We're peeling back the layers of an early retirement to reveal how stepping away can actually result in paying fewer taxes over the course of your lifetime and having more dollars at the end of the day in certain situations!
But be careful - we'll discuss getting into the nitty-gritty of how those golden years can impact your Social Security benefits, especially if you haven't hit that magic number of 35 years in the workforce. It's a complex dance between maximizing your nest egg and ensuring you don't fall into common traps, such as healthcare costs before Medicare or penalties on early withdrawals from retirement accounts. Plus, we'll dissect the intricate interplay between Roth conversions and Medicare premiums – a crucial factor in your retirement choreography.
While our discussions are rich with educational content, remember that the roadmap to retirement is as unique as you are, so consulting a professional for your personalized plan is always the wisest route.!
Create Your Custom Early Retirement Strategy Here
Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients navigate the nuances of an early retirement.
PS: Before anyone decides to move forward with our services, I want to ensure we're the best fit to help you reach your goals and I personally have the first conversation with you.
We're peeling back the layers of an early retirement to reveal how stepping away can actually result in paying fewer taxes over the course of your lifetime and having more dollars at the end of the day in certain situations!
But be careful - we'll discuss getting into the nitty-gritty of how those golden years can impact your Social Security benefits, especially if you haven't hit that magic number of 35 years in the workforce. It's a complex dance between maximizing your nest egg and ensuring you don't fall into common traps, such as healthcare costs before Medicare or penalties on early withdrawals from retirement accounts. Plus, we'll dissect the intricate interplay between Roth conversions and Medicare premiums – a crucial factor in your retirement choreography.
While our discussions are rich with educational content, remember that the roadmap to retirement is as unique as you are, so consulting a professional for your personalized plan is always the wisest route.!
Create Your Custom Early Retirement Strategy Here
Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients navigate the nuances of an early retirement.
PS: Before anyone decides to move forward with our services, I want to ensure we're the best fit to help you reach your goals and I personally have the first conversation with you.
What if I told you it would make sense financially to no longer keep working, to pay less taxes? People go what aren't you just saying? What I'm saying is there are instances where it can actually make sense for your financial situation to stop working because you will pay less in taxes over the course of your lifetime. Now what you're wondering is okay, I'd pay less in taxes, but am I also gonna take home less money? And that's what we're gonna explore in today's episode. There are crazy enough instances where it can make sense to stop working. You will take home more money at the end of the day by no longer working, and if some of you are listening to this, I know you're going oh my gosh, I never even considered this. Should I be no longer working? What I don't want you to do is listen to this episode and then, all of a sudden, go quit your job. Okay, what I want you to do is have a good plan. It'll tell you when you are actually in a great position to retire early. So go through a process, either with our firm here or any other financial advisor that you deem is competent, and go through that with them.
Speaker 0:Now let me say this. I'm gonna start off with a few dopey jokes, okay, and then we're gonna get into the fun in the bulk of today's episode, which is a very important one, because I don't want you needlessly working if you shouldn't be working, okay, so let's explore this. The first dopey joke that I'm gonna tell you, and this is how I start off these calls with my clients. Just so you guys know, I'll give them a story, and the story comes from a client who's very nice and very close with me at this point and their child is about 22 years old at this point, and they'd come to me and they said all right, I need you to talk to my child. The client told me. I said okay, what are you only talking about? They go, they're talking nonsense right now. I go about what they go, just go talk to them. I said okay.
Speaker 0:So I talked to the child child's working first job and they said all right, I'm thinking about declining my bonus. This is what the child of the client told me. Okay, I think about declining my bonus. I said why would you do that? They go well, first job out of college. I'm making pretty good money.
Speaker 0:I think, god, I could be wrong here, so tell me if I'm wrong, that if I make more money I'm gonna get taxed at the highest bracket, that ordinary income bracket, that marginal system we have here in the US. I said that's true. They said got it. So what I don't wanna do? So you confirmed it. Thanks so much, ari. I don't wanna accept this bonus. I said no, no, no, that's not what we wanna do here.
