0:00 – Hi everyone, thank you for joining us today.
0:03 – Got an exciting topic to talk about, early retirement.
0:08 – This is a fun topic for me to talk about and not just one, it’s fun for clients because
0:14 – you’ve worked so hard and you’re thinking about retirement or you’re already retired and you think about all these fun things you get to do. And for us, it’s fun because
0:25 – we can really do some good planning
0:27 – and there’s some pitfalls and
0:30 – mistakes that can be made and we really like planning for those and getting ahead of that. And so we’re gonna talk about all those things today.
0:40 – So whether you’re a wealth crossing client or not, I hope you come away today with a framework for thinking about how to fit tax,
0:51 – spending lifestyle alignment, how do you fit all those pieces together
0:55 – a way that can be beneficial for you over the long term.
1:02 – So the rough agenda today, the first part we’re going to talk about tax. And this is a huge piece for us. There’s just a lot of planning to
1:16 – And with that Roth conversion strategies, and
1:19 – that’s an interesting topic to talk about.
1:22 – You hear about it a lot, but there’s a lot of nuances to it. And so I want to spend some time talking.
1:30 – The second part, liquidity planning, income sequencing, that’s really thinking about how do you actually get the money and where do you get it? So you’ve got money in different buckets, retirement accounts, brokerage accounts, cash. How do you know where to pull from, when to pull it from? So we’ll go through a few things there.
1:54 – The third part, aligning lifestyle goals, that is thinking about spending. So we’re going to look at some kind of spending information that we tend to see in retirement and then how do you plan for that ahead of time? We’ll wrap up with some common gaps, misconceptions, questions and answers at the end. And that’s the agenda for today.
2:27 – So who really is this for? I think you’ll get a lot from this today if you’re executive, corporate professional, and you’re starting to think about retirement. Typically, these people have a couple different retirement plans, stock concentration,
2:49 – some complexities. So
2:51 – this is a great, we’ve got some great tips in here.
2:56 – for these type of professionals. If you’ve got complex asset structure and that really just means you’ve got a lot of different type of accounts or assets, I think there’s a lot of benefits from doing some good integrated planning. And then individuals one to 10 years from retirement. Again, people just thinking about retiring, you don’t wanna wait.
3:22 – until after you’re retired. You can start doing some planning now ahead of time. And if you’re already retired, you just want to make some smarter decisions. Think through things, be a little more thoughtful. We’ve got that here today.
3:39 – Why is early retirement different?
3:43 – early retirement, and that can mean different things.
3:47 – You could be planning to retire at 70 and you say, well, I’m gonna retire at 65. You consider that early retirement. Or maybe you’re 55 and you say, I’m ready to retire now. You’re planning on maybe 60. So there’s a wide range of ages that.
4:06 – one might consider early retirement.
4:08 – And all those different ages have
4:11 – sort of tax situations.
4:15 – if you retire at 55,
4:18 – you’re not really eligible for Social Security until 62, and typically you wait. Medicare is not till 65. So there’s this gap typically where
4:29 – Your income is much lower than it’s ever been and you’ve got this opportunity.
4:36 – You haven’t started social security. You don’t have to worry about Medicare income adjustments yet.
4:41 – But there’s also health insurance, right? Depending on what type of health insurance you do.
4:46 – Some of the credits related to health insurance are based on your income. So you got to plan for all these things.
4:55 – So right, they got nobody plans for a narrow but powerful opportunity with low income taxes. We’ll talk a little bit about that. And integrated planning is just really important. I thought I’d give an example here about what does that really mean? Why is integrated planning a non-negotiable? You can think about a couple who has saved a majority of their assets in pre-tax 401k.
5:20 – They retired at 60.
5:23 – They’re waiting for Social Security until 70 and they don’t have much other income, maybe some investment income. So they’ve got 10 years or so of what we call low bracket,
5:33 – know, tax brackets.
5:35 – So a traditional approach to that would be I’m going to use all my taxable brokerage assets first, then I’m going to move to my retirement, pre-tax IRAs, 401Ks, and then maybe I’ll go to the Roth.
