One of the things we consistently get questions about is why we’re taking the two-phase approach, especially with well-funded retirement accounts already in place, instead of starting to tap those funds now, and already being able to retire. We don’t think it’s a good idea to see taxable and tax-advantaged funds as one big pool of money. And we definitely don’t think it makes sense to apply the 4% rule to your total balance to figure out what you can spend in your early retirement years, before you can access your tax-advantaged funds without penalty. (We don’t think you should be using the 4% rule at all, actually, but that’s another post.) Or even that it’s a fine idea to plan on level spending over your lifetime. Tax rules can and do change, which could spoil your early withdrawal plans. The problem is that relying too heavily on your tax-advantaged funds for early retirement makes it easy to accidentally spend some of the money older you needs later. And by the time you realize that you should have saved that money for later instead of converting it or withdrawing it early, you’ll have a much harder time earning more income than you would have in your 30s/40s/50s. But as for SEPPs and the Roth conversion plan, we see a few other important downsides worth noting, in addition to all that stuff above about selling out future you: Forced to sell when you’d rather not: With a SEPP, you must withdraw equal amounts each year, even if your investments are tanking and you’d rather not sell shares. If you’re reliant on a Roth conversion for your cash flow, you might be forced into the same situation, even though there are no tax rules forcing you to sell shares in a down year.
We’ve all heard the excellent advice to start saving and investing in our twenties and keep at it throughout our careers so that someday we will be able to retire early, wealthy, or perhaps even both. Of course, not all of us started saving early. Or some of us did, but life happened along the way, our savings got interrupted (or spent), and we are in the difficult position of having to start over or catch up later in our careers. Or perhaps you were counting on a generous employer pension that has since been frozen, and you now face the challenge of saving and investing on your own to make up for a smaller pension benefit. There are many reasons why people are not able to save early and/or as often as they would prefer.
Fortunately, there are several ways to help patch up these financial potholes along your road to retirement. Every dollar we can save now is a dollar we won’t have to scrounge up later, when we are perhaps well past our prime scrounging years. Below and in no particular order are some of the retirement back-up strategies I have explored and discussed with clients and colleagues over the years:
Estimate your retirement budget.
Make that plural: “budgets.” Create two retirement budgets. The first one will be your minimum financial requirements – your best estimate of how much you will need to meet the necessities of life (food, clothing, shelter, insurance). You might find that you could retire on significantly less than you imagined. The second budget will be your desired lifestyle – the basics along with some travel or other bucket list retirement goals.
Regardless of your resources, retirement is going to have a price tag attached to it like everything else. Knowing what your financial targets are makes it easier to brainstorm how you can get there. If you want to back into your budget based on how much income you are currently on track to generate in retirement, use this retirement estimator calculator to help you visualize your future retirement income potential.
Plan to delay and maximize Social Security.
Although entering retirement with less savings than you originally planned can make it very tempting to claim Social Security as soon as possible to generate some cash flow, this decision may actually backfire. Once…