Famous boxer Mike Tyson said, “Everyone has a plan until you get hit in the face.” If you’re among the 49% of Americans punched in the face by an unplanned early retirement, trainers Joe Anderson, CFP® and Big Al Clopine, CPA are here with 15 defensive maneuvers that’ll help you bob and weave, slip, and duck the knockout of retiring earlier than expected.
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Important Points:
- 00:00 – Intro
- 00:53 – Unplanned Early Retirement Contributing Factors
- 01:26 – Blindsided, Counter, and Comeback
- 01:43 – Early Retirement Knockouts: Job Loss, Illness, Caregiving Counter Attacks
- 03:08 – Income Scorecard: Sources of Retirement Income
- 03:55 – Bare Knuckle Budget Items
- 04:35 – Drop Debt Counter Attacks 05:22 – Access Accounts Counter Attack
- 06:21 – Calculate your Financial Blueprint for Free
- 07:18 – True/False: If you retire before 65, be ready to cover your health care until you become eligible for Medicare
- 07:54 – Health Care Coverage Options in Early Retirement
- 08:37 – Long-Term Care
- 09:15 – Retiring in a Bear Market vs. Bull Market: Sequence of Returns Risk
- 10:25 – Inflation TKO
- 12:00 – Calculate your Financial Blueprint for Free
- 13:04 – True/False: Almost 80% of professional heavyweight boxing matches end in a knockout
- 13:29 – Trim Retirement Spending
- 14:40 – When to Claim Social Security Benefits
- 16:40 – Income Taxes in Retirement: How to Make a Comeback
- 19:58 – Drop the Weight: How to Cut Costs
- 20:33 – Eyes on the Prize: Benefits of Retiring Early
- 21:22 – Viewer question: What investment should I pull from first, 401(k) or brokerage account?
- 22:43 – Calculate your Financial Blueprint for Free
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Transcript:
(NOTE: Transcriptions are an approximation and may not be entirely correct)
Joe: A famous boxer, Mike Tyson said, “everyone has a plan until you get hit in the face.” You do not wanna get hit in the face in your overall retirement plan. We’re gonna save you from that. Welcome to the show, everyone. Show’s called Your Money, Your Wealth®. Joe Anderson here, president of Pure Financial Advisors. And I’m with the big man, Big Al Clopine, he’s standing ringside.
Al: Ringside. We’re gonna go do a little boxing?
Joe: Yeah. You’re like Mickey and Rocky. Big Al the trainer.
Al: Okay. I’m the trainer today.
Early Retirement Knockouts
Joe: Here’s what we’re talking about. Early retirement. Half of people are forced into early retirement that are not prepared. You wanna make sure that you’re prepared. That’s today’s financial focus.
What are the top reasons why people are forced into early retirement health or disability? 31%. You can’t necessarily do the job that you were set out to do and 32. Job changes, right? Layoffs out with the old in with the new. Why am I going to pay you several hundred thousand? We get these young kids in, we can pay ’em a lot less.
Don’t let these statistics scare you. There’s a lot of things that you can do. That’s why we got the big man, Big Al Clopine.
Al: All right. We’re talking boxing today and in particular how that relates to an unplanned early retirement. You can get blindsided. Right with a job loss or whatever it may be. But there’s counter punches. We’re gonna go over those strategies and most importantly, how to overcome and how to come back, how to win the retirement game. So Joe, let’s let’s get our boxing gloves on.
Joe: Alright, let’s go early retirement knockout. Couple things that we just talked about. Job loss, illness, disability. Or maybe you have to take care of a parent. So those are some knockouts that could happen that are unexpected. Big Al what can we do about ’em?
Al: Let’s start with job loss. So if you are laid off, think about, employing, applying for unemployment. maybe you can find some kind of online job. Maybe there’s some self-employment for you. Maybe you can make some money on the side. There’s a gig economy. Maybe you’re good at consulting. Maybe you’re good. You have a skill where you can make a little bit of money.
Joe: Hey, when you look at illness or disability, this could be a short term stint. Do you have a workplace disability policy in place? If you don’t, you might wanna consider a private disability or maybe both of these in conjunction. And then also understand Social Security if you’re out of the workforce. So making sure that you have cash flow coming in, if you’re sitting on the sidelines.
