When Can I Retire?
PLANNING FOR RETIREMENT
Retirement is a significant life transition that requires careful planning and consideration. In a recent episode of the 90 Days from Retirement podcast, wealth advisor Jaeden May and Erik Soderborg discussed some of the key factors to consider when trying to determine the right time to retire. While there is no one-size-fits-all answer, these topics aim to give direction to wise financial decisions as one enters the next phases of life.
Health Care Planning
A common concern with individuals looking to retire before age 65 is health care expenses. Because of these concerns, many individuals decide to delay retirement until they are covered by Medicare. When asked about this, Jaeden said:
“If they took a step back and looked into their Marketplace options, they might realize that it really might not be as bad as they might think, and, in some cases, it could even be cheaper than their employer plan.”
If you have the assets necessary to retire early, you may be able to retire before Medicare-age worry free.
Tax Diversification
Just as investment diversification is crucial, so is tax diversification. The tax treatment inside your accounts matters, and having the right balance of each type can greatly influence your financial plans in retirement.
Account Types:
- Traditional IRA - contributions are before tax, meaning all of your withdrawal will be taxed at ordinary income tax rates
- Roth IRA - contributions are after-tax, so all of your withdrawal, including gains, are tax-free
- Taxable Account- contributions are after-tax, and only income and gains are taxed
ACCESSING QUALIFIED RETIREMENT ACCOUNTS BEFORE 59 1/2
The magic age for accessing qualified retirement funds without penalty is usually 59 ½. This can pose challenges if one wants to retire early but does not have the necessary funds outside of these qualified accounts to sustain themselves. However, there are some specific methods that can be used—assuming the plan documents allow them—that enable individuals to access their retirement funds earlier.
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The Rule of 55
Allows individuals to pull from their retirement plan at age 55 if they fully retire.
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72T Election
This option—calculated by your tax professional—allows you to distribute a set amount of the funds in equal periodic payments. The individual is obligated to take these payments for the later of 5 years or when they reach 59 ½.
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Roth IRA Contributions
An individual can pull their initial contributions from their Roth IRAs without penalty.
OPTIONS FOR EMPLOYER INVESTMENT PLANS
When you cease working for an employer, you have options with the retirement funds you have built with that company:
- Keep it in your employer’s plan
- This is a great option if your plan allows for distributions before age 59 ½ by using the Rule of 55.
- Roll the funds to an IRA
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- Rolling your employer-sponsored retirement plan funds into an IRA typically allows you to have a more robust selection of investments to include within your account.
ADJUSTMENT FOR SPENDING
Psychology and money intersect significantly when it comes to retirement. It's common for retirees to harbor fears about spending down their savings, a concern that is entirely valid given the uncertainty of future needs. However, this fear should not overshadow the joy of retirement. With careful financial planning and a well-structured spending strategy, retirees can confidently utilize their assets without jeopardizing their financial security. This balance allows them to fully enjoy the fruits of their labor, making retirement a fulfilling and worry-free phase of life.
