The Complete Guide to Early Retirement

[Music] can I retire at 55. that's what we're going to look at today on the your financial EKG YouTube channel we're going to look at three retirement savings values 500 000 saved for retirement 750 000 saved for retirement and one million dollars saved for retirement and we're asking the question can I retire and if the answer is no then the next question is how can I retire at 55 with five hundred thousand dollars seven hundred and fifty thousand dollars and one million dollars saved for retirement hey my name is Drew Blackson I'm a certified retirement counselor investment advisor representative and I'm your virtual financial advisor help you get to retirement helping you get through retirement and protecting your ability to stay in retirement and we're all asking the question can I retire so let's look at can I retire at 55. now before we can go into the exact scenarios which I want you to hang on to the end because we're going to go into the detailed scenarios we have to ask ourselves how to retire at 55 or how can I retire at 55 and how do I know if I have enough money to retire at 55 have I saved enough in retirement savings to retire at 55. well let's go through a few rules to understand if you've saved enough to retire at 55 and then let's go through some ways that you can retire at 55 and let's put both of those into action and go through the specific scenarios you ready all right let's go now the first way to determine if you've saved enough for retirement is the simple rule called the 25x rule now the 25x rule is really simple basically you take your annual expenses you multiply those by 25 and that will tell you have you saved enough for 4. retirement so let's assume that your annual expenses are fifty thousand dollars a year so your annual expenses are fifty thousand dollars you multiply that by twenty five so we'll do fifty thousand times twenty five that gives us one million two hundred and fifty thousand dollars so the 25x rule says if your annual expenses are fifty thousand dollars then you wanna have at least 1.2 million dollars saved for retirement before you retire so no matter what question you're asking can I retire it's but such and such age you need to have this much saved if this much is your expenses your expenses are not a static number your retirement expenses will go up and your retirement income will go up with Social Security Cola increases your retirement investments will go up with the market and so the 25x rule is a great way to get a base I idea have you saved enough for retirement another way to do that and usually it's on the high side is to take your annual income using the replacement ratio and use the 25x rule so let's say your annual income is a hundred thousand dollars the replacement ratio which is another great rule to follow says that you at least need eighty percent of your annual income in retirement so if your annual income is a hundred thousand dollars eighty percent of that would be eighty thousand so do the 25x rule on 80 000 so 80 000 times 25 that gives you two million dollars in retirement savings before you can't retire now keep in mind if we're using our income with the 25x rule we're not calculating in Social Security and pensions that's going to take this number down what I'm trying to do is a planner is just give you base case scenarios I would rather overshoot than be underwhelmed I would rather go hey you need at least this much to retire you get into retirement you realize I don't need that much money instead of not saving enough getting into retirement and going oh no I need to either get a part-time job or go back to a full-time job because I didn't save enough when we're planning these are just rules and so we're always going to want to be on the high side so the 25x rule gives us a great way to determine have we saved enough to retire at 55. now let's think about how to retire at 55. all right we just went how to save for retirement at 55 we looked at the 25x rule and the replacement ratio now let's talk about how to retire at 55 and the rules that you need to follow if you're retiring at 55. well the first rule you need to think about if you're going to retire at 55 is the rule of 55. now the rule of 55 is really simple and this is for individuals who have the majority of their retirement Savings in 401ks so this is our 401K Savers now if you are working at a current job and you are turning 55 this year or in the year you're deciding to retire between the ages of 55 and 59 and a half you can use your current 401K for retirement income without paying a 10 penalty so if you leave your job if you're fired you retire you decide to just quit altogether and you're 55 years old or older you can use your current 401K for retirement income without paying a 10 penalty so there's no 10 percent penalty that's eliminated now there still is taxes so always think about taxes you're still going to pay money if you have a trade additional 401K with pre-tax money even if you've been putting money into the Roth portion of your 401k if the company's been giving you a match that's going on the pre-tax side 99 of the time when you pull money out of your 401k there's still taxes so the rule of 55 eliminates the penalty but not the taxes all right the second rule you can think about if you're retiring at 55 is using a 72 T now what a 72 T is for individuals who mainly have Ira SEP IRA or simple IRA retirement savings so this is going to be for individuals who need to use their Ira for retirement income before the age of 59 and a half and a 72 T allows you to use your IRA before you turn 59 and a half eliminate the 10 penalty still pay taxes