Typical retirement strategies assume a retirement age of over 60. With an earlier retirement goal, a careful look is required to determine what strategies will create the best outcome. James responds to a listener’s question about where to invest as he anticipates an early retirement. James walks through the steps of Root’s Sequoia System to explore options for early retirement scenarios.
Questions Answered:
How does early retirement impact traditional retirement planning strategies, such as the 4% rule?
When deciding between retirement accounts (e.g., 401k) or brokerage accounts for pre-60 funds in early retirement, what factors should be considered?
Timestamps:
0:00 - Question about early retirement
2:21 - Is early retirement possible?
3:30 - Why the 4% rule doesn’t apply
6:08 - Assessment of Juan’s situation
8:11 - The Sequoia system Step 1 - purpose
10:16 - Step 2 - retirement income
12:49 - Relying on SS benefit?
14:09 - Withdrawal strategy
15:32 - Sourcing funds from age 50-59
17:20 - Brokerage vs 401K
20:22 - A part-time income scenario
23:04 - Consider how expenses might change
25:14 - Step 3 - investment planning
28:09 - Steps 4 & 5- taxes and protection
Create Your Custom Strategy ⬇️
Typical retirement strategies assume a retirement age of over 60. With an earlier retirement goal, a careful look is required to determine what strategies will create the best outcome. James responds to a listener’s question about where to invest as he anticipates an early retirement. James walks through the steps of Root’s Sequoia System to explore options for early retirement scenarios.
Questions Answered:
How does early retirement impact traditional retirement planning strategies, such as the 4% rule?
When deciding between retirement accounts (e.g., 401k) or brokerage accounts for pre-60 funds in early retirement, what factors should be considered?
Timestamps:
0:00 - Question about early retirement
2:21 - Is early retirement possible?
3:30 - Why the 4% rule doesn’t apply
6:08 - Assessment of Juan’s situation
8:11 - The Sequoia system Step 1 - purpose
10:16 - Step 2 - retirement income
12:49 - Relying on SS benefit?
14:09 - Withdrawal strategy
15:32 - Sourcing funds from age 50-59
17:20 - Brokerage vs 401K
20:22 - A part-time income scenario
23:04 - Consider how expenses might change
25:14 - Step 3 - investment planning
28:09 - Steps 4 & 5- taxes and protection
Create Your Custom Strategy ⬇️
On today's episode of Ready for Retirement, we're going to be talking about the changes you need to make if you plan to retire early. Most people assume that maybe one or two things change when you plan on an early retirement. Maybe you need to plan for healthcare and maybe you need to invest a bit differently because of the way that you're going to take money out of your portfolio. There's actually a whole slew of changes that you need to be aware of, and in today's episode we're going to go through Juan's case. Juan is a listener. He submitted a question. We're going to use his example or his scenario as a sample to show you what are the changes that you need to make if you're planning on retiring early. This is another episode of Ready for Retirement. I'm your host, james Cannell, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. Let's jump right into Juan's question. Juan says this I'm planning for retirement around age 50.
Speaker 1:I plan to save enough to cover anywhere from 25 to 50% of my expenses before age 55. I might work another part-time job in a less stressful job, just enough to cover my expenses. My employer offers a traditional and an after-tax Roth implant option through my 401k plan. Should I use this for my pre-60 funds by using the principal, or is a brokerage account better? I already have both, but I'm wondering if I should focus on one over the other. What are the pros and cons?
Speaker 1:Here's some information about me. I'm 45 years old. I have a $175,000 salary that comes out to $250,000 after bonuses and RSUs. I have $1.2 million in my 401k plan. I'm saving around $40,000 per year. I have $200,000 in a brokerage account. That's half in a US market fund and half in treasury bills. I estimate $100,000 per year of expenses to maintain my current lifestyle. I'm married and have a single income. Gracias, juan, all right. So, juan, thank you very much for that question.
Speaker 1:As I always do when we go through these, this is not intended to be advice. I don't know nearly enough information to make actual, specific recommendations, nor could I on this podcast here, but what we can do is walk through what are some of the things that you need to be aware of so that, juan, as you're going through this process of thinking about early retirement, or any of you listening or watching this or going through the process of thinking about early retirement. Simply being aware of the things you need to plan for is the first step into building out that plan that's going to allow you to accomplish everything that you want to do. Here's my big question. So there's a whole bunch of things I'm going to walk through. I don't want to skip too far to the end here, but I also don't want to neglect the elephant in the room, and the big question to me is this it's while I'm going to discuss some of the different aspects of retirement planning changes and nuances that you need to be aware of my first question is is this even possible?
