Planning for early retirement involves a delicate balance of income, expenses, and long-term goals, especially when factoring in an expected inheritance. James sits down with Matt and Beth, a couple in their late 50s, to explore how their financial strategies align with their retirement goals and how the uncertainty of an inheritance can impact their plans.
Matt and Beth, both 57, are contemplating early retirement wBoth Matt and Beth 57ithin the next two years. Like many affluent individuals approaching retirement, they’ve saved diligently, put their kids through college, and built a diversified portfolio of assets. They own a primary home and a condo and have several investment accounts. However, the couple still faces challenges, including how to manage their savings, potential income sources, and an anticipated $750,000 inheritance.
Early Retirement Goals and Challenges
Matt and Beth are planning to retire by 59½ to avoid penalties on withdrawals from their retirement accounts. This timeline aligns with the age when they can access their 401(k) and 403(b) without incurring early withdrawal fees. However, they are flexible with this target. As Beth humorously puts it, their goal “depends on the day,” indicating that they are open to adjusting their plans based on their financial situation.
One of the couple’s biggest concerns is managing their income flow in the early years of retirement. With monthly expenses around $4,900, plus $6,000 annually earmarked for travel, their financial strategy needs to ensure that they can maintain their desired lifestyle while minimizing the strain on their portfolio during the initial retirement years.
James highlights this critical period, noting that the first five to seven years of retirement rely heavily on their investment portfolio. Their withdrawal rates will likely be higher during these years before Social Security benefits and the expected inheritance kick in. The challenge is balancing these early withdrawals to avoid depleting their savings too quickly.
Travel and Lifestyle Considerations
Beth and Matt’s retirement plans aren’t extravagant—they envision spending their time traveling domestically, visiting national parks, and skiing. Their modest travel goals reflect their desire to stay active rather than pursue luxury experiences. This simplicity works in their favor, as they won’t need to rely on excessive withdrawals from their portfolio to fund expensive hobbies or frequent international trips.
Nonetheless, they plan to set aside $18,000 annually for healthcare costs until they qualify for Medicare and have earmarked $25,000 for a child’s wedding. These expenses, along with their regular travel, are essential considerations as they structure their financial plan.
The Role of Real Estate in Their Plan
Real estate plays a significant role in Matt and Beth’s financial strategy. They plan to sell their primary home and live temporarily in their condo before purchasing a larger property in Petoskey, Michigan. Whether they retain the condo as a rental property or sell it depends on various factors, including market conditions and their need for liquidity.
James emphasizes the importance of flexibility in their real estate decisions. While rental properties can provide additional income, they also require ongoing maintenance, which can become a burden in retirement. By selling the condo, Matt and Beth could free up capital for other investments or purchases, like their desired $550,000 home in Petoskey. James assures them that this purchase is not a “pipe dream,” but it requires careful planning, particularly regarding how they manage their early retirement outflows.
Counting on an Inheritance
The couple is also factoring in a substantial inheritance, expected to be around $750,000 in six years. While this potential windfall could significantly bolster their retirement funds, James cautions them about the risks of relying too heavily on it.
Beth feels confident about the inheritance, noting that half will come from property sales and the other half from retirement accounts. However, as James points out, inheritances are never guaranteed. Unexpected health expenses for their parents, market downturns, or a delay in selling the inherited property could all impact the timing and amount of this inheritance.
James advises Matt and Beth to plan for multiple scenarios, including the possibility that the inheritance might not materialize as expected. For instance, if they receive only a third of the anticipated amount, they may need to adjust their spending or delay retirement by a couple of years to ensure the long-term sustainability of their financial plan.
Strategies for Managing Withdrawals and Taxes
One of the most significant challenges for early retirees is managing tax-efficient withdrawals from their retirement accounts. Matt and Beth have been contributing to both Roth and traditional retirement accounts, but they’re unsure how best to optimize their withdrawal strategy.
James recommends spreading their withdrawals across different account types—Roth IRAs, traditional IRAs, and brokerage accounts—to balance their income and avoid large tax jumps. By carefully managing where their retirement income comes from, they can reduce their tax liability and make the most of their savings.
Beth also brings up their 6% mortgage and asks whether they should prioritize paying it off or continue saving. James advises them to keep building their savings, even at a lower rate of return, to maintain flexibility. Paying off the mortgage would reduce their liquidity, making it harder to adapt to unexpected expenses or changes in their retirement timeline.
The Importance of Flexibility in Retirement Planning
Ultimately, James emphasizes the importance of flexibility in Matt and Beth’s financial plan. By staying open to part-time work, carefully managing their early withdrawals, and preparing for multiple inheritance scenarios, they can increase their chances of a successful, stress-free retirement.
While Matt and Beth are eager to retire, they are also realistic about the challenges they may face. They’ve built a solid foundation with their savings and investments, but as James notes, the key to a successful retirement is planning for every possible outcome—especially those that are less favorable. This proactive approach will help them navigate any surprises and enjoy their retirement years with peace of mind.
For affluent individuals like Matt and Beth, the journey to retirement is about more than just accumulating wealth—it’s about making informed, flexible decisions that support their long-term goals and lifestyle aspirations. By working closely with their financial advisor and staying adaptable, they’re well-positioned to make their dream of early retirement a reality.