but you can use your IRA for retirement income now there's a few stipulations the first is you have to set up a substantially equal periodic payment schedule now the IRS has designated these schedules there's three of them amortization annuitization and requirement on distribution the most popular are the first to amortization and annuitization you can easily find a calculator on Google talk to your CPA your tax account and call me we can calculate what a 72 T would be for you but a 72 T is a way for you to retire at 55 to use your IRA for retirement income without paying the penalty now if you do a 72 T you have to do it for five years or 59 and a half whichever is longer okay so five years or 59 and a half whichever is longer so if you retire at 57 and you use a 72 T you've got to do it from 58 59 60 61 to 62. if you retire at 50 you have to do it till 59 and a half 59 and a half is longer than five years keep in mind this this 72t follows a very stringent IRS Schedule if you mess it up there is a 10 penalty in the year that you mess it up and all the previous years so the IRS wants you to follow this to the T so make sure you work with a CPA a tax accountant myself a financial advisor somebody who understands 72 T's but this is a way that you can retire at 55 and use your IRA assets for that now another way that you can retire at 55 5 and use your retirement savings to do that is to use a taxable brokerage account now I talk a lot about a taxable brokerage account on this channel and what a brokerage account allows you to do is you're allowed to invest money at any time any amount and you can pull out money at any time with any amount it's just like having a basic account in your name so for instance for me it would be a Drew blackston individual investing account it's set up at TD Ameritrade or Vanguard Fidelity Charles Schwab wherever you have custodianship and it allows me to invest in anything I want but specifically it allows me to invest for retirement now with a taxable brokerage account I do pay yearly taxes so there will be taxes on dividends interest capital gains also I can write off any Capital losses for those crappy stock picks that we might make and so a taxable a brokerage account gives us the flexibility to use money for retirement at any time there's no IRS rules on a taxable brokerage account so if you retire at 55 you don't have to use the rule of 55 you don't have to use a 72 T you can just use that money to bridge the gap to get you past 59 and a half or you can use it to get the Social Security it's your freedom bucket of money you can use it for whatever you want and I encourage you if you're saving in a 401k an IRA or Roth IRA think about opening up a taxable brokerage account and saving more money in there as well and looking at ways that you can structure your retirement income so that maybe you won't have to do the rule of 55 you won't have to do a 72 T but you can use your brokerage account get over the age of 59 and a half and then the world is your oyster for your retirement income all right the last thing I want you to think about when you're thinking about how to retire higher at 55 is using a combination of the rules we just talked about because you don't have to use one or the other you can definitely use a combination think about it like using bucket planning maybe you've worked at multiple jobs so you've got an old 401k you've got current 401ks you have money in a taxable brokerage account and you want to retire at 55. think about using bucket strategies to get you over the age of 59 and a half and allow you to retire at 55. so let's say you have an old 401k that you put into a rollover IRA and then you have your current 401K at your job and then you have money and let's say it's in Charles Schwab this is your taxable brokerage account okay so you have three buckets of money all three uniquely different the Charles Schwab monies are Freedom bucket we can get money in get money out our current 401K we can use the rule of 55 as long as we are turning 55 in the year that we decide to quit and we have our rollover Ira which we can use a 72 T and if you're 55 years old and you need income that's going to last till you're over the age of 59 and a half which gives you the ability to use all these without penalties without special rules you might do a combination maybe you start using the rule of 55. and you don't want to pull out too much money of your 401k because of taxes so you pull out just as much as you need for the rule of 55 and then you use your Charles Schwab account to make up the income because the income over there is only capital gains interest and dividends or maybe you need more of a steady paycheck every month so you set up a schedule with a 72 T and you get a steady paycheck every month for five years or age 59 and a half whichever is longer and then you use your trial Schwab to make up any excess income that you might need for travel or for purchases or whatever so you don't have to use one or the other you can use a combination of all three just remember that all three are taxed differently you're gonna have ordinary income tax on your IRA and on your rule 55 401K you're going to have capital gains and interest okay and dividends on your Charles Schwab money or your taxable brokerage account and with the 72 T you just need to make sure you follow the rules exactly or there will be a 10 penalty on the year that you mess up in all previous years so again let me remind you make sure you work with a CPA a tax accountant call me or your financial advisor if you're doing this but this is how you can retire at 55. now let's look at the specific strategies can I retire at 55 with