5:50 – the end.
5:51 – So that can work.
5:53 – But,
5:54 – what can happen is all of a sudden you have required minimum distributions. So, you know, you’re 73, you’re taking requirement of distributions, you’ve started Social Security, all of a sudden you’re in a 32 % income tax bracket, probably for the rest of your life.
6:13 – The integrated thinking is, okay, it’s a more flexible drawdown strategy and
6:19 – depending on the situation year over year, we’re gonna pull from different accounts.
6:24 – For example, if we know we’re gonna have to pay 32 % later when we pull from IRA, we’re probably okay paying 10%, 12%, even 24 % now. And that can be related to a Roth conversion.
6:40 – just using it for funding. So again, we’ll sort of come back to this, but the integrated planning, we really think can make a big difference over someone’s lifetime when you take into account cash, tax strategy, and just maintaining your lifestyle.
7:02 – All right, so a little more on the tax side. There are, we just talked about a little bit the income tax value. And again, that varies person to person, family to family. But in most cases, you have lower income and you haven’t started social security. Income is at its lowest and it’s controllable. So you have control over where you pull income from and which bucket.
7:33 – And that’s a really powerful flexibility you have.
7:39 – One thing to keep in mind in the low income years, your long-term capital gains rate could be 0%.
7:45 – 2026, up to $98,900 of long-term capital gain income can be taxed at 0%.
7:55 – That’s pretty attractive.
7:56 – Now that’s assuming you have no other income, right? But that’s one example of
8:03 – somewhere where if you have really low income, you should take advantage of these low brackets.
8:10 – IRMAA you probably hear about this a lot. This is the income adjustment for Medicare. So
8:21 – Medicare looks at the previous two years. So we look back two years over 2025, they looked back at 2023 tax return. They looked at your income and they say, if you make X amount over X amount, your Medicare premiums increase. That tends to catch people by surprise because you weren’t really thinking about Medicare two years ago.
8:46 – So things like large Roth conversions, you could have done a big capital gain, you know, sale of a fund or a stock. You might be getting deferred comp payouts that can impact that. So it’s something to keep in mind. It’s a cliff. So you go a dollar over this bracket, you then pay the higher premium. So we want to be really careful about thinking about those different brackets.
9:13 – We’ll talk.
9:14 – later a little bit about there’s some ways to adjust. So if you have a, if you retire and you had a big income year before, you can let Medicare know that you’ve retired, you have lower income, and they’ll adjust your premiums down. We can talk a little bit more about that here shortly.
9:35 – If you got deferred comp, so many executives, professionals
9:39 – have, can have a big deferred comp payout. That’s taxed as ordinary income when it’s received. It can’t be rolled into IRA.
9:49 – You don’t necessarily have much control after you retire on the timing. So
9:54 – this is something that you want to think about before you retire
9:57 – is your deferred comp payout. So
10:00 – A few ideas here and just a few reminders as year over year these things can affect how much tax you’re
10:09 – in each year.
10:13 – So I want to spend some time talking on the Roth conversion.
10:17 – This can be a really powerful tool. We love Roth conversions.
10:22 – At the core of it, Roth conversions make sense when you can pay less tax a day than you would in the future.
10:30 – And how do you know that? Well, you don’t really know, but you can run projections and get an idea of your requirement among distributions.
10:41 – I think that’s always a good sort of activity to see, okay, with my social security and my future requirement of distributions, what bracket will that put me in?
10:51 – You can see I have the brackets here. And on the right is married filing jointly. You have 10, 12, 22, 24, jumps up to 32%. So you might imagine a situation where you run some projections and you say, oh, I’m going to be in the 32 % bracket once I have social security and I’m taking RMDs.
11:14 – I’d be fine.
11:16 – paying 22 % or 24 % now on some of those
11:22 – dollars that would eventually come out.
11:24 – So that’s kind of a tax rate differential benefit. Some other reasons you might do a Roth conversion.
11:34 – might think taxes will go up over time. We don’t really know.
