Early Retirement - Financial Freedom (Investing, Tax Planning, Retirement Strategy, Personal Finance)

3 Retirement Rules Of Thumb That Don't Apply To An Early Retirement

• Ari Taublieb, CFP®, MBA • Episode 189

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There are many rules that work for the traditional "Retire at 65" and "Die at 95" (sounds dark, I know).

The truth is those don't rules apply to you if you want to optimize an early retirement.

You may need this income a lot longer and want to have a strategy designed for years of travel, healthcare costs, 40+ years of income, etc.

I walk you through what you do and don't need to worry about when it comes to your early retirement.

Create Your Custom Early Retirement Strategy Here

Get access to the same software I use for my clients and join the Early Retirement Academy here

Ari Taublieb, CFP ®, MBA is the Vice President of Root Financial Partners and a Fiduciary Financial Planner specializing in helping clients retire early with confidence.

Speaker 1:

There are so many rules out there you don't know what to follow. Some people say that you should save 15% of your income. Some people say you need $2 million to retire, and I don't believe in any of that. I don't believe in cookie cutter planning. I believe it just depends how much you want to spend in retirement and do you have the assets to support that level of income. The truth is, you might be in an awesome spot and your neighbor might not be, but it doesn't mean that you're not gonna run the chance of running out of money, because maybe you wanna spend a lot the first 10, 15 years and then a whole lot less in the future. But then all of a sudden a healthcare event comes up and it might be the opposite where all of a sudden you've got a brother or a sister or a coworker that's like, oh my gosh, I'm in such a good position, and then all of a sudden they go. Well, it turns out I kind of under projected what I wanted to spend and that remodel. Well, that was way deeper than I thought it was going to cost my pocket. So to me it's got to be a customized plan and I'm going to walk you through the rules of thumb that you should think about and the rules of thumb you should not think about in today's episode. There's a lot of fluff out there and it is my job, as I see it, it to give you what is the most important information that is actually applicable to you. So, if you don't know already, my name is Ari Taublieb, I'm the certified financial planner, I'm the host of the Early Attirement Podcast and I'm the vice president here at Root. So we are, of course, on the podcast app. If you're listening right now, continue to listen there If you enjoy doing it that way. If you want to watch on YouTube, you can, of course, do that now, and you're going to see me walk through the review of the week. So this comes from Katie Libby, 1315, who says took the new retirement route at 59. I have a $10,000 side gig that feels more like volunteer work. Now, at 65, we have not touched our retirement funds. Spouse plans to take new retirement route in two years at 62. Next stage will be transitioning from saving to spending. So awesome comment. I love hearing that you're bringing in some income and it feels like you're volunteering.

Speaker 1:

What I the reason I want to highlight this comment. It is not easy. It's not a light switch that you can simply go yep, I'm just going to turn the lights off or turn the lights on and I'm going to be a great spender. Now, if you are a great spender and a very great spender if you know what I mean, you wouldn't probably be listening to this right now, or you're listening going. I need a lot of help, because most people I speak to are not amazing spenders. They're amazing savers and that's why they are where they are today.

Speaker 1:

I want to make sure you do not remain a good saver. You're like what do you mean? Well, if you remain a good saver, you might have plenty of money, but you might look back going. Why didn't I spend more when I had my energy and my health, when the money was literally worth more? And I don't want you to run the risk of running out? That's why I say I'm the meanest financial advisor around, because I don't want you to run the risk of running out too early going. Why didn't I work another six months or another year, so I could actually have spent what I wanted to the rest of my life? At the same time, I don't want you to underspend and go oh my gosh, I have plenty of money. What was I thinking here?