five hundred thousand dollars in retirement savings with 750 000 in retirement savings and with 1 million million dollars in retirement savings all right can I retire at 55 with 500 000 that's what we're going to look at here now we have to take in some characteristics of this person that is retiring at 55. now we already know they have five hundred thousand dollars saved for retirement asking the question can I retire with five hundred thousand dollars at 55. so they're age 55. now Social Security at 67 is going to be twenty eight hundred dollars that's what I found is a good average for people at full retirement age retirement expenses fifty thousand dollars a year that's the average across the entire United States it could be different based on where you live if you're in La it's going to be different than when you're in Tampa like me so fifty thousand dollars is the number we're going to use for this scenario obviously your scenario is going to be individualized for you living in Toledo or you living in Des Moines where ever you might live the rate of return for the money that's in the market is going to be six percent that means our investments are going to stay invested in the stock market they're going to pay us a retirement income and we're going to assume a six percent rate of return for the rest of our life now the stock market's averaged right about eight percent since 1950 but we're going to use six percent because we're using our money to live off of and we're going to use inflation of three percent that's just an easy round number inflation's average right about 3.24 the last 108 years so 55 to 67 we want to get the full retirement age if we're retiring early we want to try to get the full retirement age so five hundred thousand dollars in retirement assets 4 166 dollars is our monthly expenses okay because that's fifty thousand dollars divided by twelve just an easy way to do that so we're going to need 4160 six dollars a month off of our five hundred thousand dollars now what I did because I wanted to be extremely accurate for this video down to the penny I actually put this into my retirement planning software this 4166 is going to have inflation of three percent but that's going to be calculated on a monthly basis as well normally when I do a video like this I calculate inflation on an annual basis but I wanted to be so exact so down to the penny so you can answer the question can I retire at 55 with five hundred thousand dollars so this value is going to get inflation on a monthly basis so 4166 plus inflation is what we need off of our retirement investments from 55 to 67. we're going to earn six percent in the market and there's three percent inflation okay so how long or what amount of money do we have at 67 well unfortunately in this scenario we have zero dollars it actually only makes it about 10 years from 55 to 65. so can I retire at 55 with 500 000 know if your retirement expenses are 50 000 a year so I come back and I say okay how can we retire at 55 with five hundred thousand dollars something has to change we either have to increase the rate of return on the money in the market we have to either lower inflation or we have to lower our monthly expenses I don't necessarily want to go down the risk scale to try to earn more income in the market so we're going to leave that alone inflation's not going down anytime soon so it's going to have to be monthly expenses so let's use the same scenario five hundred thousand dollars we want to get from 55 to 67 we're going to have a six percent rate of return and three percent inflation how much money or how much retirement expenses does that have to come down in order to accomplish this well according to the software again I wanted to be very very very detailed for this it's 2500 bucks so twenty five hundred dollars a month is what statistically can be pulled off of this money to make sure it's going to last for the rest of this person's life 346 thousand dollars so we've pulled out twenty five hundred dollars a month plus inflation we've got six percent on our money in the market and we're down about what's that a hundred and sixty thousand dollars in round numbers 500 to 346 at 67 though we're going to have social security kick on that's twenty eight hundred dollars our investments have inflated or I'm sorry our expenses have inflated from 2500 to 37 14. so that's our expenses now this is our social security we're still going to get the same rate of return in the market when we're doing the Assumption so six percent and three percent is inflation so now we ask ourselves how long is this going to last and based on inflation calculating on a monthly basis a six percent geometric rate of return three percent inflation this goes to zero at 95. so we get this person from 55 to 95 if their retirement expenses are twenty five hundred dollars a month all right can I retire at 55 with 750 000 in retirement savings let's look at this scenario so again we've got a 55 year old individual Social Security at 67 is going to be twenty eight hundred dollars a month we've got 750 000 in retirement savings okay I'm not specifying the specific investment vehicle we've just got 750 000 in in retirement savings our retirement expenses are fifty thousand dollars a year that is an average annual retirement expense for the United States so maybe you're in Detroit you don't have fifty thousand dollars in retirement expenses maybe you're in Louisville might be less just depends on where you are in the country our rate of return for the 750 000 in the market is six percent in our inflation rate is three percent that means that our spending is going to increase by about three percent