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

The One Reason Everyone Delays Their Retirement

• Ari Taublieb, CFP®, MBA • Episode 240

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Fear of retirement often arises from the head trash that clouds decision-making and prevents individuals from taking action. Understanding the valid concerns behind this fear is essential to dispel myths that delay retirement readiness.

- Explaining the concept of head trash and its impact on retirement decisions
- Real-life case study illustrating financial planning for early retirement
- Practical strategies to overcome retirement anxiety and promote sound decision-making

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

Ari:

The one reason that everyone delays their retirement is because of head trash. It's not a real phrase, I just made it up, but head trash is the concept that I talk about, where people are like: I'm going to retire, I think I'm in a good spot, but what if markets go down or you know what? Maybe I just wait one more year, one more bonus, then I'm going to retire. I know I should retire, but I don't have long-term care yet. And what are we going to do? I mean, how am I going to spend my time? Am I going to have purpose? And I could retire, but my kids are still in college." So, all of these thoughts, I'll call them head trash. It's not a perfect phrase. I'll use head trash primarily when I'm talking about things that my clients don't need to worry about, and so part of my job as an advisor is to advise. "hey, here's an investment strategy, here's a tax plan, here's a withdrawal report, whatever it is. But also part of my job is to go hey, here's a bunch of things you're worrying about right now that you just don't need to worry about." For example, I have clients that reach out, "hey, oh my gosh, I can't retire yet, I don't have long-term care, I go. Maybe you shouldn't worry about that because you have enough income from your portfolio. As long as that keeps growing, and you have a sustainable plan, it's better that you actually don't go pay a separate company, an insurance company, pay the premiums to yourself instead, unless financially something shifts and legislation shifts and there's a new requirement or tax that occurs." So it's not me just saying "hey, don't worry about it." It's me saying hey, don't worry about it for now, but, like anything, you have to keep tabs on it and be dynamic." So what I'm going to go through today, today is more of a story.

Ari:

I have lots of different podcast episodes that are deep case studies. Hey, if I have 2 million, how much can I spend? If I have 500,000, when can I retire? If I have 20 million, am I in a spot to never have to worry truly, and can I leave the legacy I want? But then I also have specific episodes, like you're going to hear today, which is just a story, and so I'm going to talk about the story that I had with a client of mine. So this is a client that is a very nice person, and so if they are watching, please know. I asked you if I had permission to post this and you said yes, so don't forget that. If I had permission to post this and you said yes, so don't forget that, just messing around, that actually did occur. But they told me that I could share the story. Just can't share names, obviously.

Ari:

So this couple they were not worried about their retirement in terms of like 60 to 90, 60 to 100. That was not their concern. Their concern was hey, we're worried from 55 to 60. It's these first few years of retirement. I think that's where most of our concern is. I said totally get it, you're a human, that's why You're not a robot. Let's dive into the finances. And so we did. And when we dove into the finances, we found that they were going to be okay if they retired at 55, but they didn't have a brokerage account.

Ari:

And a brokerage account is what I call a superhero account. A superhero account is a brokerage account, a taxable account, a joint account, individual account. All four of those accounts are the exact same thing. The financial industry just makes it really annoying for these basic phrases that come with all these different names. It's like those acronym people in your life that are always trying to sound smart. It's like just tell me what it is. So superhero. I call it a superhero because it allows for flexibility.

Ari:

And so this couple is going okay. So like, why do we? Why do we not feel at ease? I said I don't know, like, what's your healthcare costs? Now I knew what they were, but I wanted them to say them. And they said, yeah, that's, you're right, I think that's it. And so sometimes I need my clients to say it out loud. If I just say what I think they're thinking, number one I could be wrong. But number two, if they don't actually speak it, they're not going to really ever have the ability to overcome it. From my experience and from what mentors have shared and from what I've seen, so I've asked them to share hey, what did healthcare? And it was for them about $8,000 a year each for healthcare until Medicare kicked in. That's significant.

Ari:

And so the reason that I said that they had anxiety is for healthcare, college planning and remodels. That was their head trash. I think I said healthcare a second ago. Healthcare is one of them, but this head trash.

Ari:

Basically I say, hey, the reason, guys, you're hesitant to retire is not because you won't be okay long term. I think you also recognize that it's because these first few years of retirement, that's where you're nervous. And I get why you're nervous. I'm not confused. The reason you're nervous is because if you get unlucky and retire and markets don't do well, because you don't have a superhero account, you can't shift your income that easily. Now why can they even retire at all?

Ari:

Well, there's something called a rule of 55. Many of you know this already, but what this is is this is something that allows you, as long as you retire in the year you turn 55 or later, as long as you're working at that company in that year, once again, you turn 55 or later, you can start pulling from your 401k. Now, that just avoids a 10% penalty. You still have to pay taxes. So basically, you just have the ability to turn this on at 55 instead of 59 and a half. So this is great for people that have a lot of money in a 401k and want to retire early. It's an option to withdraw income, but it's not optimal. And the reason it's not optimal is because if you start pulling income from your 401k when you actually live off that income, it's as if you're making ordinary income. It's like W-2 wages. It's not pulled that way, but that's how it's taxed through what are called IRA distributions.

Ari:

And so for this couple, they pull from their 401k. That creates income and that income is taxed at ordinary income levels, and so they're not receiving any health care subsidies. They also, once again, they need to pay for college expenses. How are they going to pay for those college expenses? Well, they need to pull from cash flow, because they don't have 529s. Well, cash flow, they don't have cash flow. They're retired, in this hypothetical, at 55. So they're now pulling more, which once again gets taxed at a higher bracket, because now they're taking 40,000 out to pay for college expenses, in addition to the 100,000 that they wanna live off. So, 140,000, they need 140, but not really, because they need like 160, 170 so that they can pay taxes and end up with 140,000. And that's me being nice there, by the way. So the point here is they also want to do a home remodel because they don't want to retire and not have their bathroom done. Well, that's another 20,000.