Al: Yeah. And if you become a caregiver, and this is probably more common than you think, and it’s not only your parents, it could be your kids, it could be a friend, it could be all kinds of people. So if you need to be a caregiver and you can’t work full-time at your job. Maybe you can work remotely or maybe part-time, part-time work, or maybe part-time remote. So if you can get flexible hours or maybe you can afford to hire a caregiver so you can keep your job. So all these things are possible.
Joe: Alright, let’s look at the scorecard. Right now you wanna have a balance. I don’t care if you’re 15 years old or 85 years old. Just understanding where your scorecard sits is very important. It could be on a napkin for all I care, but just looking at a, do I have IRAs 401(k) brokerage accounts, right? Write that down. Check. Do I have annuities? Am I going to receive a pension from my employer? Looking at life insurance policies. How about employer, severance or disability policies? Your Social Security statements and working spouse income? This is your scorecard. You wanna make sure that you know what you have, so then you can have a really good strategy to plan for the future.
Al: Yeah. And Joe, we don’t always think about those things while we’re working. But if all of a sudden we’re not working and it’s unexpected, you gotta take a look at what income you have. But also, if you leave your job or you’re forced to leave your job, or you have to leave your job caregiving or health, then maybe at least for a while, you need to pare down your budget. Look at what’s essential, right? And try to, eliminate all the extras. Essential is usually considered to be housing, utilities, food, transportation. Insurance. Those are things that we have to have, but maybe some of the vacations, some of the new clothes, some of the entertainment, some of those things. Maybe you pair down on that for a while.
Joe: Yeah. It’s looking at what you have, what cash flow’s coming in, what’s going out, and just writing things down of what that budget is. No one likes to be where I get it, but having a good understanding, a high level of understanding, because somethings could happen. Counter punch, drop your debt. Right, so you can consolidate some loans. Looking at systematic payouts or balance transfers. So for those of you that are approaching retirement or in retirement, you want to get out of debt. Most of us do, but let’s say that I’m several years from retirement and I built up a lot of debt, understanding what that is. Sometimes we’d like to hide under the desk. But just get it out in the open. Understand your payments, your interest rates, the balance, and then you can start consolidating, looking at different strategies on how to pay that off.
Al: Yeah, and I think that’s important because I mean, you don’t know, like, like we just said, 49% of the people retire earlier. Then they expect right unplanned retirement and try to get that debt under control before that happens.
Joe: So let’s say if you need to access some of the accounts to create some income, if you’re on a short-term disability or that unplanned retirement, can you tap into your 401(k)s and IRAs without penalty? IRAs is 59 and a half. Your 401(k) is 55, but you have to be separated from service from that employer. At age 55. So if you’re 54 years old and you’re outta work, you can’t tap in this, but just understand that there’s a 10% penalty and taxes are owed from those retirement accounts. If you pull it prior, then you’re able to,
Al: I think, Joe, that’s such an important point. A lot of people know the 59 and a half. Date, which is when you can pull money outta your IRAs. But 55 is the date for 401(k)s. As long as you’re still working at your employer that has a 401(k), at age 55, you leave, then you can access that money without penalty.
Joe: Hey, we never know what’s going to happen in life. There’s good, there’s bad, and of course it’s wonderful, but you wanna be prepared. Go to YourMoneyYourWealth.com. Click on that special offer. It’s our Financial Blueprint. Alright? Make sure that you understand. If something were to happen tomorrow and you did not have a job, are you able to continue the lifestyle that you want? Or if you have to tone it down, what does that look like? Go to our Financial Blueprint. You can start mapping this out. Alright? Don’t go anywhere, we’ll be back. We’re gonna talk about more risks in that retirement ring. Show’s called Your Money, Your Wealth®.
Counter Attacks for Illness, Sequence of Returns Risk, Inflation
Joe: Hey, welcome back to the show. Today we’re talking about early retirement, but an unplanned early retirement. It’s great, we all wanna retire a little bit earlier than expected, but what can really hit ya is that if it’s on plan. So we wanna make sure that you’re prepared for anything that comes your way. Before we dive in, let’s see how you did on the true false question.
Al: If you retire before 65, be ready to cover your healthcare until you become eligible for Medicare. I dunno if that’s true or false, but that’s a true statement. That is
Joe: true. Right? So here’s what people miss often. Is that Medicare starts at 65, and so a lot of us will have to pay for private insurance if we retire prior to 65.
