At REAP Financial, we see many clients with questions like this: how can you retire early, successfully, with a certain amount saved? There is a lot of confusion about which numbers indicate that you can retire early successfully. From the total amount saved, the withdrawal rate, inflation rate, and more, there are lots of factors to consider. However, the real driver of whether you can retire early successfully is none of these things! It’s one you likely don’t even suspect.
Imagine, you’re 58 years old and you have $1.4 million saved up. But, can you retire early? Many people come to the table with a number in their mind when planning for early retirement, representing the minimum amount they need to live out their ideal retirement. This drives people to constantly question, ‘how can I retire early?’ ‘do I have enough money’, ‘has all of my effort of saving for early retirement been enough’?
Spoiler! When retiring early, saving alone is not the answer! In this article, we’ll walk you through how we coach families towards retirement to achieve true success and offer a plan with ways to retire early with confidence, using an example. Watch the video below or keep reading if that interests you!
Presentation on How to Retire Early
Our Example Case Study
In this case study, we’ll follow a family who wants to maintain their lifestyle in retirement. They’ve done a great job saving and they’re considering retirement early, at 58 years old. How do you retire early? Can this family pull it off? With a living plan that grows and changes as they do, tracking their progress and future outlook. By cultivating a forward-thinking perspective, you can keep tabs on everything, take control of your finances, and retire early with confidence!
This case study couple wants to retire at the end of the year, with a current combined income of $150,000. To figure out what position their money is in to meet this goal, we analyze several things, starting with Social Security benefits. For Social Security benefits, it’s important to consider when you’ll start taking them. We encourage you to consider Social Security alongside your other accounts, so you see how it works alongside your other accounts, such as 401Ks and brokerage accounts. REAP Financial helps you walk through these questions and decide when is optimal to start collecting those benefits.
Then, we’ll look at your assets. This includes cash, brokerage accounts, retirement accounts, real estate, and more. It’s important to look at these in detail, since they’re all taxed differently. If you can plan to pull optimally from your assets, you’ll avoid higher taxes and have more money in retirement. Then, we’ll look at their risk portfolio. Our risk portfolio looks at your assets in terms of what is subject to loss. Once you get closer to retirement age, you want to consider moving towards a lower-risk position, so you can have financial security in retirement. Lowering your risk portfolio protects your retirement funds from swings in the market. We also do a tax analysis, which shows how your assets will be taxed and how diversified they are.
To see how this plays out year by year, we then break out your cash flows. This allows you to see your expenses, income, social security, assets, and more all in one place. It’s a great tool for long-term planning, since it’ll show you where you need extra planning. For example, our case study couple will not yet have access to Medicare when they retire, so they need to plan in spending for a health plan (roughly $700-800 a month per person). With this budget, we’ll set up projected yearly cash flow, accounting for inflation (assuming an average 3% inflation), and tracking the average return on your spendable assets (assuming a conservative 6% rate of return). When our case couple hits 67, they begin collecting Social Security, and we track that as well. It’s extremely helpful to see how your money works throughout the year, including a 2% cost of living adjustment on Social Security Benefits.
For our case study couple, they’re projected to exhaust their spendable assets in 2042, in their seventies. However, they still have significant home equity. This focuses on some future decision points, where they might need to downsize and sell to draw on their home equity later in retirement or get a line of credit on the house.
Our Case Study: The Verdict
At REAP financial, we want you to go into retirement with confidence and enough assets to live out your retirement to the fullest. For our case study couple, we would not recommend retirement at this time. Running out of spendable assets in their seventies, even if they pull money out of their house, they won’t have a stable cash flow into their later years with their current lifestyle and budget.
A lot of people feel success is dictated by the amount they’ve saved, the rate of return, or the rate of inflation. However, the most important number in your retirement plan is your budget. At the end of your working life, you’re likely not living on a budget, but when you no longer have that steady income monitoring your budget is crucial. If you plan your budget carefully, you can plan your cash flow, so that you never have to worry about running out of money.