11:40 – I would guess it’s more likely than not that taxes will go up.
11:43 – So again, in that sense, you’d rather pay taxes now. Roths don’t have RMDs. So you’re not required to take money out of a Roth like you are a pre-tax traditional IRA or a 401k. So those can continue to stay in the Roth IRA over your lifetime. And if you don’t need the funds, they’ll continue for your heirs over a period of time tax free.
12:07 – If you’re expecting a big inheritance at some point, that might bump your future tax rate up. It might make it more attractive to do Roth conversions now.
12:16 – So again, it’s really understanding what’s my long-term tax rate and what am I going be paying in the future. Would I rather pay it now
12:26 – benefit over the long term?
12:28 – Many times we’ll also see clients that are not necessarily between this 24 and 32. They might be, you know, I’m in the 22 % bracket now. I might be in the 24 later. There’s not really a big differential between the two. It might not make sense to do the Roth conversions.
12:47 – one other thing to think about, if the rate differential isn’t huge,
12:51 – You could consider converting if the market is down significantly. The reason being, if you convert when the market’s down and you get the assets into the Roth, you can capture the upside in the Roth IRA and all that’s tax free. Those opportunities don’t come along very often, but it can be something to think about if we’re in a recession or the market’s down significantly.
13:18 – you can take advantage of a Roth conversion that way.
13:22 – So lots to think about there. I think again, on the tax side, it’s doing projections, thinking about what’s going to happen in the future and then what’s going to happen this year and how can I take advantage of some of these lower rates?
13:40 – So the next part of liquidity planning, income sequencing.
13:45 – So where do I get my money?
13:48 – Think about that original example I had of the traditional sense is you take from your brokerage taxable accounts, then your retirement, then your Roth.
13:58 – That’s really what income sequencing. So we really want to try to maximize each year, because it might not be the same every year.
14:08 – The four big sources of income are your taxable investments. So, and that typically has dividends and you get capital gains on those. That’s considered income. You have your retirement accounts that you can pull from. And hopefully they’re also earning income within those accounts. And at some point you’re gonna start social security.
14:34 – You might have a pension, you may have an annuity, you got to start at some point.
14:39 – So there’s lots of different options.
14:41 – so our recommendation is to be flexible in your approach year over year. And don’t take the I have to only pull from taxable investments and then I can only pull from retirement.
14:54 – Typically what we see as best is some mixture.
14:56 – of these different income sources and looking at your bracket each year to keep you under a certain
15:04 – So that’s generally income sequencing.
15:08 – The other important piece of this is managing risk. So when you retire, we call the sequence of return risk, it’s on the right there. A big market decline early in your retirement is significantly more damaging than later.
15:24 – So you may hear you want to be more conservative as you approach retirement and at retirement. That’s part of the reason why. If you have to withdraw funds early when your spending is likely the highest, that can permanently reduce the capital available to recover from. So how do we manage that? We recommend a buffer of 12 to 24 months. And that’s just of projected expenses.
15:50 – Holding that in some kind of short term equivalent.
15:52 – That can be money market funds, short-term bonds.
15:56 – That buffer is there to avoid you having to sell during a market downturn.
16:02 – For example, you know,
16:04 – when the market’s doing well, we’re going to maintain the 12 to 24 months of living expenses, but we may be down 20, 30 percent for whatever reason. Well, instead of selling the assets over here, we’re just going to draw down that cash buffer.
16:19 – and wait for the rest of the portfolio to recover.
16:23 – Hopefully you also have some fixed income in the portfolio that’s also a buffer, but we really want to avoid having to sell assets that have declined significantly to fund your lifestyle, or you having to change your lifestyle because the market is down.
16:40 – So again, maintaining that cash buffer. There are a number of ways you can do that, but this is a great way to help manage that risk.
16:52 – So to sum up some of the things we’ve been talking about, I think this visual does a good job of helping think through the different periods of retirement. On top of it all, we want flexible withdrawals. You’ve got existing cash, you have brokerage accounts, you might have a 401k, and the right source each year is based on your bracket, whether you’re taking Medicare, whether you’re doing Roth conversions.