If I retire at age 55, guess what? That’s a 10 year timeframe, then I’m going to have to pay for private insurance. Now, there’s a lot of way to cover that big Al. Right. There’s Medicare that we talked about at 65. I could go on Cobra, but that’s only gonna last 18 months. Affordable Care Act, depending on my, what? My income, there could be some subsidies here, but private insurance, it’s a lot larger expense, I think, than people realize if they retire early.
Al: it is and so, and yeah, we just talked about Medicare 65, but let’s say you’re laid off or you have to, you leave your job at age 60, you’re gonna have five years of coverage.
Cobra’s good because that’s the same coverage you had from your employer. The bad part is you have to pay for it yourself, and it only lasts about 18 months. Affordable Care Act is another way to go that can be expensive unless your income is low enough and you get sub subsidies.
Joe: Now, let’s say if something catastrophic happens or if you look at as we age, the good news is that we’re living a heck of a lot longer.
The bad news is we’re living a lot longer and because of age, we’ll probably need a little bit more care in our older. Years. So long-term care, 60% of US adults will need some sort of assistance at some point in their lives. 60% al. So are we prepared for that?
Al: Yeah, that’s a bigger number than you would think, right? So just make sure you’re prepared. You gotta have some funds for long-term care, maybe a long-term care insurance, or maybe you use equity in your home. There’s different ways to pay for it.
Joe: Alright. Now another big risk that’s facing us is a sequence of return risk. So volatile markets, as we’ve been experiencing this year, really helps us out as we’re saving dollars.
It’s called dollar cost averaging. You’re averaging the dollars that are going into a stock or a mutual fund. On an ongoing basis. So if the markets are volatile, sometimes you’re buying outta stock at $10. Maybe it drops and you’re buying it at $7 and back at 10, and so on and so forth. So it averages out usually at a lower price, and that’s a good thing.
The bad news is that when you have volatile markets and you start taking distributions from your overall portfolio. Could be disastrous because if you start in a down market and you’re pulling dollars out, it takes those dollars that much more to recover just to get you back to square one.
Al: It does, and that’s tricky. So with sequence of returns, if you happen to retire, if it’s an unplanned retirement or regular retirement, if the market declines, then make sure that you are. Pull back a little bit like we talked about on some of those non-necessary type expenses. But Joe, here’s another one. Inflation, a 55-year-old, for example, let’s say their expenses are $50,000. By the time they get to 85, 30 years from there, 3% inflation rate. Now it’s 91,000 for the same goods and services.
Joe: Yeah. I think a lot of times what, when people are planning for their overall retirement, if you’re just doing it on the back of the napkin, which is a good starting point, but they don’t necessarily know how to, calculate the overall impact of inflation. So if you have cer certain dollars that you’re using to create this income, just know that those dollars potentially still have to grow just to outpace inflation. So once I hit retirement, it’s not like I can just basically go into cash. I still have to be invested. That’s why finding that right portfolio is so key. So you’re getting a target rate of return that you need. E to maintain your lifestyle, but also to all pace inflation.
Al: Yeah. And how many times Joe, do we hear people say they’re age 60, 65, 68, whenever, and they retire and then all of a sudden they tell us, I can’t afford to lose any money ’cause I’m retired, I don’t have a paycheck. And I understand that feeling. But at 65 you could live another 20, 25, 30 years, you gotta have some growth to outpace inflation.
Joe: Yeah. The timeframe is you’re thinking about. It is, it’s not your retirement date. You’re 60 years old and you’re like, all right, my timeframe is five years for me to retire. Okay. But yeah, you probably have to switch the portfolio up a little bit, but your timeframe is not five years. It’s probably like Al said, 35 years. So you still need a little bit of risk assets in that portfolio to get the growth that you need. If you need more help than this, if you wanna dial your situation down.
We have a free gift. Of course. If you go to YourMoneyYourWealth.com, you can click on that special offer. It’s our Financial Blueprint. They’ll ask you a bunch of questions. You answer them. Boom. A PDF will pull out and it will tell you green is good. Yellow, oh, warning, red bad. Tells you some things that you need to do, some action steps to get you back in the green. Do it right there in the comfort of your home. We’ll be right back.
Comeback: Trim Retirement Spending
Joe: All right. Welcome back to the show folks. We’re talking unplanned early retirement. Are you ready to come back and win?
Go to YourMoneyYourWealth.com. Click on that Financial Blueprint. It is free of charge and it will map out where you’re doing well, what you’re not doing well, and some action steps that get you to where you want to go. Your money wealth.com. Click on that special offer. It’s our Financial Blueprint. Let’s see how you did on that True false question.