The Most Important Part of Your Retirement Plan: the Budget
Let’s go back to our case study to think through how impactful your budget can be in retirement. In our example, the family started out with a budget of $9,500 per month at retirement age, and they’re projected to run out of spendable assets in 2042. However, if we take the same couple and reduce their starting monthly budget to $8,200, it’s a very different story. With this new budget, holding everything else equal, the family will not run out of spendable assets until 2049, when they are 84. This is a substantial improvement. However, it may still not be enough to guarantee their retirement funds will last their whole lives.
Today, in the United States, the average lifespan of a man is 88 years and of a woman in 92 years. When we’re modeling these scenarios, we want to make sure you have enough money to carry you through your whole lifespan. For this couple to retire with confidence to know they’ll have enough money to live comfortably in those later years and retire in 2024, we have to look at the budget again.
The same family can retire comfortably at 58 with a starting budget of $6,500. Holding everything else equal, with this budget, the couple can reach 100 years old without depleting their spendable assets. In fact, their portfolio grew for more time (since their withdrawal rate was lower), allowing them to keep equity in their home. This gives them more flexibility to use their home to finance care in the later years, such as a nursing home or long-term care facility, should it be necessary.
Consider Your Tax Bracket in Retirement & Diversify
Ultimately, your retirement success doesn’t hinge on the amount you save, it is most influenced by the amount you plan to spend. When you’re thinking through your budget, don’t forget to consider your tax bracket. This will impact your required distributions, which could pull more money out of your account. Maintaining a lower tax bracket helps to protect your assets in retirement. Having a well diversified portfolio, tax-diversified portfolio, allows you to withdraw your money strategically from different accounts to remain in a lower tax bracket and hold onto your well-earned dollars.
Roth conversion planning is also a powerful tool we recommend for many of our clients. It allows you to take money in your traditional Roth 401K or 401K and turn it into a Roth IRA, letting it grow and be dispersed tax-free. It also has no required minimum distribution, so you have more freedom there. Obviously, you’ll have to pay up at the time of conversion, but this can be a great tool to diversify your taxable assets. Having tax-free money in retirement is even more appealing now, when we expect taxes to increase over the coming years.
If Roth conversion works for your family, keep in mind the goal should be to convert enough over the years so that when you hit your required minimum distribution age, you’re not pushed into a higher tax bracket. If your requirement minimum distributions push you into a higher tax bracket, you end up paying more of your Social Security and other income back to the government.
It can also impact your Medicare premiums, since your Medicare premiums are dictated by your income. At REAP Financial, we can project out your anticipated Medicare premiums based on your retirement plan. If you’ve done a great job saving for retirement, you could be paying much higher Medicare premiums, based on your income bolstered by those minimum required distributions. This is why designing your retirement to keep your taxable income lower is so impactful. If you can keep more, you can spend more. If you can keep more, your money will last longer. It’s all in the planning! So, if you’re 58 with $1.4 million wanting to retire early, the most important number for you to look at is your budget.
Preparing for Retirement with REAP Financial
If you’re planning your retirement, there are a lot of things to think about. While the budget is a key number, there are many other tips and tricks we suggest. If you head to reapfinancial.com, you can download a free copy of our Ten Top Retirement Tips Guide.
The guide will show you the top ten tips we cover with our clients to make sure they can walk into retirement with confidence. If you want to do a more in-depth analysis, we do these at no-cost in 60 minutes for our viewers and readers.
If you’re approaching retirement, we recommend you take advantage of this! There are lots of nuances in retirement planning and the little tips and tricks can often make an enormous difference. You can request your free analysis on reapfinancial.com, retirement planners in Texas, by clicking the “Get in Touch” button at the top of the page and book a 1:1 appointment to walk through your retirement plan with one of our retirement advisors.
Whether you continue to work with REAP Financial or implement the recommendations of your consultation yourself, you’ll leave with a better sense of how to set yourself up for retirement success!