17:21 – And we had these different kind of milestones here that I think are important to think about. If you retire early, and in the sense of before age 60, the baseline rule is that you can’t access your retirement accounts before age 59 and a half. If you do, you have a 10 % penalty in addition to the ordinary income tax you pay.
17:45 – And there are some exceptions to that.
17:48 – One of those is if you leave your job in the year you turn age 55 or later,
17:54 – you can take withdrawals from that employer’s 401k without the 10 % penalty. But it has to be that employer’s 401k. It can’t be an outside IRA. It can’t be another employer’s 401k.
18:07 – It has to be that employer’s 401k. before you retire or before you roll over your 401k to an IRA,
18:15 – Think through whether you might need the funds from that account.
18:18 – If it’s before 55 and you don’t apply for this 55 exception, there’s something called substantially equal periodic payments. That’s another exception to the rule.
18:30 – And we won’t go into that today, but there are a few exceptions. I just want to point it out that really it takes until 59 and a half to really access these IRA 401k retirement accounts without penalty.
18:43 – Medicare is an important milestone.
18:47 – As many of you know, healthcare is not getting any cheaper.
18:51 – Remember, Medicare looks at two years before to look at your income and determine your premium based on that.
19:00 – So your income in 2026 will affect your 2028 Medicare premiums.
19:07 – So you need to be thinking about that now. If you’re taking Medicare in 2028 or 2027, 2029, keep that in the back of your mind. There’s different Medicare brackets. And again, I mentioned this earlier, but you go a dollar over one of those brackets and you’re paying an extra couple thousand or more per year. There is a form you can request an adjustment.
19:37 – And many times if you retire, let’s say at 63 and you’ve got a really high income year last year of work, you start Medicare two years later at 65, they’re looking at that last year you were working, you can let them know you retired and what you expect your income to be and they’ll make an adjustment for you. So we see that pretty often and it’s a really good thing to do. It can save you thousands of dollars pretty quickly.
20:07 – When you start Social Security, we could do a whole separate discussion on when to take Social Security,
20:13 – between 62 and 70, it grows each year
20:17 – you wait.
20:18 – Generally, if you’re healthy,
20:20 – you want to wait at least until full retirement age.
20:24 – Remember, if you’re the higher earner and you have the higher benefit,
20:28 – it’s generally better for you to wait as long as possible.
20:31 – Again, assuming you’re healthy and you don’t need the money. Remember, there’s a survivor benefit. So when the higher earner passes away, the surviving spouse steps into that higher benefit.
20:44 – So you waiting benefits both you and your spouse if they ever need it. But there’s a lot of nuance to that.
20:53 – that social security decision affects
20:56 – what assets you might need to pull from or whether you don’t need to pull from other assets because you have this additional income.
21:02 – The last big change is RMDs And I’ve mentioned this a few times, RMDs are required minimum distributions. It’s a percentage of
21:11 – pre-tax retirement accounts you’re required to take out.
21:17 – And it goes up every year, you get older. That’s forced taxable income, whether you want to take it or not. And we mentioned this earlier, whether you’re probably taking, well, you will be taking social security at this point.
21:30 – And then you have this added on ordinary income, maybe you got a pension now. We find people end up in a higher bracket than they thought they might be in
21:39 – based on these RMDs and social security.
21:42 – Again, just keep that in mind.
21:44 – Lots of different strategies here, but again, the overall theme is just be flexible with your withdrawals year on year, year over year based on the situation.
21:55 – So aligning lifestyle goals. This is really talking about spending and expenses. One of the most important things you can do is understand your expenses going into retirement and use them to project how much you might need from the portfolio. So what we tend to see overall is expenses pick up a little bit at retirement. And that makes sense. You’re traveling. Maybe you’re more charitable.
22:24 – number of things. And then it starts to trend down and even out over time.
22:31 – So again, we call the go-go years, 55 to 70, spinning that’s peak, you’re traveling, you’re doing fun things.