Speaker 0:Yes, if you get a bonus of $10,000 and you are taxed at 30% between Fed and State which, by the way, it's not what it was, just an example well, that's $3,000, that would be going to taxes, meaning you're taking home 7,000. And they go yeah, 3,000 is a lot of money. I go, it is, but it's a net take home pay of 7,000. You are going to put more dollars in your pocket by paying more taxes. In this instance, they're like oh, I see, so just needed a little click there. Now, once it clicked, they're good to go. Same examples I'm gonna go through here for you guys.
Speaker 0:Sometimes it makes sense, based off your age and your you know, rmds and all these different things where it can make sense for you to stop working, even though you could keep working and bring in another 100, 200, 300, $400,000, because you're gonna get crushed in RMDs shortly and I need that income to be low, to do a big Roth conversion which is gonna save you millions, as opposed to just bringing in a few 100,000 in a single year. So it depends on your situation and that's what we're gonna go through in today's episode. So, with that being said, let's go over a recent comment of the week, and this is another one. Sometimes I'll pull from iTunes, sometimes I'll pull from Spotify. This one is coming from YouTube and this comes from Darrell Bratton 9679, who says love the channel, love the show and the fire movement recreational employment. So what is he saying here? What he's saying here is the fire movement. A lot of you know what this is.
Speaker 0:It stands for financial independence, retire early, and I don't subscribe to that If you're going. Well, I think that's kind of exactly what you do. I listen to your show. You talk about an early retirement. What I talk about is recreational employment. So replace retire early with recreational employment. So financial independence retire early becomes financial independence, recreational employment.
Speaker 0:I find most people don't wanna do nothing. They wanna do something. They just want it to be fulfilling, and that's the premise of the show. The premise is I don't want you to just go retire for the sake of retirement, I want you to retire to something. Retiring from something, oh my gosh, I can't wait to go do X, y, z. Some people, they just wanna retire and they retire now. They don't have a plan for fulfillment or what they wanna do.
Speaker 0:So I'll expose my clients and say how much do you love what you do? And they'll say you know, seven out of 10. I go. Are there days where it's like a three? They go, yeah, but that's pretty normal. I go. You're right, that is normal. Any days where it's a one and they go, yeah, sometimes I go. What? If you took a job paid a whole lot less but you enjoyed it more, would you even consider that they go? Well, yeah, I'd consider it. But the truth is I just don't think it's going to work out. So I'll do it to humor you, ari, but really it's not a value to me. I say, okay, let's just humor me then and I'll show them and they'll go. Oh my god, that's like a $200,000 difference over time. But by me talking switching to this job you're recommending, I go, that's true. What does it say at the end? And they go well, it still says $3 million plus. I go, that's right. I'm recommending that you have fewer dollars at the end. They go well. That's pretty bad.
Speaker 0:Financial advising, ari, I say, yeah, it is on paper. On paper, the financial spreadsheet answer is incorrect. This spreadsheet answer is keep working, not one more years or two or five, 20 more years, because your plan will look great. But how much is enough? And good luck quantifying the impact on your health by you no longer working this stressful job where you are not prioritizing time with family and friends and relationships. So hopefully you're able to see the nuance here. The goal is not to die with the most amount of money, but to get the most life out of your money. So sometimes I'll recommend taking a job that pays a whole lot less if you're in a great spot to do so. If you're not, different story okay, but hopefully you can see my little example there.