per year that's because that's the 108 year inflation average which is calculated by the CPI which is a consumer price index so let's look at this I want to retire at 55 I've got 750 000 in retirement savings can I do it so from 55 to 67 our expenses would be four thousand one hundred and sixty six dollars per month that's fifty thousand dollars now we're gonna put inflation on this and that inflation is going to be calculated monthly I've used my retirement software to get all of these figures because I wanted to be exact down to the decimal point Penny point zero zero one exact so I'm not going to use my calculator I'm going to use some software to make sure we are exactly exactly correct now six percents are rate of return on the money in the market and we're going to use three percent inflation okay so inflation is three percent how much money are we going to have at 67 when we kick on Social Security well simple we're gonna have three hundred and twenty eight thousand three hundred and eighty two dollars so we're down four hundred and something thousand dollars basically taken out fifty thousand dollars a year inflated at three percent so at 67 now our expenses have increased because of inflation Social Security is kicking in so we're getting Social Security of twenty eight hundred dollars a month but now our expenses because of inflation have gone up and essentially we run out of money at 74 years old we're out at zero or we're out at 74 we have zero dollars in retirement savings so can I retire at seven at 55 with 750 000 not with fifty thousand dollars in annual expenses now keep in mind we've got to change some things we either have to lower our monthly expenses we have to we have to raise the amount of money we make in the market so our rate of return has to increase or inflation has to lower well let's just say this is not going to change so inflation's not going anywhere so it's going to just stay at three percent most people say well Drew I can earn more in the market well let's see how much do you have to earn to have fifty thousand dollars in retirement income based off of 750 000 in retirement savings and inflation at three percent your rate of return would have to be nine point three eight percent now my question to you is can you guarantee 9.4 in your retirement investing accounts every year between ages 55 and 100. probably not and so now we have to go back to the expenses we've got to lower our retirement expenses so if we want to retire at 55 with 750 000 we either have to lower our expenses or bring in some more income now if you're married obviously obviously this scenario is going to be different I'm looking at this as a single individual so let's go let's look at this can I retire at 55 with 750 000 and lower our expenses what do we have to get to in order to do this well 750 thousand dollars when we look at the calculation in order to retire at 55 with 750 000 our starting monthly retirement expenses would have to be 3 100 bucks because remember that Thirty One hundred dollars is going to get inflation so we're going to get six percent is our rate of return in the market our inflation rate is three percent so from 55 to 67 we're going to take out Thirty One hundred dollars from our retirement investing accounts so at 67 we'll have 687 445 now at 67 we're kicking on Social Security of 2 800 bucks our expenses have increased from the thirty one hundred dollars now they're at 46.06 that's what our expenses are so we'll take our expenses we'll subtract out our social security and that's what we're going to need from our retirement investing accounts for the rest of our life six percent still our rate of return and three percent is inflation how long is now this money going to last we are out we're at zero at 98. I feel really good about being at zero at 98 years old so if you're one to retire at 55 with 750 000 assuming six percent rate of return assuming three percent inflation rate and assuming that you're single you need to start with Thirty One hundred dollars in retirement income all right so I hope this has helped can I retire at 55 with one million dollars we've made we've gone through can I retire with five hundred thousand dollars can I retire with 750 000 and now we're asking the question can I retire at 55 with 1 million dollars now let's look at our individual again to remember our characteristics we have a 55 year old individual they are single Social Security at 67 2800 a month and we're trying to get the 67 because that's the full retirement age remember if you take Social Security at 62 you're only going to get 70 of your full retirement benefit if you take it at 67 you'll get a hundred percent of your full retirement benefit and if you take Social Security at 70 you'll get 124 of your full retirement benefit because this individual is single we're trying to maximize our social security benefit which is why we're trying to get to 67 not starting it earlier okay our retirement expenses are fifty thousand dollars a year that's just the national average our rate of return for the million dollars in the market is six percent that means this million dollars is going to stay invested it's going to stay invested in high quality ETFs dividends stocks mutual funds whatever and it's going to earn a geometric return of six percent now we know the market doesn't move in a straight line it moves like a roller coaster like a duck duck duck duck duck duck and sequence of return risk which is the risk that the market will go down in the first few years of your retirement that is a real risk and it's something that needs to be calculated but on the board we're going to use a six percent rate of return