Al: Almost 80% of professional heavyweight boxing matches end in a knockout. True or false? that turns out to be a true statement. And Joe, you’re the boxing fan. What do you think?
Joe: 79%. Says it right there. Alright, we’re talking about a retirement knockout. We don’t wanna get knocked out folks. We wanna come back. We wanna win this match. Alright, so what are some things that we can do? You can trim your spending. If you have $500,000 and you’re getting that 6% rate of return, if you think, all right, here, if you know when you’re gonna die, we can map this out perfectly. 15 years. You can spend 40, 120 years, 3500, 25 years, three grand, 30 years. Three.
Al: Yeah. And of course there’s a big caveat. You have to earn 6% even the whole time, which never happens. So it’s what makes this hard, right Spending. That’s why sometimes we have the 4% rule and things like that, where it seems like, gosh, I should be able to. Spend more than that, and in many cases you can, but this, these calculations are basically showing you ending up at zero at a flat, 6% rate of return at these timeframes.
Joe: Yeah. If you think about it, that 4% rule, you have a hundred thousand dollars. A hundred thousand dollars is a lot of money, but 4% of a hundred thousand at $4,000 a year is what you can spend from that nest egg. So. You need to think about, alright, what is my strategy for spending? How do I combine my assets into Social Security and do I have a pension in taxes and everything altogether?
Al: Now, Social Security, you have an unplanned retirement, so of course you’re thinking, all right, let’s get into Social Security. I can start that at 62. And that may be the right answer for you if you need it for the cash flow, but realize that if you take it that early, it’s gonna be a lot lower. If you can get part-time job or some way to make some income so that you can delay your Social Security.
So it’s a lot more later on. That’s a great thing. And if you look at some of the averages, right, you look at the average of benefits at age 62, right now it’s about $1,300. You look at 67, it approaches 1900, and at 70 it’s over 2000 bucks. Couple things to
Joe: note. If you take it at 62, still a lot of people, if you look statistically, they’re taking at 62 and they do it for a variety of different reasons.
So if you want to look at the straight math at 62, you got $1,300. If I wait until age 70, I get $2,000 per month. If I wait until my full retirement age, it’s right around $2,000. So why do people take it early? A, they might not think that the system is gonna be there. That’s one reason. Two is that they need the cash flow, or three, they think that there’s a break even.
It’s like, a burden of hand is better than two in the bush. So why don’t I go ahead and take it and I’ll take less from the overall portfolio, or maybe I wanna live a little bit more extravagantly from 62 to 72. So I want a added cash flow. This is a very personal decision. You know, if you wanna look at the straight math, if you live into life expectancy, you’re going to get more money out of the system.
If you take it at age 70, because each year you delay from full retirement age, you get an 8% delayed retirement credit. That adds up plus the cost of living. So if I look at math, but you can’t run your life in your retirement by math. Things happen in life. So you wanna make sure that you make the right decision here, because some of you could be leaving a lot of money on the table, or you could be leaving a lot of memories on the table.
Al: Yeah. Now, one thing you can count on is income taxes. Right? So, and a lot of people don’t think about this in retirement, right? They don’t, you know, you, maybe you get laid off at age 58 and you start pulling money outta your IRA, probably the worst thing possible, right? Because you’re paying income taxes on that.
And that 10% early withdrawal penalty. So when you do retire, whether it’s unplanned or not, take a look at where your assets are so you can figure out what’s an appropriate distribution plan. Should I pull it outta my tax deferred and I’m gonna pay tax on that? Or maybe I got Roth IRA money, what that’d be tax free.
Or maybe the non-retirement taxable account, Joe could be at capital gains, which is a better rate.
Joe: Couple strategies that I want all of you to look at if you’re still employed. So most of us have a tax deferred account that we’re adding to. That’s your 401(k), right? So if you have a 401(k) at work or a 403(b), you can add dollars to it.
You get a nice tax deduction for the dollars going in. All of these monies grow tax deferred, and then when you pull the money out, then that’s when the taxes are owed. So overall, these are phenomenal plans. If I look up here at tax free, this would be your Roth. So the difference between a Roth IRA and a 401(k) is that this is an after tax contribution.