Speaker 0:Now let's hop in to start by talking about when you should never stop working just for the tax purposes. Okay, because a lot of you are listening right now loving this idea that it can make sense for you to stop working. You'll take home more dollars and you're going. I want you to tell me that and I'm going to tell you that, but I'm going to start by telling you when it does not make sense. So I have. I'm doing, of course, all my episodes iTunes, spotify. You can listen on the podcast apps. Wherever you podcast Google Stitcher, you name it. I'm also on YouTube. So on YouTube, I'm doing this content because you want to see me actually go through this. I'm wearing my root shirt right now, so clients get these root shirts. We work very seriously on our merchandise here at Root. So, with that said, I have a few notes I want to go over here, and here are the three instances where it does not make sense to simply stop working for the idea that you'll have more at the end. Okay.
Speaker 0:Number one it's going to reduce your social security benefits. So if you retire early, what's going to happen is social securities. What they do is they look at your 35 highest years of earnings. So if you've worked for 30 years, then you have big fat five zeros in there. I think of a nicer way to say it, but I just went out and said it five fat zeros in there. Your social security benefits going to get diminished by a whole lot. Okay, now the truth is we don't know if you're retiring early, if we're planning on a hundred percent of your benefit or 75% of your benefit. Some of my clients just want to see it as a bonus.
Speaker 0:However you like looking at social security, the truth is your social security is going to be impacted by these 35 highest years of earnings. So if you retire early because on paper you run a few things and go, wow, my RMDs are going to be crazy required minimum distributions for those of you that don't know, which are going to turn on for most of you at 73 or 75. Once that turns on, it doesn't stop. So you're going to be forced to take out a lot. So people say, once I retire, my income is going to be low, maybe I can do some tax things so I don't get crushed later.
Speaker 0:And so, depending on your age, it can make sense to stop working. But before I get to when it does make sense, let's make sure we dial in when it does not make sense, because part of my job is advising and part of my job is really telling you. This is head trash, don't think about this, don't worry about this. So if you're simply going, I like the idea of retiring early simply for the tax benefits, because I'm going to crush the RMDs and I don't love what I do right now. Don't do it just for that reason. Okay, now I'm going to go over the two others, but real quick, what I'm trying to get at and you won't get a specific answer from this today. The reason for I'm not being mean, it just it depends.
Speaker 0:This is what we do for our clients. You're not going to know their magnitude of the decision and that's the real important thing here is sometimes it can be a $2 million decision to retire early. Sometimes it's a $70,000 decision and if it was a $70,000 decision to keep working or not my clients would say oh my gosh, $70,000. In the grand scheme of things, I'm going to stop working tomorrow. It doesn't make a big difference for me. Yeah, there's less dollars, but it's a smaller margin versus $2 million or $3 million, as you can imagine. So understanding the magnitude of savings can help. Let me give you one more example. I'm just thinking it could help. I could be wrong here, but I talked about this. Last week.
Speaker 0:Client came to me and said should I pay off my mortgage or should I invest? It's a common question. I'll get. And the truth is the answer depends not just on your mortgage interest rate, not just on RMDs and things like that. It depends what are you going to sleep better at? And they go what do you mean? I never even considered that I go. What's going to make you sleep better? And they're like let me understand what you're saying here. Because what I'm saying is, if it was a $600,000 difference meaning if it was clear it did not make sense to pay off your mortgage and you should invest I'll tell a client hey, you're welcome to pay off your mortgage, but you're leaving hundreds of thousands of dollars on the table by doing so. And here's how you can see that. Other times, I'll tell a client, you're leaving money on the table, but we're talking about 40 to 60 thousand over the next 20 plus years, and I know you and you are going to sleep better with that mortgage paid off. So go pay it off. Yeah, the spreadsheet answer says not to, but the magnitude of that decision isn't as great. It's not 600,000. If it's 300,000, it's. You know, let's have a conversation. It's a lot of money, but you would sleep better. Let's talk about that. So hopefully you're going to see what I'm talking the nuance of how all this gets related.
