In this weeks episode we will discuss:

  • Strategies to access money from retirement accounts prior to age 59.5 penalty free
  • Why someone may consider using these strategies
  • The pros and cons of the strategies and the steps to achieving this

Call to Action:

Start thinking and planning about:  What strategy sounds the best to you for access money given your situation?  What date will you have enough?  What will you do with your time?

Show Notes:

Why would someone want to retire early

    • More Life balance
    • Do what they want to do
    • Pursue long list desire(s)
    • Opportunity to work less (might not retire fully – downshift a little bit) keep the work you love
    • Time with family
    • Volunteer
    • Travel
    • Start a business
    • Take classes
    • Read
    • Ultimately to live the best life they imagined.

Steps to achieving early retirement

  • Defining your why behind want early retirement.
  • Pick your goal date and begin with the end in mind.
  • Identify your current situation.
    • Net worth (assets minus liabilities).  Your net worth is what you own minus what you owe.
    • Monthly and Yearly Spending
    • Cost of investments
    • Return of investment
    • 4% of your investment portfolio
      • What is that number?  Will that number support your lifestyle – look at monthly/yearly spending to see.  If you need $40,000 then 4% of that is 1 million.  Will you need to work part-time?  Will you need increasing investments savings?  Do you have enough?  When are you projected to have enough?
      • Another way to look at it is yearly expenses and multiply that number by 25 is what you will need.
    • What is your current savings rate?  Is that going to meet your goal?
    • What is your current asset allocation?  This is how much you have in stocks, bonds, and cash.

Future Projection

    • Compile all current information.
    • What levers can be adjusted? How much adjustment is needed?
      • Savings rate?
      • Spending?
      • Asset Allocation?
      • Investment costs?
      • Income?

Accessing money before 59.5

    1. When making this decision think about if you will have any money from a pension or part-time work?
    2. Non-retirement/taxable/brokerage account(s) you can access at anytime.
    3. Roth IRA you can access contributions before age 59.5 as long as the account is 5 years old.
    4. SEPP (Substantial Equal Periodic Payments) AKA 72(t)  IRC section 72(t)
      • Substantially equal periodic payments are one of the exceptions in the United States Internal Revenue Code §72 that allows receiving payments without the 10% early distribution penalty from a retirement plan or deferred annuity before the usual 59​¹⁄₂ age restriction under certain circumstances.
      • The amount you withdraw every year is determined by formulas set out by the IRS.
      • If you quit the SEPP plan before it concludes, you’ll have to pay all the penalties it allowed you to avoid, plus interest on those amounts.
      • A SEPP plan is best suited to those who need a steady stream of income.
      • At 59½, you can withdraw additional funds from your retirement accounts without penalty
      • Drawbacks of SEPP
        • The plans also have distinct drawbacks, however. To start, they’re relatively inflexible. Once you begin a SEPP plan, you must stay with it for the duration—which can potentially be decades if you begin the plan in your 30s or 40s.
        • During that time, you have little to no leeway to alter the amount you can withdraw from the fund each year.
        • If your financial need is short term, consider whether SEPP withdrawals are right for you. Once starting SEPP payments, you must continue for a minimum of five years, or until you reach the age of 59½, whichever comes later. If you fail to meet this requirement the 10% early penalty still applies, plus you’ll owe interest.
        • Consider the example of Sherri, who is 37 years old. After starting SEPP withdrawals, she will be required to continue making withdrawals for the next 22½ years, when she reaches 59½. For Sherri, age 59½ comes after five years.
        • Another example is Bob, who starts his SEPP program at age 56. For Bob, the earliest he can end his program is at the age of 61. For Bob, five years come after he reaches 59½.
        • If you terminate your SEPP prematurely, you will owe the 10% penalty on the amounts taken under the program, plus interest. The IRS allows an exception to this rule for taxpayers who die or become disabled.

5.  Laddering Roth Conversions

  • A Roth conversion ladder works in four steps:
    • First, rollover your 401k/403b/457 into a Traditional IRA. This can happen when you quit your job.
    • Second, transfer the funds from your Traditional IRA into a Roth IRA. Be sure to convert the amount you’ll want to access in five years.
    • Third, wait five years. This is also known as the Five Year Rule — an investor can only take converted money out of their Roth IRA five years after it is converted.
    • Fourth, withdraw the money you converted. 
      • You will be taxed on the amount you convert from your Traditional IRA to your Roth IRA if it hasn’t already been taxed. So make sure you’re in a lower tax bracket when you make this conversion.
      • Consider inflation to as you may want to convert a little more each year to keep up (average of 3% annual inflation)  low inflation environment now.
      • Consider doing annual Roth IRA conversions starting at least five years before you plan to retire early.
      • You can reduce the amount of the Roth IRA conversion based on expected cash flow from other sources. This can include withdrawals from taxable investments, as well as any earned income or passive income sources you expect to have. A partial Roth IRA income strategy can work if you semi-retire early, and then fully retire later.
      • Roth IRA conversion ladder is to provide you with a tax-free, penalty-free source of income during early retirement. But there still needs to be a large enough amount of retirement savings so that you can continue in retirement for the rest of your life.

Healthcare before 65

    1. COBRA (18 months)
    3. HSA (Health Savings Account)
      1. See previous podcast episode on this the trifecta of HSA’s
    4. Subsidy eligibility
      1. Based on silver plans
      2. The single and your annual 2020 income is between $12,490 to $49,960 or if your household income is between $21,330 to $85,320
      3. They don’t switch to using the current year’s FPL (federal poverty levels) numbers until open enrollment begins in November