We’re here to talk about early retirement planning tips and here’s what we’ve seen going on. So many big companies are allowing people to retire early. They’re giving them a package. They’re offering them some type of advanced pension benefits, maybe giving them an extra two or three years.
First we’re going to talk about planning for that possible early retirement. With the pandemic, a lot of people are reexamining their workplace priorities. A lot of people that said, “Hey, I’m going to work till 65 or 67” are saying, “You know what? I think I’ve saved enough money. Maybe I will retire early.” And a lot of times that’s a discussion. If you have a spouse or partner, you’re thinking about that with them. Maybe one person can retire early and the other person needs to keep working.
These examples are some of the things that we have seen happen and the conversations we’re having with our clients. And also the conversations that we’re having with people that aren’t clients that are just call up or calling in from our TV program, and wanting to know what should they do.
Again, the idea here is to give you a little bit of a self-assessment of where you’re at and help you write down possibly the things that you need to plan for. And then maybe the most important is to give you confidence. One of the things that wrecks an early retirement faster than anything or wrecks any retirement, quite frankly, is that fear, that unknown, that sort of obsession of knowing that you may run out of money, knowing that you may have issues.
Things to consider before retiring early
Maybe you haven’t saved enough for healthcare. That unknown can cause all kinds of anxiety. And quite frankly, when you retire you’ve worked for 20, 30, 40 years, most likely 40 years, you deserve to be rewarded for the sacrifices you’ve made. So let’s hit a few points here very quickly:
- Can you even retire?
- If you can retire, are you able to plan for an early retirement?
- Have you had the opportunity to save a little bit extra?
And some of the impediments to that, some of the things that hold you back from being able to do that is, quite frankly, maybe putting kids through school.
Maybe you’ve borrowed money or you’ve sacrificed putting kids through school. Maybe you have reduced the contributions to your 401(k). And so we’ve got to do kind of a quick check on, “Hey, what does that look like now?” You might have done a financial plan in your 40s, but they never stay perfect. It’s just a roadmap and so you want to do an assessment. So first question I want you to think about and maybe we can help you answer, or at least give you some of the questions to ask is can you plan for only retirement?
And if you do decide you actually want to retire early, then what exactly do you need to do? So what are some of the things that you need to make sure are in place? And let me just back up a minute before I get into these particular items that I want to talk about is maybe you just want to be in the position where you retire from your main job, but you work somewhere else because you want to work part-time.
I can think of a client who’s an engineer and felt like the company had changed after working there for 35 years, he had done a great job saving money. He loved carpentry. He loved building things. He loved remodeling his own house. He retired and went to work for Home Depot. Again, not because he had to. He wanted to do something to keep busy, but he also wanted to work in an area where he really had an interest there.
What are your expenses going to be?
Now, one of the first things you’ve got to ask is what are your expenses going to be? What is your budget? And quite frankly, I don’t like budgets. I don’t like to look at a piece of paper and say, “I can or can’t spend money.”
But when you get into retirement or you get close to retirement, this is one of the things that you need to really look at is what are your expenses? And you don’t have to have them down to the penny here, but you really need to know the major expenses: food, gas, rent if you’re renting a place. We’re seeing a lot of clients now that want to rent instead of own their homes. If you do own the home, what are the taxes? What are the upkeep? What about travel? The big expenses. I wouldn’t worry about the small things, maybe 50 or $100 a month, but what are the big ones? What are the ones that are going to get that retirement budget or impact it significantly? And you want to kind of get a ballpark. It’s going to change. I promise you, it’s going to change a little bit. That first year of retirement, you’re either spending a lot more or a lot less than you planned to, but get a ballpark. Let’s say in your case you want $10,000 a month to retire and to do all the things you want to do. We can work off of that. A good financial advisor can build off of that. So again, you don’t have to be to the penny. You don’t have to come in and say, “I need $9,281.27 every month.” You don’t need that. But to get that ballpark, 9,000, $10,000 a month, then somebody can help you start building a plan.
Pick a retirement date
Pick a retirement date, get an analysis done and ask yourself, “Am I behind with what I’m going to get in guaranteed income, Social Security, possible pension benefits with what I’ve saved?” Assuming a reasonable rate of return. If I want to retire in let’s say the year 2025, “Am I going to be able to do that? Am I behind?” And the only way to do that is with a good software program. I guess you could do it manually, but who wants to do that these days? With a good software program, you can look at projections on rate of return. How much can you pull off your investments every month? And then of course, you’ve got to factor in inflation and that’ll give you an idea of if you are behind or not. Now, what do you do right now? And this is the one of the most important question that you can answer for yourself. You only have control over certain things. You really don’t have a lot of control over what inflation’s going to be. You don’t have a lot of control over the folks down in Washington, D.C. or even in your state legislature and what they’re going to decide. You have influence by voting, but you don’t have control.