22:39 – We want to plan generously for
22:42 – plan for inflation over time.
22:47 – Just talked about this, activity sorts of naturally slow as you enter your late 70s, early
22:54 – Discretionary spending starts to drop, healthcare
22:57 – premiums, out of pocket costs tend to make up more and more of your spending.
23:02 – Maybe you become a little more charitable, maybe legacy planning becomes a little more important to you. And then 80 plus,
23:12 – Again, healthcare tends to be a higher expense. Overall expenses come down.
23:17 – So the theme here is
23:21 – Understanding expenses is really important. It’s not a static, you know, I’m spending $100,000 per year and that’s going up just a little bit every year. It’s a really flexible thing that you need to plan for. Some important additional items here, healthcare.
23:38 – Depending whether you do COBRA, the marketplace, or you self-fund, before Medicare it can be fairly expensive if you don’t have any premium tax credits.
23:48 – Definitely something to plan for. Discretionary travel spending tends to be pretty big for some of our clients who enjoy that. And then family and legacy. This I think sometimes gets missed. Think about whether you want to help your children. If you have any, if you have weddings you’re going to need to pay for or help pay for. You want to be more charitable.
24:14 – Think through all these things and include that in your spending assumptions as you think about, know, do I have enough to retire and how much do plan on spending?
24:28 – All right, and then wrapping up here, common planning gaps, misconceptions we see.
24:33 – I’ll figure out taxes later.
24:35 – Tax planning, for the most part, has to happen in the same tax year. We file the tax return, for example, for 2025, we file it in 2026. By that point, there’s not much we can do. So before the year ends, we’ve got to make some decisions
24:55 – not wait until we file the tax return.
24:57 – So, and again, that’s sort of in the year planning and thinking about the next few years, what might be on the horizon. Underestimating healthcare costs. So again, we want a budget for healthcare. It’s usually an expense that changes quite a bit from your working years.
25:16 – And we want a budget higher probably than we expect
25:19 – for healthcare costs.
25:21 – we hear this a lot. I’m just going to take social security early. Really think through the impact of that. It’s a permanent reduction in your social security benefit. You’re earning 8 % per year plus inflation every year you wait.
25:36 – and again, there’s a lot to think about there with the claiming with your spouse, um, and the survivor benefits, spousal benefit. Uh, but there are some real
25:45 – real benefits to waiting on Social Security if you’re healthy and you expect to.
25:51 – Ignoring the one-time expenses, mentioned this earlier, renovations, weddings, down payment help for maybe your children. Those need to be in the plan.
26:03 – example we see, maybe you decide to buy a second home, maybe a condo
26:07 – somewhere.
26:08 – These are things we need to think about before you decide to retire. Assuming the plan stays static,
26:16 – As we talked about, every year is different. Life changes, things happen. so adjusting the plan every year, looking at, projecting that to the future is really important.
26:31 – And then siloed advice creates gaps. So, you know, your CPA, your tax preparer may be preparing your return. For example, in 2026, when 2025 has already happened, we want to be ahead of that. So we think it’s really important to plan in the year before the year’s over and take those opportunities to pay less tax over time.
27:00 – So the integrated approach, right, we’ve talked about tax strategy, income sequencing, like where do I get money from when, if I don’t need the money should I do Roth conversions, all these decisions directly affect which account you draw from. Siloed advice, so again like I just talked about, CPA and advisors should be talking to each other. If they’re the same person, we should be planning ahead of time.
27:29 – before the end of the year. Inconsequencing, lifestyle planning, your spending plan is so important. You have control over spending. It determines how much you need, how much you have to draw down from the portfolio,
27:47 – and
27:48 – a really important tool, just sort of knowledge to have as we project out your financial plan. And then here at WealthCrossing,
27:58 – integrate tax into everything we do. this integrated approach is really important to us. Every one of our decisions we make is looking at the different accounts, tax strategy for the year, how that integrates into investments. We think there’s a ton of value from integrating all these things over the long term.