Speaker 1:

So love this comment from Katie Libby the way I like to explain to clients. It's more like dimming a light, and some of you are like, yeah, I've got the new dim light system in my home. Some of you are like, no, I still got the old fashioned light switch. Well, if you have that dimming feature, that's what I want it to be more like where not even I want it to be more like. That's what it is like where you're in retirement and you're like, oh, so I'm starting to spend a little bit more and little more and I'm comfortable and, oh, I'm spending and I'm still in a good spot. Okay, great, Let me spend a little more. It's not some magic switch. So love this comment from Katie Libby. 1315. Thank you for this, as always.

Speaker 1:

Let's hop back into the content that I want to go through today on the episode. If you, of course, want to submit your own question, or you want to leave a review of the week for me to mention, or you're on YouTube and want to drop a comment, that is, to leave a review of the week for me to mention, or you're on YouTube and want to drop a comment. That is how I pick these and it's just fun selfishly for me to read what all of you guys are thinking. So thank you for those that are dropping comments. This makes my job more fun. So this is what I want to go over what are the rules of thumb that are totally useless, that you should not avoid excuse me, that you should avoid and which are the ones that you should not avoid? So the first one I want to go over is there's this phrase of hey, you need a million bucks to retire, or 2 million to retire. You don't need any of that.

Speaker 1:

I have a client with 500,000. That's, in a way, better position than my client with 10 million, because the 500,000 are client, they are not big spenders and they have a pension that covers the majority of their needs. I have another client with $12 million who I am consistently saying if you stop working, we're going to have a big problem, because you want to spend $35,000 a month, which is okay. Some of you are like $35,000 a month, like what are you crazy? You don't let them spend that. They want to spend that and I'm the first to say, great, I want you to spend that, but it means you're working this long and most people don't want to work into their sixties or seventies, and this is a person that loves what they do so much that they're going to if that means they can spend more. That's more important to you.

Speaker 1:

So one of the first questions that I will ask people when I speak to them is would you rather work longer so you can spend more, or would you rather work less, even if it means you can't spend as much? And many people go. You know what? 10,000 a month couldn't spend that if I wanted to. That would not add to my quality of life. Other people go 14,000 a month. If you told me I could only spend 14,000 a month, why am I? Even stopping work Like that wouldn't even let me travel to the degree that I'd like. So it's not this cookie cutter approach that you. Just you can't follow that. Now, some of you have seen this, some of you have not, and if you're listening on the podcast app I know you can't see it, but I'll explain it. You can see I've got my little jar here. It's the coolest gift I've ever received from someone and it says anti-cookie cutter jar. Love the pod One people know I do like cookies and some.

Speaker 1:

What's your risk tolerance on a scale of one to 10? You're like, well, I'm a two today and an eight tomorrow, like that's not going to help me retire and that's true, it doesn't. So I'm going to walk through what are the rules of thumb to think through, the first rule of thumb that I want you to think through and I'm going to tell you what not to worry about. I want you to understand that you can do a whole lot better than the 4% rule. So I want you to think about your portfolio, like I mentioned last week, like a business where it's its own, like living, breathing thing that I need you to treat like a baby. And there's going to be times the baby's really hungry and you got to go feed it. Maybe that's like you're spending a little less because markets are doing well. Then the baby's going to be in total bliss and you're going to love it, and that's going to be like you're on vacation, spending more going first class because markets are doing well. So I have a few clients that like send me photos of their grandbaby and they're like this is my portfolio right now. I'm like, okay, that's pretty hilarious. So my point here I want you to understand you can do a whole lot better.

Speaker 1:

Not bad, but it doesn't go deep enough and doesn't apply to an early retirement. The 4% rule says if you have a million bucks, you can live off of 4% 40,000 a year and you won't run out of money. It's good, but it's designed for 30 years, so it's not applicable to you. If you're considering retiring early, you can take out between really, the study says about 4% and you won't run the risk of running out. But let's assume you have a million bucks. If you take four percent out of a million, that's forty thousand. But that's not enough. Like what do you mean? Well, if you're pulling from an IRA, do you need to take out forty, five or fifty to pay for taxes to end up with forty? It's not taking that into account, so I need it to go deeper than that. That's why I like these other studies, like the guardrails approach, which is designed for an early retirement and it says you can take out between 5.2 to 5.6% and you won't run the risk of running out of money for 40 plus years. So if you have 2 million bucks, you can really quickly go. Oh yeah, I can spend a hundred thousand dollars a year after taxes, adjusted for inflation, and I won't run out of money. That is very real if you're following the right rules. So keep that in the back of your head.

