Three Tips for Early Retirees
By Allie (DeYoung) Schmidt, Financial Advisor, CPA, CFP®
Thinking of retiring early? Here are a couple tips to help work towards the next chapter of your life successfully.
1. Pay Taxes on your Timeline: If you’re in your late 50’s/early 60’s and have a dramatic decline in your taxable income due to an early retirement, you have several new options available to you in regards to how you look at paying taxes. You should strive to take advantage of the years you’re in a lower tax bracket, and pay taxes on your earning timeline. It may make sense to actually create a taxable event (take cash out of IRAs/401ks) to take advantage of your lower taxable income in early retirement, prior to receiving social security or a pension. I’ll agree it is a shift in thinking for most early retirees going from a “defer” mindset to “incur”, considering the prior year, many were likely in the highest earning years of their lifetime and trying to defer paying taxes as possible. So, even if you don’t necessarily need the increased cash flow think about either taking cash out of your Traditional IRA/401k (tax-deferred accounts) and putting into your non-retirement investment account or doing a Roth Conversion (after-tax accounts) to pay the tax today. You could pay up to 10% less in taxes overall by planning ahead and pulling income if you’re in the 15% tax bracket, as opposed to the 25% tax bracket later in retirement.
2. Stay in the Game: It is tempting and used to even be a rule of thumb to dramatically reduce your stock or growth piece of your portfolio when you retire. The old adage went something along the lines of: your age should represent the percentage you have in bonds, so at age 30, 30% bonds/70% stocks and age 60, 60% bonds/40% stock and so on. However, we are now in somewhat of a new normal with bonds. This was created by record low interest rates and the inherent risk in bond prices is causing concern of principal decline when interest rates rise. This compiled with longevity (with many retirees now living in retirement for a couple decades as opposed to just a couple years) has caused us to take another look. Depending on your personal goals, needs, and risk tolerance, it may make sense to stay in the growth game and position your portfolio to keep up with the rising cost of living to be available for you not just today or tomorrow but 15, 20, even 25+ years from now.
3. Consider Part-Time Work: The major deterrent to early retirement is the addition of the early years that your portfolio will need to provide cash flow. Creating some cash flow from a part-time gig may allow you to delay pulling on your retirement assets, potentially allowing them to continue to grow. Compound interest, once coined the 8th wonder of the world by Albert Einstein, can be dramatic over just a couple years, especially if those years happen to coincide with a bull market. Additionally, you may be able to take advantage of different employer offered benefits, such as health insurance, 401k, or other employer sponsored plans that may offset some of your early retirement expenses. Sometimes the ability to retire earlier may simply lie in being open to supplementing income before social security or a pension with part-time work. For others, part-time work is a part of the retirement dream, being able to do something they enjoy. In addition to beaches, a cerveza or two, and a good book, part-time work doing something you enjoy could also add to your retirement happiness.