Speaker 1:Let's look at this in an overly simplistic way. So Juan wants to retire at age 50 on $100,000 per year. I know he mentioned he might do some part-time work. There's some things that might change, but let's just take a very simple look at this. Juan retires at 50 on $100,000 per year. My first question is Juan, is your portfolio projected to be large enough to support those $100,000 per year of withdrawals? That is going to be the primary thing that allows you to live in retirement. It's going to be your financial capital, the portfolio you have. It's no longer your human capital, which is your ability to work and create an income. So is your portfolio going to be large enough to generate $100,000 per year of withdrawals?
Speaker 1:You've probably heard about the 4% rule. Maybe you've heard about the 4% rule those of you listening in. The 4% rule says look, if you want to retire, if you invest your assets a proper way and you withdraw them a certain way, you could take out about 4% per year from your portfolio balance and be okay through retirement, regardless of if you retire into a great market or a really horrible market. And that research is sound. The 4% rule. That's based upon real numbers and it's very sound research. However, that 4% rule research is based upon the premise that you want to be able to retire and have your portfolio last for 30 years For traditional retirement. That's probably what you're looking for.
Speaker 1:If you want to retire at 65,. If you want to retire at 70, you probably don't need to plan on too much longer, too much more than 30 years of your portfolio withdrawals. So that research said how do we take the highest amount out of our portfolio such that we can be assured that, regardless of what happens in the market, we don't take too much out, that we end up spending on our money before we run out of life, before we pass away. 4% just so happened to be about how much that paper found you could take from your portfolio without running the risk, or at least having the ability to minimize the risk, of running out of money. So what's the problem here? Well, the problem here in one situation and by the way, juan, you're not telling me you want to take 4%, I'm just kind of going through this thought exercise the problem here is if Juan has enough money to last for 30 years, you're going to have to take 4% out of your. What's he going to do from age 80 and beyond? He doesn't do one any good to have enough money for the first 30 years if the next 10 to 20 years he is broke and out of money and has no ability of going back to work to pay his bills. So we probably don't want to plan on a 4% rule for one. Let's just assume a 3.5% withdrawal rate.
Speaker 1:This is a much bigger conversation. Do you use the 4% rule? Do you use a guidance guardrails type approach? Do you use other research? There's no silver bullet magic answer. So I'm going to use 3.5% here, not because that's the magic answer If you want to retire at 50, just take 3.5% of your portfolio. What I'm doing is I'm taking a little bit less, so that what that's doing in practice is it's going to prolong how long your portfolio will last, all else being equal.
Speaker 1:Well, if we think that, okay, juan, what's the portfolio value you need to have at age 50, such that by taking 3.5% per year out of it, we could generate $100,000 per year? You would need to have a portfolio of about $2,860,000. That $2.86 million portfolio at age 50, if you took 3.5% out per year, that's $100,000 per year. That could then be adjusted for inflation over time. I'm oversimplifying this. I haven't adjusted the $100,000 for inflation between now and the next five years, so by the time he's 50, maybe it's more than 100,000 he wants to live on. I'm not accounting for taxes, like I said, I'm keeping this super simple just to provide a framework here.
Speaker 1:Well, if we need 2.86 million for Juan in five years and Juan has $1.4 million today between his 401k and brokerage account, we also know that he's adding or he's saving an additional $40,000 per year. So how much is he going to have in five years? Well, it completely depends on what does his portfolio do? We don't know what the market is going to do, we don't know what his portfolio is going to do in such a short time horizon. But what we can do is this we can plan for maybe a range of outcomes. Let's assume the market grows anywhere from 3% in a bad case, to 10% in a best case scenario over the next five years, or his portfolio grows by 3% to 10%. I should say, obviously the market or his portfolio could do much worse, could do much better, but let's use that as a range. Well, if Juan gets 3% growth annualized in his portfolio over the next five years, his $1.4 million today still assuming he's adding $40,000 per year grows to $1,835,000 or thereabouts. He gets 10% over the next five years, his $1.4 million today grows to about $2.5 million. So maybe anywhere between $1.8 to $2.5 million five years from today. The problem is Juan might need closer to $2,860,000.