Speaker 1:

That's number one. Number two here the concept of saving 10 to 15% of your for retirement. I'll go tell that to children of clients, and clients will come to me and go all right, you didn't tell me to do that, so what's going on? Here I go. That's true. I want your child to build good habits and if we overwhelm them with information, they're not going to want to save for retirement and they're going to be so overwhelmed that they're like going to feel bad all the time, wondering if they should be saving and they should. So give them a number and tell them to never decrease it. Let's assume they're making $60,000 a year. Tell them to save 10%. Okay, great, $6,000 a year. Tell them to never decrease that. So now they're making $80,000 a year. Now they're saving 8,000. Well, now they're making 100,000. Now they're saving 10,000. Let them understand and get involved in finances on their own and don't overcomplicate it.

Speaker 1:

I don't want you, if you're in your 50s, saving 10 to 15% for retirement. Now some of you are like, why not, that would help me have more money? I go, that's true. And if you want to always have more money, work 30 more years and you'll have plenty of money, you're like, yeah, but then I'll be 90 and I can't travel or spend time with family. I go exactly.

Speaker 1:

The point here is not to keep saving when you're early on in your career. I need you to save like crazy so that it can grow for you. When you've got 2 million bucks and you want to save 20,000, I will say who cares? And you're like, why not? I thought every dollar matters. I go, it does. And if you have $20,000 to save and you can still live the life you wanna live, then great. But I don't care because you have $2 million and I care that that's growing way more efficiently because a 10% return on $2 million is $200,000. Good luck trying to out-save that strategy. So it becomes a whole lot more important to invest well versus continuing to save if you're thinking about your retirement. That's number two, these rules of thumb. Some are applicable, some are not. The third one here. This is the big one In today's episode. It's going to be shorter than usual, but it's important.

Speaker 1:

Everyone says personal finances is personal. Hey, that's great and that's true, but it also depends. And when I went to a doctor and this was months ago now I said hey, doc, you know that sounded good. I think you think that sounded good. I don't know what you just said. And you just said it depends. I need more than that. You're the doctor. Tell me what to do. So I don't want to make fluff content for you guys. I want you to go. Oh, yeah, it depends, and personal finance is personal. But, like, still, teach me, what should I do? So what I want you to do is I want you to understand and dream big for a second.

Speaker 1:

How much would you love to spend in retirement? Not, what could you get by on? Not, yeah, I think we could make it, because a lot of you are really nice. And you reach out to me and you go yeah, ari, you know I've got 2 million bucks, 3 million, I think I can make it happen. Or you know I've got 500,000 now and you know I'm growing and I'm going to be in a position one day where I'm going to not have to work any longer. I said that's true, what would you love to spend and you guys are like, well, I think 5,000 a month is kind of good, I could get by on that, but I've got a mortgage and that's going to go away. I go yeah, let's assume there's no mortgage, no rent, you own your home, free and clear, Even if you don't just humor me for a second there's no remodel.

Speaker 1:

How much would you love to spend in retirement and dream big? I'm talking travel and golfing to the umpteenth degree and all of that. And one person said I could get by on 5,000 and I'd love to spend 12. Another person said they could get by on 4,000 and they'd love to spend six Two very different people. If you would love to spend 6,000 a month, I'm looking at that and I'll do it with you, because I do it on my calculator.

