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Retirement Answers is a podcast built to help you succeed in retirement. The thought of retirement can be overwhelming and downright scary for many... but it doesn't have to be!
The goal of this podcast is to provide thoughtful insights and strategies to give you the confidence you need to retire successfully. At the end of the day, my ultimate goal for my clients and podcast listeners is to live a fulfilling retirement.
Follow along as I publish a new episode each week covering everything from retirement income planning, tax planning, Social Security, insurance planning, investing, and much more.
Here's to learning everything you need to know to live out your dream retirement!
If you're wanting to retire before age 65, then this episode is for you, because early retirement can definitely be an incredible opportunity. You can start enjoying the life you've always dreamed of. But retiring before 65 also throws a few different wrinkles and factors into the equation that you have to be paying attention to. And the difference between doing those things correctly and knowing what to look for as you go into retirement, especially before 65, is going to be important. So today, we're gonna walk through five different questions that I think that you need to be able to answer before you retire at 65.
Jacob:But before we jump in, my name is Jacob Duke. I'm a certified financial planner. I'm the host here of the Retirement Answers podcast and also the founder of a retirement planning firm where we help people just like you plan smarter and retire better. So as I go through these five things, I also wanted to let you know on the front end that I've created a checklist that you can go through yourself and say yes or no, or I have not done that or I haven't thought about that. That way you can get a good assessment of your retirement readiness if you are thinking about retiring before 65.
Jacob:So if you want a copy of that checklist, it's completely free. All you have to do is click the link down in the description below and grab yours and test yourself and see where you stand in relation to your ability to retire pre 65 and what all you might be missing that you might want to pay attention to. Alright, the first thing that's probably on everyone's mind as it comes to retirement before 65 is going to be the health insurance piece. This is always the hardest part. It's actually what causes people to delay their retirement and push it to beyond 65 so that they know that they're going to be eligible for Medicare.
Jacob:Now, here's what I'll say. It seems scarier most of the time than it really is, but it doesn't mean that it's not going to be costly. So whenever people think about retiring before 65, they're thinking, well, am I gonna have any good insurance because Medicare is great. And then there's this, you know, private, you know, open market insurance I have to go get and that is bad insurance. It doesn't mean there's bad insurance at all.
Jacob:Really, the issue comes down to how much you're going to be paying for that insurance and whether or not you do qualify for subsidies. So this is the question that blindsides a lot of people early in retirement, more than anything else, because once you leave work at 65, you're gonna be on your own. You don't have an employer plan anymore, there's no Medicare yet, and the Affordable Care Act Marketplace, it becomes really the option that you can go with. Now, the tricky part again, is that your premiums, they're directly tied to your income, your modified adjusted gross income, not how much money you have. So that's important to understand because you can have $5,000,000 and pay minimal premiums on your health insurance because the premium determination and whether or not you qualify for subsidies, again, goes back to your income, not how much money you have.
Jacob:This means that where you decide to take money from in retirement, which accounts you're going to be using, whether or not you take Social Security yet, all of those are big decisions because the source of your funds, that determines the taxability of them. And if you're thinking about maybe doing Roth conversions because you've got $3,000,000 in a tax deferred account, you've got a way out and decide for yourself, hey, does it make sense to do these Roth conversions before 65? And also, I'm going to be paying these higher premiums because I would not qualify for subsidies anymore. That's a big decision you've got to kind of think about and do some math on to say, hey, maybe I should still do the Roth conversions and give up the subsidies because the benefit long term is way better on the Roth conversion side. Or maybe for you the Roth conversions, they're not as beneficial as other people.
Jacob:And so you might want to try to get those subsidies rather than do those conversions pre '65. So there's a lot of different layers here to this decision process of what to do pre '65. And do I have the option to reduce my income by, you know, taking money from a different account type? But here's the real kicker in all of this. Up until 2025, this year, this is the last year that you will have these additional or enhanced subsidies before you actually go back to the cliff system, the subsidy cliff that we have been used to.
Jacob:So there's been since COVID 2020 through 2025, there's been a more lenient and less like hard cliff that you have to pay attention to when it comes to your income and whether or not you do qualify for subsidies or not. Now that we're going into 2026, that cliff is going to return meaning as soon as you go $1 over those different levels, you would go into the next bracket all the way up to if you're 400% of the poverty line, depending on how many people you have in your household and things like that, your specific bracket for your ACA subsidies, those are cliffs. As soon as you go $1 over, you could go from $500 or $600 a month in a premium all the way up to $1,600 just because of $1 of extra income. So this is very important to pay attention to, especially heading into 2026, if you are 65 and need health insurance through the marketplace. So that's the first thing is do you have a plan for your health insurance?