Speaker 1:So I'm going to come back to this in a second. But Juan, my first thing, the first thing I always want to do when someone's asking about retirement, there's usually nuanced questions or tactical questions of how do I maximize returns, how do I minimize taxes, how do I prioritize after tax Roth versus pre-tech? These are good questions, but we want to start with the strategic question first, which is are we doing the right things to put ourselves in a position to retire? Once we've put ourselves in a position to retire and we're on track for that, then we can optimize, then we can focus on the more tactical pieces, such as reducing taxes, investing better understanding which account types make the most sense. So I want to start there just to really question is this possible, or do you maybe need to work a couple more years? Or do you maybe need to pay her back on expenses when you retire? Or, as you mentioned, juan, that you might already be thinking about doing, do you get a part-time job in retirement to supplement some of that income? There are certainly ways to make this work, but in the overly simplified version of what I just did, it probably isn't realistic to think you're on track exactly as I explained it here.
Speaker 1:So where do we go next? Well, what I want to do is I want to walk through a framework I'd walk through so, when people reach out to become clients at Root Financials so our financial advisory firm where we help people with all these things we go through a very structured process to ensure we're building a truly comprehensive financial plan for our clients. We call that process Sequoia System, and it's not just hey, come here and let's figure things out. There's a framework, there's an order of operations, there's kind of a foundation that we build, that we then continue to build layers on top of, to build out that plan. And so I'm going to walk through the steps of that plan, that Sequoia System, as if one was a client. Now, again, this is not advice. I'm just going to walk through each step and say, hey, juan, here's the things I would be thinking of and, specifically, here's how these things change from a traditional retirement or someone who's retiring somewhere in their 60s. So what changes for Juan, let's go through that Sequoia System, at least talk through things that would be brought up.
Speaker 1:The first step is purpose. So, before you really dive into investments and taxes and income and all these good things, what is it that you're trying to create? Purpose simply means what's the purpose of the funds that you have? Do you want to go travel the world? Do you want to spend time volunteering at a local shelter? Do you want to make sure that you're spending time with family and friends, because you didn't get a chance to connect with them because you were so busy with work or whatever the case might be.
Speaker 1:So start there, because $100,000, sometimes people look at that and say you know, that's a nice round number, let's just go with that. And while that's a good starting point, if you're just building out some basic projections to test your retirement readiness, the real goal is to say how much do you need to have to fulfill your purpose, to fulfill what you want to have happen in retirement? So what you might find is, hey, $100,000 is actually way more than I actually need. Well, that has significant implications. When you start looking at other things, like your retirement income and investments and taxes, or one you may say, or anyone listening to this, you may say, as I actually think about what I'd want to do, it takes more than that $100,000 per year. So simply starting there, like I said, I'm not going to go too into this because, juan, this wasn't your question and I want to make sure we devote sufficient time to addressing your actual question. That's where I'd start.
Speaker 1:Once you have that purpose aspect, down the second step, the second thing I'd look at is your income, so your retirement income. Now here's an important thing, an important difference between someone who's retiring early, like Juan, at age 50, versus someone who's retiring at a more traditional age. The first thing I think of is social security. So when you retire, say at 67, and then you collect social security at 67, your social security benefit probably isn't covering all your retirement expenses, but it might cover anywhere from 30 to 75% or so on average. So if social security is covering, let's say, even half of your expenses, the practical implications of that are it means you need to have half as much in your investment portfolio than you otherwise would have to meet the same level of living expenses. So if you have an investment portfolio, that investment portfolio can create a certain number of dollars for you in retirement.
Speaker 1:Now, if you have a social security benefit, what that's saying is your investment portfolio doesn't need to create all of your income. It just needs to create income to supplement your social security. So, whatever your goal is, maybe you wanna live on $6,000 per month. Then social security covers 3,000 of that. Well, your portfolio only needs to cover the remaining $3,000 per month of income. So it really lessens how much you need to have in your portfolio to cover the same expenses or to still maintain the same lifestyle. Well, compare that to one One wants to retire at age 50.