Speaker 1:

If you go, listen, I know I could spend more than $6,000, but $6,000 a month or $72,000 a year, that would really allow me to do a lot of what I want to do. Like I would be very happy living that life and I go great, I want you to be happy living that life and if you tell me it's not going to add a whole lot more value to your life by spending more. It's like great, you might need way less than your neighbor or your coworker that's still working today. If you want to spend $6,000 a month and you have $2 million, that's a 3.6% withdrawal rate. That's so low that I'm going to be like, hey, I need you to spend more than that, or I need to make sure you're not working unnecessarily right now. Now you might go yeah, that's great, but I would love to spend 150,000 a year. Okay, great. Well, if you have $2 million and you want to spend 150,000 a year, that's a seven and a half percent withdrawal rate. So it's not me saying you don't get to retire. It's me saying listen, you want to go, do part-time income and bring in 20, 30,000 a year and enjoy your life more and still travel? Or would you rather work another two, three, four years so you could spend this $150,000 with your new two and a half, three million bucks with total confidence? So it's all about maneuvering these levers in ways that resonate with you.

Speaker 1:

So I spoke with someone this week who's like hey, I really love my job, I just don't want to do it forever, but it's super stressful. I love it, but it's super stressful. I don't know how long I want to keep doing it, but then I'm going to do something. I'm not going to do nothing. I don't know how much it's going to bring in. Maybe 40,000 a year. I said that's amazing. Like 40,000 a year. I thought that'd be like no big deal, because like 40,000 a year is really important because it's 40,000 less coming from your portfolio, which lets that continue to compound and grow for you a whole lot more.

Speaker 1:

And that 40,000, if you thought that you might like something and you could potentially bring in 20, 30, 40, 50,000 a year, but you would do it for 20 or 25 years you're in a really strong spot to consider in early retirement. If you already have, yeah, seven, eight, nine, a million bucks, you are in a strong spot, stronger than you think. So what I always want you to do is dream big. There's nothing right or wrong. You might go. I would love to spend 15,000 a month. You might go. I don't know, it's going to change. It is going to change. I recognize that. I want you to. Really, before I'm giving a green light to someone on an early retirement, I'm going.

Speaker 1:

I want you to use the software that I use for my clients and you guys can buy this right now, if you want to, in the description and model out. How often are we buying new cars? Every 10 years, every 15 years? 75,000 for a new car? Is it 50,000? Um, what about vacations? How much are we spending? Is it $30,000 every year for the first 10 years? Is it forever? You're always going to want to travel. Is there a certain amount you want to leave to children? Once you model it out, you're going to have way more confidence to go oh, I see what I'm on track for, and this software allows you to do it better than anything I've ever used before.

Speaker 1:

So this does not come with like one-on-one guidance from me, but it's for a few hundred bucks. Get the software. It's going to help you understand how much you need in the position that you want to be in, and it's going to decrease a lot of anxiety, which is why I release it to all of you. So that's what I wanted to go through today A few kind of pro tips to leave you with things to not worry about.

Speaker 1:

And this is stuff that you may have seen online or may not have, but there's something called the rule of 10, which is hey, reflect on how it's going to make you feel in 10 days, 10 weeks and 10 years. I like the rule. It sounds nice and perspective is really helpful. So if you're buying something, hey, how's that going to make you feel in 10 days, 10 weeks, 10 years? I like the rule, but that's not the rule to dictate your retirement on A lot of people. Go well, in 10 years, are you going to still want to spend $70,000 a year on travel, or 20,000. Hey, I don't know. Like I haven't done it yet, so don't beat yourself up. Going, well, I don't know exactly what I'm going to want to spend it. You couldn't know. You couldn't know everything.

Speaker 1:

This is a rule of thumb I don't love, but I'm going to mention it anyway. It's called, like, the house expense ratio. Some people say you add your mortgage and taxes and insurance and it should not exceed 30% of your gross monthly income as you're still earning and making money. I like the rule of thumb, meaning I don't want you to go buy a home that's 50% of what you're bringing in and you're like, listen, it's now. Yeah, I bought this awesome home, but now I can't spend or save what I really want you to do. So I don't love the rule in and of itself, because I have a client that currently is spending 50%. But they inherited a good amount of money we call it the lucky sperm and egg club and so they're in a perfect spot to own the home and pay that current mortgage they're paying. So if you're listening to this right now and you know who you are, you're in a good spot.