Speaker 0:The second reason you don't want to simply retire early just for the income. Okay, the concept that you would be saving more in taxes is do you have enough in a brokerage account If you're retiring early? Do you have a brokerage account? Number one. But number two is are we pulling from IRAs, 401ks? Ultimately, where will income come from? Are we paying any taxes and penalties in order to get that income? And then finally, healthcare costs bridging that gap until 65. Maybe you're going to retire early and on paper it looks really good, but it's a way to second healthcare and you know, I don't know where I'm going to come out of pocket for that, and maybe between you and your spouse, you're looking at $25,000. And then all of a sudden you go well, that's for five years, so you know 125,000 bucks. That changes my plan. So all of this to say just don't forget these big expenses which can put a big debt into the plan Planning.
Speaker 0:Oftentimes I'll just call it bullet proofing, because you know I'm an Excel guy, like using Excel and a lot of my clients like it as well, and they'll use Excel and it all looks good. And if you forget one variable or you do a Roth conversion incorrectly by one measure. All of a sudden you get a tax return and two years later you've got these Irma surcharges with Roth conversion. So when you do a Roth conversion, two years later, your Medicare premium is going to go up. If you're not careful Other times, what's going to happen is you're going to do an amazing tax move and then you're going to see your tax return and go why on earth did I get a $40,000 refund? And it might be because your withholding was wrong. So there's all these little variables that impact this. I'm not going to go through the weeds of it, because you will fall asleep and that is not my goal.
Speaker 0:Okay, I just want to give you some helpful information on when it does potentially make sense to stop working for financial reasons. I'm not talking about emotional reasons. If you love what you do, great, I want you to keep working. If you don't, here's when you should consider it. So there's one real, real clear answer here, and the clear answer is if you're in your late 60s, early 70s and you have significant RMDs, if you are 68 years old right now and you're listening to this, of which some of you are, and the reason I know it is because I talked to you and you retired early.
Speaker 0:And people are listening going 68, doesn't sound early and this person's still working. They retired early, unsuccessfully. I mean, they retired early, which you don't want to do, you want to retire once and they went back to work because they didn't plan out everything I talked about in all my episodes not to their fault, just real life stuff. Well, to their fault, but you know what I'm saying here. So the premise is I want you to retire early with total confidence, one time. Okay. Now, when you do retire, the truth is and this is just the facts there's going to be expenses that you can't plan for, because that's how life works.
Speaker 0:I work with people, not robots, but what we do understand is if you are 68 or 69 years old and you have $5 million in an IRA excuse me, I'm almost getting mixed up on my words. I'm doing a quick calculation on my end, like literally, with you, and if RMDs are gonna start, which means requirement of distributions at age 73, as an example, and you're 68 right now and you have five million dollars in an IRA, what you're gonna have to take out a hundred ninety thousand dollars. Okay, that's the minimum starting point for your RMD. Now it's gonna happen, as you probably also have Social Security, maybe of rental income, maybe there's a pension, which means maybe you know, in four or five years from now, if you're 68, so in five years from now You're 73, what's gonna happen is you're gonna have to take out three hundred, four hundred thousand plus dollars Of course, depending on how markets grow and things like that in ten plus years from now. So the truth is you might go. I don't need three hundred, four hundred thousand dollars. I need like 70 or 80 or a hundred thousand to do everything I want to do. I say the government doesn't care and they're gonna want their piece of the pie. So I'll tell a client what's your income today and they'll say you know, when I'm bringing 120,000 a year, I go okay, what if we considered retiring earlier and stopping working on purpose? So 120,000 is no longer coming in the door and I know a lot of You're going ari, but I know it's not the hundred, twenty thousand you talk about. It's now 120,000. More has to come from a portfolio which changes the withdrawal rates. All of that is true. Okay, so there's a lot of nuance to this, but I want you to understand the concept, which is, if there are significant RMDs that you're coming into or Significant inheritance that is coming to you, a major windfall, it can make sense to stop working for tax purposes and you will keep more money in the long term, and that's the premise of good tax planning.