Speaker 1:Now, at age 50, one is not going to be eligible for social security. So if one wanting to live on $100,000 at age 67 and had 40,000 per year coming in from social security, his portfolio only needs to cover $60,000 per year. Of course, I'm just neglecting taxes here. To keep it simple, well, at age 50, one that portfolio needs to create that whole $100,000 per year of income for you. So this is pretty significant because what that means is there's gonna be a significantly greater strain on your portfolio to cover the entirety of what those expenses need to look like. And that makes sense. When I walked you through at the very beginning, you probably need about $2.86 million or so to create $100,000 per year of income. If you're listening to that saying, oh my gosh, I'm wanting to retire and I wanna create $100,000 of income and I'm 65 and looking to retire the next couple of years, well, you probably don't need to have $2.86 million in your portfolio, because if you're 65 and doing this, or 66 or 67, social security is gonna cover a huge chunk of that. So you might be able to get away with having half of that, or less than half of that, depending on how much is coming in from social security. So that's one big change, now one.
Speaker 1:The second big change is to what extent do you want to plan on social security even in your 60s and beyond? So social security is one of those things that's always a hot topic of what's that gonna look like? How is this gonna be funded? The current system is under too much stress. It can't be supported long term. If no changes are made, there's going to be a reduction in the social security benefits people can expect to collect. So one you're 45 today. You wanna retire at 50. There are almost certainly gonna be changes to social security by the time that you retire.
Speaker 1:The question for people looking to retire early is to what extent do you wanna count on social security in your plan and to what extent do you want to maybe count on a modified benefit? And to what extent do you wanna be super conservative and just say what if social security didn't exist at all? And to be very clear, that example I looked at before of how much do you need in a portfolio to generate $100,000 per year of income. Well, that's almost assuming social security never kicks in Because that's saying what's the starting portfolio value today that could create that income forever. But the reality is a social security kicks in, say, anywhere from 12 to 20 years after one retires. That's lessening how much needs to come from one's portfolio at that time. So it's probably lessening what that portfolio value actually needs to be at age 50, but what I did is I just fully excluded social security Not saying you should, but that is absolutely something that would change. The big thing is what's the withdrawal rate you want to count on?
Speaker 1:I already walked through the fact that the 4% rule the traditional 4% rule that was published by Bill Bangan. It was based upon saying how do we get our portfolio to last for 30 years regardless of what market conditions we might retire into? There's other approaches. So Jonathan Geithen and William Klinger they applied that guardrails approach that I've talked about a bunch here. They said if you want your portfolio to last for 40 years, you can do so and you can actually take a higher amount of your portfolio as a starting value anywhere from 5.2 to 5.6%. But you need to make sure that you're making some portfolio adjustments along the way and you need to make sure you're smart about where you're pulling income from each year. So that's another thing.
Speaker 1:And then Vanguard even published a white paper showing that that 4% rule might not be unrealistic for a 50 year time horizon, aka for someone retiring early. But you have to go way beyond the basic asset allocation that was proposed in the first 4% rule white paper. You've got to go beyond the withdrawal strategies that were assumed in that first 4% rule white paper. So make sure that you get really crystal clear on what is your withdrawal strategy. What withdrawal rate do you feel comfortable with? Not just do you feel comfortable with, but it's sound, it's based upon research. It's based upon not predicting the future, because none of us can do that, but you have an understanding of what is this based upon so you can understand if and when you need to make adjustments in the future.
Speaker 1:And then the big thing for income planning for want and for anyone retiring early is how do you get funds from age 50 to 59 and a half? So 50 to 59 and a half, you can't touch money in your IRA, which is where most of one's money is, without paying a 10% early distribution penalty. Now, if you could take a 72T distribution, what this is is, you have to take a standardized amount out of your IRA. You have to take it for a certain number of years It'll do another episode on this another time but what you're doing is you're avoiding that 10% early distribution penalty, but you are still paying taxes. So that's certainly one strategy. You could implement a 72T distribution.