You already paid taxes on it here. I didn’t pay tax on any of that. It went directly into the investment account in my 401(k), and it’s growing tax deferred. The Roth is after tax, but this account grows 100% tax free, so you’ll never pay any dollars of tax on these. Ever again. So you put $10 in there, it grows to $20.
You pull the $20 out, you pay zero tax. You put $10 in here, you might get a $2 tax deduction. That $8 or that $10 grows to 20. You pull the 20 out, you have to pay taxes on that $20. So you don’t have the full 20, you’ve gotta pay the deduction that you received back. A lot of you will be in a lower tax rate, so there’s some arbitrage as you’re playing this game.
What I think the proper strategy is, just to look at what dollars that you have in each of these different accounts. If I were to bet most of your dollars are sitting in your 401(k), I would suggest look at trying to get a little bit more money up here. That will give you a lot more flexibility when it comes time to pull the dollars out.
Now, for those of you that work for a larger company, you might have after-tax dollars that you can contribute to these plans. So you put your pre-tax dollars up to the maximum, there could be additional dollars that you could put into that plan. That is after tax. You could take those dollars and move those directly into a Roth.
Without paying any tax whatsoever. So you’re building up this tax free account for years and years that we, and, Al and I have been doing this, most of people’s liquid assets are sitting here and they have very little dollars here. What I would encourage you to do is try to have maybe a little bit more money here than you currently have, and there’s different strategies to do so that will give you the flexibility that you need when you pull the money out.
Al: All righty. We’re talking about now, expenses, dropping the weight. How do you cut back on your expenses? can you do your own housework? We could probably cut back on eating out and entertainment. Vacations. No one wants to postpone vacations, but maybe you need to, if it’s an unplanned retirement, at least for a while till you get your feet back on the ground.
Or maybe you just look at all your service providers, cable, phone, whatever it may be, see if you can find cheaper ones. Or maybe, gosh, you just go through your checkbook. You look at all those monthly charges and subscriptions, and you’ll probably surprise yourself. Cancel a bunch of those.
Joe: But you gotta keep your eye on the prize, right?
If you are forced into an early retirement, there’s a lot of positives here too. Guess what? No work related stress. Awesome. More time with the family all, I don’t know, right? That could be good or bad, but how about hobbies? You could get on that golf course. Opportunities for health and fitness.
Hey, maybe you got 10 pounds that you wanted to lose. You can hit the gym more. You can get in shape, right? Or, volunteer. Start doing things that you’re super passionate about. So just because I might be forced into an early retirement, keep your eye on the prize because I think this is all really what we wanna shoot for, right?
Doing the things that we’re happy, passionate about, being around the people that we love, and then trying to get rid of the negative stress that just probably, hurts our everyday life.
Al: This is from Jennifer in San Diego. What investment should I pull first, my 401(k) or my brokerage account? That’s a great question. And of course we were just talking about taxes. So it depends of course, on your tax bracket. If you’re in a low enough tax bracket and you’re not subject to that early withdrawal penalty, maybe you pull some outta the 401(k).
If you’re in a higher bracket, maybe you wanna pull some out of the brokerage account, which will be a cheaper tax.
Joe: Yeah, I think there’s a lot of strategy involved there. I think for years people were telling us to defer, defer, Don’t touch those retirement accounts until you absolutely have to, or until it’s forced out, because those are taxed at ordinary income rates.
So let’s draw everything else. and then of course, besides Roth, but I think you want to balance taking a look at your tax return. Taking a look at where the income sources are coming from and looking at the taxes of each of those sources is really gonna determine that withdrawal strategy. But if, yeah, you’re in a lower bracket, you might wanna do Roth conversions and live off of the non-qualified account or your brokerage account, or if you don’t wanna do the conversions, maybe it’s a little bit of both.
So it’s just all about taxes, I think is gonna determine the overall distribution strategy, not the investment themselves, because the investments you have in your 401(k) versus your brokerage account could be. Identical. Alright, that’s it for us today. Go to YourMoneyYourWealth.com. Click on that special offer. It’s our Financial Blueprint. You blueprint this thing out, that’s always a good idea. YourMoneyYourWealth.com. Click on that special offer. It’s gonna tell you the good, the bad, the ugly of your current situation. You fill in a few numbers, an answer a few question. And then it’ll pop out a report right there on your computer, YourMoneyYourWealth.com. Click on that special offer, for Big Al Clopine, I’m Joe Anderson. We’ll see you next time.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
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