Jacob:Do you understand the costs that are associated with it? Do you understand all the different things you got to pay attention to around your income and the source of your income and whether or not you're going to take your Social Security yet or not, or which accounts you're going to pull from? All of that is going to be important. So that's number one, do you have a plan for your health insurance? Number two is, are you confident that your portfolio can support you from a distribution rate standpoint, until you get to Social Security or whenever you decide to turn that on?
Jacob:And this is where retirement really gets interesting, because if you retire at 60 or 62, and you're not taking Social Security yet, your portfolio is going to be carrying the full load of your income on a monthly basis. That's the only place to get it from assuming you don't have a pension, and again, you're not yet taking Social Security. So your portfolio is your source of income. So the question is, is can your investment account support the withdrawals that you need in that first two or three or four or five years without dipping into those accounts too quickly, and as a byproduct, reducing how much money you truly have left over? Now, here's the thing.
Jacob:There's different scenarios here because you have to pay attention to what happens not only in a good market or an average market, but also in a bad market. And this is where sequence of return risk can really show up, especially in those first five years of retirement. If the market drops out pretty dramatically, you know, in those pre sixty five years, you're still going to be relying on your portfolio for most or all of your income. But the key is now you're taking the same amount of money from a smaller dollar amount. So your distribution rate, the percentage of withdrawal is actually increasing very quickly because of that decrease in the value of your accounts.
Jacob:And here's the thing, that particular sequence of return risk, that period of time early in retirement, those first few years, those are so important because if done incorrectly or having to take too much out of the portfolio, it can permanently damage your long term retirement outlook. So the sequence of return risk that we always talk about that matters the most and probably the first five years of retirement. Once you get past that, especially if you're going to be taking Social Security, it becomes less of a problem. And you don't have to worry about as much from a retirement success and never hang out a money standpoint, you've got to pay attention to it in those first few years. So you've got to understand what your distribution rate will be from the time that you retire until you get to Social Security claiming.
Jacob:What happens if you have that recession in year one or two? What's your game plan for that? Do you have enough cash on the sidelines? Or do you have your buckets built out? I talk about buckets all the time and how I always want have a five year runway of cash and or fixed income type investments that are more conservative to pull on that are also generating interest during that period of time.
Jacob:And then also to what are your plans if you're going to adjust anything if returns are not going well or if markets not performing very well, do you have a plan for that? So you're not just asking, you know, do you have enough to retire? You're asking, can my money, can my portfolio handle a rough patch in my early years? If the answer is no, you might want to think about how to mitigate that risk, but then also say, do I need to keep working a little bit longer? If the answer is yes, wonderful.
Jacob:You need to stress test your portfolio to understand what it can withstand. In this first few years, these early stages of retirement, this is where retirement is either made or broken, right? This is the critical component to this whole thing. Because again, if you get it wrong at the beginning, it messes up the rest of the plan long term as well. The third thing that I want you to think about or consider is, is what will your taxable income look like between retirement and 65?
Jacob:Because there's a lot of things that you could be planning for, especially around tax planning. And here's why this is so important. If you retire early, you're gonna be entering one of the most powerful tax planning windows of your life. This is where you can reduce your future RMDs. You can do Roth conversion strategically to accomplish that goal of reducing those RMDs.
Jacob:You can realize capital gains at that 0% long term capital gain rate that I often talk about through tax gain harvesting. Maybe you have to manage your Affordable Care Act premiums like I talked about earlier. And also too, you can find ways now to help reduce any potential Irma penalties you might encounter later on. So you've got to plan for it, but you've got to do it correctly. And most retirees just end up not using this early retirement period as well as they otherwise could.
Jacob:They take money from the wrong accounts at the wrong times, they, you know, convert too much from Roth and end up blowing up all of their ACA subsidies that they were trying to get. So they converted too much, now their income's too high, or maybe they convert too little and end up paying crazy taxes later on down the road, or maybe they just didn't analyze it correctly. And so they're avoiding the conversions because they want to save $300 a month on a premium. But if they had done the conversions, it'd save them hundreds of thousands of dollars over the rest of their life, especially once those RMDs kick in, and those RMDs would have been reduced. So once you're in this early retirement stage, especially pre 65, every dollar of income it's gonna matter, especially where it's coming from and your income tax associated with it.
Jacob:So the question then becomes, what income range should you be trying to stay within? Again, this goes back to everything from health insurance and ACA subsidies and the premiums there, as well as what tax rate you would pay on Roth conversions, what opportunities you should take on the tax gain harvesting side of things. There's so many different things to evaluate and this way you have to know what your income will look like, especially in this early retirement phase. The fourth thing that I already hit on just a little bit is what if the market drops by 20 or 30 or 40% early on a retirement, you've got to stress test the portfolio to know that you can withstand the sequence of return risk, Because let's be honest here, if a recession is going to happen, it's not going to ask you if you just retired before it hits. So whether or not you timed it perfectly or not, recessions will happen when they do.