Speaker 0:The premise is a client of mine. This is a real story. They came to me. They didn't retire early successfully, but they did retire early. On paper. They were 58 when they did it and now they're 64. They're doing something else that they enjoy doing, but they're gonna have significant RMDs. And they looked at their life and said what do I want to do for income, what do I like doing? And we found there was a job paid very minimal compared to what they were doing before, but you know what for them. They said I'm gonna have fulfillment in this job, I'm gonna enjoy this job and for tax purposes it's not bringing in a ton of income and it's good because I'm gonna be able to do really healthy Roth conversions and where markets are fluctuating and going down, we can do even more Roth conversions. And the premises those RMDs are not gonna be a big issue for me and so for them it made a ton of sense to actually not keep working to the same degree they were working before, not just because they couldn't prioritize their health, but for financial purposes.
Speaker 0:Even though it sounds crazy to a lot of people, sounding crazy to me. Okay, until you really run the numbers and go, wow, these RMDs are gonna be significant. So if you're listening right now and you go, hey, I don't have significant RMDs and you know what? I'm 60 years old right now, it on paper will not make sense more often than not to retire early solely for the tax concept that you can minimize your tax over the course of your lifetime Doesn't mean you shouldn't retire early. It still might make sense that you're in a great spot and the sign of having significant RMDs is a sign that you are in a good spot. So we're talking about margin here, okay, we're talking about optimizing your retirement. And if we can save a client $100,000 in taxes by simply telling them hey, you're in your late 60s, rmds are gonna get turned on and inheritance is coming in, you're in this sweet spot of where it does not make sense to keep working because the truth is you're gonna get crushed in taxes. Now you can not get crushed in taxes right now if you want to, but you're kicking that tax can down the road and it's gonna be there and it's gonna be waving at you big high in a not fun way, okay, so that's kind of situation number one significant windfall inheritance.
Speaker 0:Situation number two here is with pensions and interest rates. So if you have a pension, you have the option for a lump sum or you have the option for annuity payments. If you take the lump sum option it's gonna vary depending on where interest rates are at. So if interest rates are higher, it's gonna be very different. If interest rates are lower, it's gonna be different. The truth is, when interest rates are changing, it's gonna change your take home pay and that take home pay, that lump sum, what you're gonna walk away with. One year it could be 950,000, the next year it could be 800,000. So it can make sense sometimes, depending on your income, to stop working one year. Take the lump sum pension, because let's just take a hypothetical let's assume you're bringing in $100,000 a year and let's assume that the next year your pension is gonna drop from 950,000 to 800,000, and these numbers are top of mind because there's a client I'm thinking of right now. It made sense for them to stop working even though they were bringing in 100,000 a year, because next year their pension was gonna get cut by 150,000 lump sum if they took that option.
Speaker 0:So the premise is sometimes it does make sense to stop working. Now some of you are going hey, I love working, like I wanna do something. I'm not ready to retire early quite yet. For a lot of you this doesn't make sense. So some of this truly is food for thought. But the premise of good planning, even if 95% of the time it might not make sense for you, 5% of the time, if you are in this boat listening right now, I could save you hundreds of thousands, if not millions. The other 95% are going hey, this is pretty cool. Maybe I can't implement this already, but good to know. Good to know that when that day comes where I'm thinking about an early retirement, maybe I think about it a little earlier, and not just for the tax premise that what I'm talking about today is simply when does it make sense from a financial spreadsheet answer to actually retire early because you will benefit more financially. There's an answer to that, okay. Then there are instances where it does not make sense to.
Speaker 0:And I'll tell a client I still want you to retire early. It's not gonna save you more in taxes, but it's gonna save you more in quality of life and you're still in a great spot and so it's. I don't want you getting lost in the weeds. Some people get so lost with this stuff they want to optimize their taxes to an unhealthy degree, to the point where they don't retire because it's not the optimal tax time to retire. Don't get lost. And optimal these are just thoughts I want you to think of.