the markets averaged eight percent since 1950 so let's go back two percent to be more conservative and go to six percent our inflation rate is three percent that's the 108 year average measured by the Consumer Price Index or CPI so we've got a million dollars we're 55 years old can I retire well let's use the fifty thousand dollars in retirement expenses first so we're going to go from 55 to 67. and we need 4166 dollars per month off of our million dollars that's fifty thousand dollars per year now what we've done is we've taken this and I've used my retirement calculation software my financial EKG to make sure this 4166 dollars is getting that three percent inflation bump on a monthly basis so instead of looking at on an annual basis we're going to look at it exactly like the Consumer Price Index we're going to look at it on a monthly basis six percent is our rate of return in the market and three percent is our inflation so from 55 to 67 we're taking out 4 166 dollars a month at the end of those 12 years will have 856 000 644 dollars in retirement savings so over the last 12 years we've taken out what is that about a hundred and forty hundred and fifty thousand dollars in retirement income now we've earned six percent a year and our investments are down about a hundred and fifty thousand dollars not down because of loss just down because we pulled out retirement income now from here our expenses have gone up because of inflation they've increased to six thousand one hundred ninety dollars and we're kicking on Social Security of 2 800 bucks six percent is our rate of return three percents are inflation now the one thing I did not calculate on here and it's really hard to calculate this is a social security Cola increase now the average cold increase right now is 1.8 percent that's what it's been measured since 1974 when they started measuring Cola for Social Security so I'm just not going to calculate that in as that goes up with this individual it's going to be great it's going to be gravy but again we're just trying to get a base case so at this point at age 67 we've got 856 thousand dollars in retirement savings we need retirement income of six thousand one hundred ninety dollars so we subtract out Social Security how long does this money last well this is out at 87 which is pretty good 87 years old the average life expectancy for a male is 82 average life expectancy for a female is 84. so 87 is actually pretty good in this scenario and the rate of return that you would need on this money to make sure it lasted until a hundred is only 7.13 so you'd actually only have to earn 7.13 annually to make sure this million dollars last forever now can you guarantee that you're going to make seven percent every year for the rest of your life no which is why as a financial planner we're going to look at a different scenario so we've got a million dollars I want to get this just a few more years past 87. I'd like to get it into the mid 90s I think that as if you retire today at 55 Health Care is going to be totally different so we need to push this number to the mid 90s because that's how long I think you're gonna live so when I go into the software and I say okay I want this to last till 95 96 years old what do we need to adjust well we know we can adjust our rate of return that's the how much the money makes in the market that's not always the best thing to do we can take inflation and take it down we're not going to do that or we can adjust expenses let's do that first let's adjust expenses so when we do that the expense number that we would need to make this million dollars last to the mid 90s is it 55 we're going to start with 3 800 in retirement expenses we're going to use the same rates of return six percent and inflation is going to be at three percent so let's go 55 to 67. at 67 we'd have 982 527 so as you can see the difference here of look at that 130 or how about a hundred and twenty thousand dollars because we lowered our expenses was that 41 minus 38 about 300 per month now again this 3 800 is getting inflation at three percent on a monthly basis so it's an annualized inflation rate of three percent broken down on a monthly basis so at 67 again Social Security kicks on of 2 800. our new expenses then would be 5646 because they've grown from thirty eight hundred six percent again is our rate of return inflation's at three percent how long does this last boom we're at zero at 96. so 96 we've gone an extra 10 years basically from up here now the rate of return that we would need to earn to make this million dollars last well past 100. it's really simple it's only 6.32 percent so now the rate of return from up here from 7.13 has come down to 6.32 so you see how you can really if when you're doing retirement planning it's not an all or nothing there's a lot of different variables that we can look at to adjust to give us the scenario that best fits our individualized needs so can I retire 55 with a million dollars yes you can if you do it the right way hey thank you so much for watching God bless bye-bye thank you [Music]

Channel: Drew Blackston, CRC®

Views: 9,192

Keywords: can i retire, can i retire at 55, early retirement, retirement, retirement planning, successful retirement tips, how to retire early on low income, retirement planning at 55, financial planning 2023, how much do i need to retire at 55, retirement planning for 45 year old, how much do i need to retire at 60, financial independence for women, retirement investment strategy, retire early financial independence, how to retire early, retirement planning 101, retirement savings

Id: aLs3nssnDmk

Length: 34min 39sec (2079 seconds)

Published: Mon Jun 19 2023