Jacob:But the question is, is does your plan survive that volatility early on? Do you have your portfolio set up correctly to withstand that and then come out the other side even better? So this means in my mind, I want you to have two to five years of what I call safe money, that first bucket and second bucket, the cash and the bonds, everything else is allowed to be in equities beyond that. Do you have a clear withdrawal strategy during that downturn? Maybe it means you need some flexibility in your spending.
Jacob:Maybe you don't want to plan your income around, hey, I need $8,000 a month, and that's like bare minimum, and that's all I'm going to spend. You might want to have two different numbers here. I often talk about having a spending range or a distribution rate range, and say, hey, I can, as a bare minimum, can live on $4,000 a month, right? But I enjoy spending 8 to 10. That's typically what I spend monthly, that's just normal life without having to cut too much out.
Jacob:So you can start to develop the spending range from between 4 and $8,000 or 4 and $10,000 If you're operating within that, then you're in a good spot. So maybe you would, you know, plan for, hey, let's spend $8,000 every single month. That's what we're building our plan around. But to have the flexibility in your spending, especially if that market drop happens here in the first few years of retirement, to go down in your spending and cut out different things that are discretionary or not going the extra vacation if you don't really have to or not doing that home remodel you've been dreaming of. Yes, we want to do that one day for sure, but maybe now's not going to be the right time.
Jacob:So having the flexibility around how you how you spend and when you can spend is going to be important because how you react when markets are not going well and your ability to reduce that pain is going to be so crucial. So if your plan only works whenever the market is up or actually stays the exact same, you might not be ready to retire. You've got to think about what happens kind of in worst case scenario and plan for that, not the best case scenario. And the fifth thing that you should be asking yourself is what are you retiring to? Not just what you're retiring from.
Jacob:Now, this might be the most important of them all, because even if you've got all the money stuff dialed in, the numbers work, the data and the planning, it all ran perfectly, you've got 100% chance of success. Although I don't really like to see 100% chance of success. Let's say that everything's perfect, right? And you get there and you've been working your entire life, you've been saving and grinding and doing the whole thing. You get to this thing called retirement and now you're miserable.
Jacob:Why? Because you don't have a plan. You don't know what you're doing every day. You don't know what the future holds. You don't have a mission to accomplish.
Jacob:You're not driven anymore. There's no goal to go achieve. So what I don't want you to do here is get into that phase of I retired, now what? I want you to have that figured out before you retire. So understand and write down a part of your plan.
Jacob:What are you retiring to? Because retirement's not just a math problem, it's not just figuring out the numbers, it's really like a personal shift. You're moving from work, from structure, from purpose and socialization and mental engagement, and a reason to really get out of bed and go do something. But then when you retire, technically that's going away and life could get very empty or boring or unfulfilling very quickly. So you've got to ask yourself, what are you gonna be doing every day?
Jacob:Who are you gonna see regularly? What gives you meaning? What projects or goals matter to you now? What are you gonna go accomplish? What rhythms support your physical and mental and spiritual health?
Jacob:All these different questions are important because people don't fall apart in retirement because of money most of the time, they really don't. And I can say that after helping over 100 people retire is that the money is typically yes, it's a big part of the equation. But what is most unsatisfactory is not how much money they do or don't have. It falls apart because they lose a sense of purpose or fulfillment. And especially if you're retiring before 65 and retiring early, you're gonna be retiring, you know, long before many of your peers, and you've got to have this dialed in even more, you've got to be that much more focused on what you're gonna be doing because you've got a lot of time ahead of you, but then also probably your health is in a great condition, you're in the probably the best health you'll ever be in.
Jacob:So now's your time to go and do and figure that out, but you have a plan for it, so you don't just wake up one day and say now what? I want you to know the answer to now what before you even get there. So as we close out here, remember, we've got that checklist, I want you to go check that out, it could be helpful for you terms of your early retirement readiness. You can go download it and do that yourself and then shoot me any questions if you have any, or if you'd like any help analyzing your situation. But hopefully this gives you a good perspective of what you should be paying attention to.
Jacob:Obviously, there's a lot of other things not covered here today in this episode, but These are some of the main things that the early retiree crowd might want to be looking at. Thanks so much for tuning in. We will see you again next week. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only.
Jacob:Thanks for tuning into this week's episode. I look forward to talking with you again next week.