Speaker 0:And then the last one here I wrote down is location arbitrage for tax reduction. So moving to a state with lower income taxes or no state income tax, of course, after retirement, that can, of course, significantly reduce your tax burden. And I'll ask the client I'll go, do you want to live there? And they go no, but it's going to save me a ton of taxes. I go say like you want to move away from your family and friends? They go all right. Like, look, how much is going to save me a tax. I go, no, I know it's a lot, is it worth it? And they'll say yeah, it is for like three, four years. I say great, then like, let's consider this because you can see the tax savings. Other times I'll say here are the tax savings.
Speaker 0:You can't quantify time with family and friends, but you shared with me before the health of your mom's not the greatest, and how many more times would you see her if you moved to this state? Like, yeah, probably a whole lot less I go. Then you're going to pay the taxes and you're going to be kicking yourself because I know you and you don't want to overpay, but the truth is you're just not going to get back that time with your mom. So in this situation I'm recommending that you pay more in taxes. Okay, so you can see.
Speaker 0:The premise here is it depends. Some of my clients go. I don't have family or friends. I want a new community, and if I'm going to go to a new community and I want to live in the heat because I'm in New Jersey or Rhode Island or whatever, then I'm going to go to Florida and I'm going to live my best life there and I'm going to pay less taxes. Great, I want you to do so. But so very few examples.
Speaker 0:But the premise here don't let the tax tail. Well, the life dog and get your thoughts thinking of okay, I'm not doing cookie cutter planning anymore, because a lot of you it's. You know, maybe you have an advisor right now or maybe you don't. And it's what's your age, what's your risk tolerance? What about these tax, these insurance, these estate planning? If you even look at the recent you know root financial Google reviews, which is, of course, our firm you're going to see on there, you know, I'm saving clients in terms of what's their umbrella insurance premium? What are they doing for their auto and home policies? What are you doing for all property and cash? What about long-term care?
Speaker 0:Some of my clients go well, I'm going to self-insure long-term care. I say, great, Did you know there's a law that's going into place where you're going to be forced to have to get a policy and when you do get it, and everyone's going to go at the same time, what do you think the cost is going to be? And they're like, yeah, a lot, I go, exactly. So none of this stuff is, of course, me being mean. I'm just trying to save all of you as much as I humanly can in taxes and thinking a little bit differently. So sometimes you're going to listen to this and not take an action item away like this one. For a lot of you, you're going to go. This didn't apply to me. Maybe a few of you are going to go. Wow, I didn't think about that.
Speaker 0:Regarding my pensioner, you know what that location? Arbitrage for tax reduction, or, oh my God, I do have inheritance coming in. How does that change my plan? So all of these are thoughts, doesn't mean you're implementing all of them, but my job is, as I see it, is, to invite you to think about all these different ideas, and the way I'll say it is during, you know, the holidays around my family.
Speaker 0:We're big on not marrying ideas, so we all have ideas. Let's put them on the table and pick the best idea. We will kind of write all of them down and put them in a hat, because if it comes out of one person's mouth, naturally we might go. Well, that idea, you know that person made this decision before. We want that out of there. So, with my clients, so do the same thing. I'll go. Here's the financial spreadsheet, life. Here's the financial spreadsheet, answer to everything we discussed. They'll go. Wow, good to know, I'll go. Here's the life answer. Here's what I actually recommend you do and they'll go. Why do those look so different? I go because a spreadsheet is not going to tell you the whole story, so hopefully that's helpful.
Speaker 0:This is all I had for today's episode, guys. These are situations where it can make sense to actually stop working to take home more money financially, versus other situations where it certainly does not, and I do not want you retiring too early. So let me be crystal clear on that. Okay, you only want to retire once. You want to do it with success. So hopefully, guys, this was helpful.
Speaker 0:If you're watching YouTube right now, please do drop a comment. If you're listening on the podcast apps, please do leave a review. Helps more people find the show. Thank you for listening to another episode of the early retirement show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial, tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.