Speaker 1:Another strategy now. This would require one to be employed somewhere, but if one was employed until the year that he turned 55, at the employer, whereas 401K was held, then he could access funds from that 401K without the 10% penalty as soon as age 55. To qualify for this, though, one has to be employed at that employer up until the year in which he turns 55. Still pays taxes on those withdrawals, but no longer is there 10% early distribution penalty, or one could have enough money in his brokerage account to fund this. So he has $200,000 today in his brokerage account, even if he saved all $40,000 per year that he mentioned he's saving to this brokerage account which I don't believe he is. He mentioned he's put in a lot of that into his 401k. He would have around $500,000 in his brokerage account by age 50, assuming a 6% per year withdrawal rate. So $200,000 today at $40,000 per year grow by 6%. You're, at right, about $500,000 five years from now. Well, that's 50. One needs that brokerage account to last until age 59 and a half If he wants to spend $100,000 per year. But he only has $500,000, that gets him five years in, but he still has a shortfall.
Speaker 1:So this is where I want to get to one's actual question, and his question is this so again, my employer offers a traditional after-tax Roth in-plan option through my 401k after I max out my 401k, should I use this for my pre-60 funds by using the principal, or is a brokerage account better? I know one's kind of sent this in shorthand. What he's essentially saying is look, I have 401k. I can put money into it pre-tax or after-tax. In the Roth 401k there's also an after-tax option. An after-tax option means even once you've maxed out your employee deferrals, you can put more money into your 401k. You don't get a tax deduction for any of the money that you put in after-tax. But what happens is when that money leaves or when you retire, that after-tax money can roll over to an Roth IRA where it continues to stay tax-free. But any of the growth on those after-tax contributions, those are considered pre-tax. Those would roll into a traditional IRA.
Speaker 1:So what one is wondering is he's saying what's better? Do I prioritize this after-tax contribution? Because I can do this and at least the principal that I put in. You know, if I put in $10,000 per year for five years, that's $50,000. So I could live on that from age 50 to 59 and a half. Or should I be redirecting that money to a brokerage account?
Speaker 1:So, again, before I go any further, I want to make another reminder that I cannot give specific recommendations. One because I don't know one's entire situation and two because I cannot give specific recommendations on this podcast or to anyone who is not a client of root financial. But what I can do is provide a framework for how to think about this. So here's where the answer is. It depends on the things that you want to think about, depend upon what your situation is going to be at that time. Let's assume that one or someone like one fully retires at age 50. So there's zero income coming in. It's all a matter of how do I now live on my money, my portfolio?
Speaker 1:Well, if you have no part-time income, then you really need every single dollar, every single non-IRA dollar, to live on. So, ideally, you're living on brokerage funds. You can do a 72T distribution, like I talked about, but I try to give other options because the 72T distribution can handcuff you a little bit. You're forced to take those distributions for a certain number of years. So if you need it, it's there. If you can avoid it, it's better to avoid it, in my opinion. So if you're trying to avoid it, then you are going to try to have as much as you can outside of your IRA to live on. So you're probably going to prioritize something like a brokerage account or a savings account or something that's not tied up until age 59 and a half, the after-tax dollars that you contribute to the after-tax 401k. Assuming you did that, the dollars that you contribute are accessible but the growth is not, so that growth would still be tied up until 59 and a half and beyond. So to me, I would try to prioritize flexibility. In that situation, trying to oversimplify this here, assuming zero income, no part-time work, no cutting expenses, no creative solutions, you're probably trying to build up the brokerage account.
Speaker 1:Versus what if one or someone else does have part-time income? Well, that's a different story. Let's assume I know this is a really big assumption I'm making, but assume that one has part-time income I'm not even going to say part-time income but his income drops to 30% of what it is today. So if today it's $250,000, let's assume it drops to $75,000 total. So he takes a 70% pay cut and he starts doing something that's much more enjoyable at 50. Still working, still bringing in income, but not making nearly as much as he is today.
Speaker 1:Well, if one is earning $75,000 per year, I'm going to disregard taxes here, just for simplicity. In an actual analysis, if you're actually applying this, don't disregard taxes. Taxes are going to be a pretty big component of this. But if you did disregard taxes, just to keep it simple, he makes $75,000, he wants to live on 100, now he only needs $25,000 per year of other funds to supplement the shortfall. Well, if he needs $25,000, he needs that for 10 years to get from age 50 to 60. Really, from age 50 to 59 and a half. I'm just running to 60. Well, $25,000 times 10 is simple math. That's $250,000. One already has $200,000 in his brokerage account with a little bit of savings and a little bit of growth. Not unrealistic to think that $200,000 could become $250,000, but a time one gets to 50. Again, he's 45 today. Well, that might be a good reason to prioritize those after-tax contributions, because there's some tax benefits to that. That's money that can then roll over to a Roth IRA. Ideally, if you can do an after-tax 401k contribution and immediately convert it to a Roth, even better. That's the money that's now growing completely tax-free forever, and not even the growth on those dollars is taxable.
