you. Disclosures: https://onedegreeadvisors.com/solutions/#disclosures