Speaker 1:

What I do want you to do is understand how much you can spend on you, not the dream. So I just said, hey, I want you to dream big travel, whatever. How often are you going to give to children and buy new cars? And yeah, I want you to dream big. But I would even argue like, let's assume you need 7,000 bucks a month to meet all your basic living expenses. Okay, cool, that's not really going to you. That's going to bills and groceries and gas. Yes, it's important.

Speaker 1:

How much are you spending on true you fund? I spend between 10 to 12% of what I make on just me when I say me buying new soccer cleats, making sure that I can go to physical therapy. Now I go to a very nice physical therapist and I pay out of pocket and I let myself do it because I'm saving intentionally for that reason. I own a semi-professional soccer team with my brother and we want to make sure that the guys on our teams are feeling good. So, yeah, we're buying all the little sugar sticks and stuff before the games and get them hyped up and we've got them in the recovery boots. We like doing that stuff. That's fun money that I get to do for me. I want you and your partner to go. Yeah, we have our fun money design, not just like go to the movies where, hey, you know, here's a thousand bucks every month, but like very intentional, here's how much I want you at least spending on true you for fun.

Speaker 1:

Most people don't do that or never have done that or don't understand how to do that. Once again, the software that I talk about and that I use for my clients and you see on the YouTube videos it has an amazing budgeting app. Now, I don't personally believe in budgeting every week. I don't have the discipline to do weekly spreadsheets Some of you do Kudos to you. I don't and I don't believe it works.

Speaker 1:

I believe the best thing you can do is automate. And so, if you have 10,000 a month coming in net after 401k contributions and insurance. Okay, 10,000 months coming in, I want you to automate a portion ideally 10% to your superhero account. Now, it depends how much you have in your superhero, but your superhero is your brokerage account. That's what's gonna make all the magic of an early retirement really happen. So, as you're saving and investing, I want you to think about that brokerage account beyond just adding new money to your 401k or your IRA.

Speaker 1:

I don't want you to be qualified rich and cash poor. That's where you have so much money in your 401ks and IRAs you can't actually retire early or even consider a part-time income job because so much of it is locked up. I have a client that's 53 that I'll always tell you the story of, who has $4.3 million and they want wanna quit. They cannot get themselves to do it because it's all locked up and they'd have to pay a 10% penalty on the income they withdraw, which they refuse to do even if they're in a good spot. And so here's someone that really invested too well and cannot retire early. So I don't want you to do that.

Speaker 1:

So these are the rules of thumb that I wanna go over today. There's a lot more than this. Okay, how much life insurance should I have and hey, when should I do a Roth conversion? And I have plenty of videos and topics on that Today. I just wanted to kind of de-still a lot of common myths out there so that you're not out there thinking and worrying about stuff completely unnecessarily. So that's it for today's podcast. Guys, if this is helpful, please leave a review, like it, share it with people. That's what allows me to have more fun and I like getting to see all of your responses. If you're watching on YouTube, please like this video and share it with someone that you think could resonate with it. That's all I got for you guys today. Love you guys.

Speaker 1:

Thank you for listening to another episode of the Early Retirement Show. If you have a question that you want answered in a future episode, you can always go to my website, earlyretirementpodcastcom. That's earlyretirementpodcastcom, and you can go ahead and submit a question that I'll look to answer in a future episode. Thank you all for listening. Please do rate it, review it and share it with someone who you think would benefit from this information. If there's anyone out there that you know, I certainly appreciate it and I will see you all each week. Hey guys, it's me again. Please be smart about this. Nothing in this podcast should be construed as financial tax or legal advice. Consult with your tax preparer or financial advisor before taking any action. This podcast is for informational purposes only.