Speaker 1:So what you can start to see is that the question of where should you save? It's not a black and white answer. There's no formula for this as much as a. Let's look at your situation. What other resources do you have and what option do you want to prioritize, based upon what things might look like at that time? So working part time is probably one of those main variables that would determine should you prioritize brokerage account savings or should you prioritize after tax 401k savings. Both can be great options. It's more a matter of are you prioritizing flexibility and forgoing some tax benefits that's what you're doing the brokerage account or are you prioritizing tax benefits and forgoing some of the flexibility? That's what you're doing with the after tax 401k savings. There's not a right or wrong answer. It depends upon your total situation and an understanding of where do you currently stand in terms of both maximizing flexibility and tax benefits. So that's something really important to consider.
Speaker 1:Another more high level detail that I'd want anyone retiring early to consider is not just what are your retirement expenses when you first retire, but how will those change? You've maybe heard me talk about the go-go years and the slow go years and the no go years, and it's not a term I coined or created. It's kind of based upon other papers that have been written of how do people actually spend money in retirement. It's not as if they spend one amount and then just increase that for inflation forever. There's typically the go-go years, where you're spending a lot more, you're more active, you're doing a lot more, you're traveling more. Then there's the slow go years where you're slowing down a bit, you're not taking as many trips, you're not as active as you once were. Then there's the no go years where you're really not doing a whole lot of anything, but your expenses might actually increase because of health care costs, maybe long term care costs. So those are three kind of high level phases of retirement. They don't all have the same amount of time that you typically spend in each of them, but if you're retiring at 50,.
Speaker 1:What are those go-go years going to look like? How do expenses change? Is this $100,000 that you want to spend the first 10 years of your retirement because you're satisfying your bucket list and you're doing all these really cool things but then you're going to pare back quite a bit? Or is $100,000 what you want to spend indefinitely, as long as you possibly can? So, even thinking of some of those changes, it may not seem like a big deal with your plan, but when you factor in what if we need $100,000 forever, when you calculate how much of a portfolio do you need to make that work, it's going to be a significantly different number. Then if you said, look, what if I only wanted $100,000 for the first 10 years of retirement, and then it's $85,000 for the next 10 to 15 years, and then it's probably even $70,000 after that, adjusted for inflation, of course.
Speaker 1:But when you look at that, it's a significant implication in terms of how much money do you need in your portfolio day one of retirement to make each of those different scenarios work. So have some understanding. Not that you can predict the future, not that you know exactly what retirement is going to look like, but at least have a baseline level of understanding of what you think that might look like, because it will have pretty significant implications for the timing of when you can retire and for the amount you need in your portfolio to retire. And this is really magnified if you're planning on an early retirement the next part of Sequoia's system. As we go through this process and someone was going to retire early, I would encourage them to think about and really we plan with them in this case. But we talk about investment planning.
Speaker 1:So with investments, the bigger risk, the earlier you retire, starts to become longevity. So we typically think of risk from a standpoint of volatility. You retire with a million bucks and 2008 happens and your million dollars turns into $500,000. Most people, that's the biggest risk that they're concerned about. That is a very big risk. I don't want to deny that. However, when you retire early, especially significantly earlier, that's one risk, but the other risks that you cannot neglect is longevity risk. Here's what I mean by longevity risk. If one's expenses are $100,000 on day one of retirement at age 50, inflation increases by 3% per year over the next 50 years. Well, by the time that one let's assume he has a long life expectancy, by the time that he's 100 years old, it's going to cost almost $450,000 for him simply to maintain the lifestyle that he could mean today on $100,000. And that's just a 3% inflation rate. If inflation is higher, that number goes up even more. So I say that because inflation, the longer of a life you have, the longer your longevity, the more and more inflation becomes a really significant risk to you.