28:22 – So before we open up to questions, just some key takeaways. This
28:28 – tax window is irreplaceable. It’s that income valley where we can take advantage of low tax rates. really important. Income sequencing, it’s not about what you make, it’s about what you keep. So really want to, over the long term, try to maximize or guess minimize the amount of tax you pay over your lifetime. And income sequencing can help with that.
28:53 – Retirement plan without lifestyles and complete. And that really just means, we accounting for all the things you wanna do in retirement? And have you included those in your plan? And proactive planning, again, is just so important. You wanna get well ahead of any planning that may need to be done.
29:16 – So hopefully that gives you a framework, some things to think about for an early retirement or getting ready for retirement. Retirement means different things for different people. But being flexible with your withdrawals, thinking about your tax strategy over the long term, and having a good understanding of your accounts and where to pull from and a cash buffer, all these things are important in retirement. So hopefully you got a few things.
29:45 – to take away from that today.
29:48 – All right, so I think we have a few questions. So I’m going to take a look at those.
29:56 – Our compliance guys want you to look at the disclosures here. All right,
30:03 – so let me pull up the questions.
30:08 – Can you talk more about the Medicare Adjustment form and what is required with that? Yes, that is the form that we call the SSA 44. We help clients quite a bit with this. Again, it’s a life changing event. So you have to have some kind of, typically it’s retirement. It can be divorce. It could be the death of a spouse.
30:36 – really just some kind of change in circumstance. And what they ask for is some documentation. You submit it. Maybe it’s a retirement letter. You got to get some kind of employer confirmation. And they also ask for an estimate of your future income. And so they’ll use that estimate to determine which bracket you’re in. And then they’ll confirm that against the tax return. Usually they’re pretty quick with the adjustment.
31:05 – But if you get one of those letters that have the Medicare adjustment on it.
31:13 – you’ll want to submit one of these if you expect to have low rain.
31:17 – All right. I am considering retiring soon, but worried about health care costs and just understanding my options. Any guidance?
31:31 – Health insurance is a big topic. are really, there’s a couple main types, like if you retire early. If your employer offers you COBRA, you can do that for up to 18 months. That is kind of like a short-term bridge. It tends to be you’re paying almost a full price plus a little bit of the plan. So again, it’s still expensive.
31:59 – The marketplace is the most common and that can be a great option if your income is low enough. There are those premium tax credits available. If you’re in early retirement, you’re on the marketplace and you’ve got no other income, you’re in a low bracket, you can see tax credits of 10, 15, 20,000. So that can be a great option.
32:30 – Again, just sort of depends on the circumstance. If your spouse is working, you might be able to go on to their plan. Some employers have their own retirement plans where they contribute to healthcare. lots of different options. We’ve actually got a pretty good resource. It’s sort of like a checklist to help you think through the different options. Just email me if you’re interested in seeing that. I’m happy to send your way.
33:00 – So just let me know. All right. What is the biggest mistake you or your firm see retirees make?
33:10 – we just talked a lot about the coordinating tax strategy, not taking advantage of the lower brackets. And it’s not like you’re doing anything wrong. It’s just sort of a missed opportunity there. I think another one is inaccurate spending assumptions.
33:28 – We tend to see people under, kind of under assume how much they’re going to spend. So I think just don’t forget about those big purchases. Don’t forget that if you’re pulling from an IRA, you’re going to have income tax associated with that. That’s an out of pocket expense that you’ve got to pay. So again, inaccurate spending assumptions. And then,
33:56 – I’ll probably mention this briefly, allocation. You could be too conservative.
34:04 – So typically people need portfolio growth over the long term. If you’re only in fixed income or you’re only in cash, that’s a risk. On the flip side of that, you can be way too aggressive. And we talked about that sequence of return risk. That can have a big impact as well. So finding the right allocation for your situation, I think, is also important.
34:30 – I think I’m out of time here, hopefully that helped with thinking through a framework, thinking through early retirement, a lot of things to think about. Happy to answer any other questions or if I missed your question, just feel free to email me at jbailey at wealth-crossing.com. Thanks