Focus on what you can control
So you’ve got to focus on the things you can control. And what I like to do is pull these longterm projections into the short-term. What can you do right now in 2022? And I could say a few of the important things you can do is get a financial projection, get a financial projection with different scenarios. What if you retire at the end of this year? What if you retire in 2025? What if you work until 2030? What if you’re already retired? What is that retirement going to look like? You’ve got to get a feel for if you’re going to be okay if you’re not going to run out of money or if you’re short, what is your strategy for that.
Taxes are a big deal. As we sit here right now looking forward for high income earners, for people that make over $250,000 a year, over $400,000 a year. Whether that’s from earned income or from investments, taxes are going up. Is there a guarantee that taxes are going up? Well, in my business, I’m not supposed to say guarantee. But if I was a betting person, taxes are going up. I’m planning for my taxes to go up in the future. So what can you do today to reduce those taxes? And sometimes it’s not just reducing taxes in this given year. Sometimes it’s reducing taxes over your lifetime, which means you might pay more in taxes today to reduce your taxes over your lifetime.
Last year, I did a big Roth conversion, which means I’m going to pay taxes this year based on last year’s Roth conversion. And it’s going to cause me to pay higher taxes than I would’ve had to in the year 2021. But what that means is over the course of my lifetime, I’m going to pay less in taxes. So that’s a big, big thing is what about taxes and then, of course, risk. Now, here’s a big problem. A lot of people they do these financial projections. They realize that they’re behind the eight-ball. They realize maybe they haven’t saved enough money or maybe they need a little bit higher of a rate of return and they say, “I haven’t saved enough. I wanted to retire in two years. So I have two choices. I can either work longer or I can take more risk with my investments.”
Be mindful of how much risk you are taking
Be very, very careful here. I would advise against taking more risk in your portfolio. The longterm rate return in the stock market or in the bond market is pretty much what it is. We don’t know what it’s going to be this year or next year. We don’t know if the market’s going to be up or down this year or next year. But when you look at any 20-year period, we know that over time, statistically, the market has gone up. 30-year period, the market has gone up. There’s this longterm rate of return on average that we can plan for into the future.
And here’s why it’s important that we don’t care about what this year or next year is going to be like because your retirement’s probably going to last for 30 years or 40 years if you’re in decent health and if you’re married. I’m married to Wendy and I’m 60-years-old. If I retire in five years, I don’t plan to, I like what I do. But if I retire in five years, that’s age 65, I need to plan for a 30- year-plus retirement based on what’s happening in healthcare right now.
And if I plan on a 30-year-plus retirement, I should not care what’s going to happen in the market in the short-term. Let’s say, I’m not ready. Let’s say I do all these calculate that I’m telling you about. And I find out, “You know what? I can’t retire at age 65. I really need to work for a couple more years based on a reasonable rate of return of say six or 7%.”
What I should not do under any circumstances is say, “Well, I still want to retire at 65 assuming a 6% rate of return, I have to work a couple years later. Let’s roll the dice. Let’s be more aggressive. Let’s go for that 9, 10% rate of return.” Don’t do that. The market will sooner or later if you take that approach, catch you at the wrong time. The timing will be messed up. You will take a big downturn. You’ll end up being years behind. You’ll have regret. You’ll have anxiety. If it’s again, my household, Wendy doesn’t pay a lot of attention to the investments. She just wants to know have we lost money? And I have to go to her and say, “Well, honey, the market’s down 30%. Now, we need to take even more risk to get back to breakeven. Now, I need to work longer.” She does not want to hear that.
Don’t just jump to take more risk. Count on your spends, performing at a long-term rate of return average, which the market has performed at, whether it’s stocks, whether it’s bonds, whether it’s CDs, whether it’s fixed annuities, whatever you’re going to use and make sure that you don’t take unreasonable risk. Most of you because you’re watching this have done a good job saving in retirement. Some of you haven’t, but a lot of have. You don’t need to take that extra risk.
If you are behind in retirement planning
Now, if you’re behind the eight-ball, get with a good financial advisor that could do some projections and come up with a plan. Confidence develops when you have a plan. This is so critical. You will get confidence if you have a plan, it’ll help you stick with it. When you watch the news and it seems like the world’s going to end because, remember the news pedals crisis. When the market’s down, when maybe you get some bad news at work, maybe you don’t get that promotion. Or maybe you end up doing something you don’t want to do because they reassign your job or something like that. Having a financial plan will help you in that area. Having a financial plan will let you stick with it when it doesn’t feel like you should. So again, we’ve talked about a few things here. Planning for early retirement. Can you do that? Are you planning for early retirement?
What about your expenses? Let’s make sure that your budget is in line with what your expectations are. Once you get the expenses, then you can find out are you behind or are you going to be okay? What rate of return do you need on your investments to be okay? What do you do now in 2022? Because again, there are only a few things that you could control. What about taxes? How do we reduce taxes? Not just this year, but over your lifetime, which may mean paying more taxes this year so you can reduce taxes over your lifetime and watch out for risk. Do not under any circumstances take more risk because you’re behind the eight-ball. Reset your priorities. Maybe look at your expenses, but don’t take more risk.