Speaker 1:When you look at retirement risk with regards to your investments and you think that risk is only defined as a significant drop in your portfolio, absolutely is a risk, but that's the only risk you see. Sometimes people make the mistake of overcorrecting. They get too conservative. They do everything they can to mitigate that risk, which they successfully do, but they unintentionally introduce another risk, which is the fact that their portfolio is not going to keep up with inflation. And one's going to wake up one day and say my portfolio balance is still staying the same value. You know, I've avoided those crazy ups and downs, but all my expenses are significantly greater.
Speaker 1:So what you need to do is you need to tell this fine line between yes, we need to make sure that part of our portfolio is fully insulated from the impact of a 2008 type market, from the impact of a significant downturn. The impacts are ability to maintain our lifestyle when we first retire. So we need to have a certain portion of our portfolio in the types of funds and the types of investments that will not drop 40, 50 plus percent when the market drops 40, 50 percent. On the other hand, we need to make sure that not so much of our portfolio is in those types of funds that inflation starts eroding our purchasing power and even though our portfolio balance is protected in nominal terms, its actual purchasing power begins to diminish over time. So that's where you could think about, maybe, a bucket type strategy. How do we have enough money in conservative assets to last for five years or so, for a number of years, to see you through a significant market downturn, but make sure that the remainder is invested for growth so that we're able to keep up with inflation over time?
Speaker 1:Now the last two steps in this process once you've gone through purpose, once you've gone through income, once you've gone through investments, the last two steps are really taxes. How do you implement a tax strategy to minimize your lifetime tax liability? This kind of comes back, juan, to the part of your question of do you prioritize, after tax 401k contributions or brokerage assets. One is a tax priority, the other is a flexibility priority. At least what you're doing shows what your priority is.
Speaker 1:Taxes are going to be a huge part of anyone retiring early. When you retire early, especially if you have a chunk of your money in pre-tax accounts and a chunk of your money in brokerage accounts, there is so much incredible tax planning opportunity available to you that I just don't have time in this podcast to fully go through, but I'll leave it at that. If you are retiring and have those assets specifically those of you who don't have everything in an IRA or everything in a brokerage account or everything in one type of asset if you go into retirement with multiple types of assets, multiple types of accounts, I should say there's a tremendous amount of tax planning opportunity available to you to the tune of hundreds of thousands of dollars or more in tax savings when you implement the right strategy. And then, finally, protection. Again, I won't spend too much time on this I know this wasn't Juan's question, especially because Juan is single.
Speaker 1:He doesn't have to worry as much about, say, life insurance. He doesn't have to worry as much about some of those other things of long-term care insurance where the real risk is to a surviving spouse If you burn through all of your assets and the surviving spouse doesn't have any. So this is something the biggest thing for Juan and anyone retiring early on. The insurance piece is health insurance. So what do you do between the time you retire in Medicare?
Speaker 1:This again ties back into taxes. Some people they will really prioritize keeping income low so they qualify for health insurance subsidies. Others will keep their income low so they can do Roth conversions. Which is right for you depends upon your situation. Both should absolutely be considered and it's not even an either or scenario. They're not mutually exclusive. But having a tax strategy, having an insurance strategy that weighs both of these even more important when you're retiring early. So that is it for today. I know we kind of just glaze the surface on a lot of these things, but really wanted to answer that question of what type of an account should you prioritize? The reality is, when you're looking at retirement income, when you're looking at investments, when you're looking at taxes, when you're looking at insurances, when you're looking at estate planning, all those things, all those retirement planning points, are amplified in many ways when you're retiring early, even more so than they are with the traditional retirement. So, juan, thank you for that question. I hope that was helpful.
Speaker 1:Thank you to all of you who are watching. If you've not already done so and you're listening to this on the podcast, be sure to check out our YouTube channel, just under James Cannell. If you are listening to YouTube already, make sure you hit the like button, leave a comment if you're enjoying this and let us know what types of episodes you would like to hear in the future. Thank you to all of you for listening and watching and I'll see you all next time. Hey everyone, it's me again for the Disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner.
Speaker 1:Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast, then go to rootfinancialpartnerscom and click Start here, where you can schedule a call to one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discussed in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who is familiar with your unique circumstances before making any financial decisions.