Ari:

But in addition to that, guys, do you think they're going to spend more time traveling or less? When they retire early, they're going to spend more. So now they have more time. When you have more time, you spend more money. So now maybe they need $200,000. Maybe they need $240,000 that they need to go sell so they can live off of $200,000. Now the reality is they have some expenses that will go away their mortgage that will go away, college expenses that will go away but they generally get replaced not evenly. But if you're not doing college expenses, you're helping out a child with a down payment. Some of you are like I'm not, but I have clients that often do this. They're helping out someone with a wedding. They are oftentimes going. We're gonna travel more and we're gonna spend money as a family to do that, because once they're out I'm trying to make.

Ari:

Here is this person that was hesitant to retire with head trash. It's a valid head trash. They are hesitant to retire early because they're worried about oh my gosh, what if all of these things? I need so much income so early on? What if it turns out we want to spend more or life changes? I don't want to have to go back to work in my sixties and I go. That's super reasonable, by the way.

Ari:

So there are people that are on track for retirement, but in the first few years of retirement. That's what I'm worried about. For my clients. It's generally not the 60 to even 70 to 90, 70 to 100. It's, I see, that income At that point there's social security helping out At that point, maybe there's inheritance at that point, but it's kind of this in between. What do we do then? And so what I would encourage this couple to do and I work with this couple obviously today, and we've had a lot of conversations about this, they are still working.

Ari:

The reason that they have this, I call it head trash. It's valid. So that's why I don't really love the phrase, but the reason I do want to bring it up. It's never I don't think it's perfect, but the head trash that they are worried about in large part they don't need to be worrying about and some of those things that, in fact, a lot of those have nothing to do with what I just said. So let me connect the dots, or else it feels like I'm going in circles here, because what I hope you just connected is yes, they have valid concerns that if they retire and get unlucky and they start pulling from their 401k, if they need to pull out 250,000, but markets aren't doing well, maybe they need to pull out 300,000. If they have 2 million, pulling out 300,000 in one year is a big deal and that's way less. That grows long term. That's their concern. That's valid.

Ari:

What's not valid is them going. You know what? What we're going to do instead is we just we're not even going to look at projections. We don't know. There's no way we can retire Absolutely not. Our friends. We know they have less money than us and they're going to have to work so much more. In fact, we also have friends that have more money than us and they are not even close to retiring. So that just confirms it.

Ari:

I cannot retire early. Why don't we just work till 65? I mean, it's just, it's safer. We can't go wrong. I guess. If politics or things at work shift, maybe I'll look for some other job, but I really don't want to.

Ari:

That is head trash. That is them cheating their self. That's like if any of you guys have run drills in sports or have children that have run drills, that's like running to the line. If they go run to the line and run back, that's like running to the line and then stopping 80% of the way there and running back. It's like you're just cheating yourself. Go get a plan that really says when you can retire.

Ari:

So for this couple, what I encourage them to do because they have a really healthy income is don't add more money to your 401k beyond the match, because that's free money. Take the remainder and put that to this brokerage account. That's for flexibility. And before you retire, let's do that bathroom remodel. That's one less thing we're gonna have to worry about. So when we retire, we're decreasing our chance of getting unlucky.

Ari:

Now, college okay, maybe we're putting money away for grad school, but maybe you're also having a conversation with children and say, hey, I'm paying for your undergrad, but beyond that, that's just not in the cards. Not because I'm trying to be mean, but because you know we only have our health for so long. We want to spend time with you guys, we want to travel, we want to do different things, and so can you eliminate some of these things, these things that cause head trash of I can't retire a home remodel, I'm not going to retire, I don't get paid my bonus for another year. Don't do that. That is you cheating yourself out. So, yeah, it's some tough love you're probably getting from me right now, but I don't know who else is giving it to you, so I hope it is really love. That's what I hope. I'm trying to do.

Ari:

I want everyone to know the earliest time work is optional. I don't want someone to retire too early and run the risk of running out of money, and the risk I'll see is it's a common example, but many people know the S&P 500. It's an amazing asset class and it's really something that when we talk about investing S&P 500, equities equities would be known as the asset class. The subdivision of that would be the S&P 500. Those are called large caps, large companies, the 500 largest technically, 505 to be exact.

Ari:

But the point here is these are companies that generally grow at 10% per year over time and there was a period where, from 2000 to 2010, it was literally like the second best literal performer versus like the entire world, like real estate and small caps and all these different types of assets. But 10 years prior, from 2000 to 2010, the S&P 500 lost an average of 3% per year because there were a few years 2000, specifically, in 2008, that did not do very well, and so if you had $100,000, and you started with that and you didn't withdraw any money in 2000, and then you checked your account 10 years later you would have lost money. So now imagine that's a million dollars, and not only did you lose money, but you had travel, remodeling, college expenses and now all of a sudden, you're spending. The rest of your life is very different. So this was a big risk.

Ari:

That someone thought they were diversified with the S&P 500. They had to go back to work. And so I'll talk to people that will come and they'll say, hey, ari, I'm retiring. I said, okay, cool, they go. No, I'm retiring again. I said what happened? They said, well, I retired, I had all my money in one investment like the S&P 500. I had healthcare, I had travel expenses, I had a home remodel, I had other investments that didn't do well, and so now I have to go back to work and you don't want to be that person On the flip side.

Ari:

I don't want any of you mad at me when you're 80 years old with way too much money going. Hey, we told you like we wanted to retire early. Why didn't you kind of give us more confidence to do that? And I have had feedback from people that are very transparent and have said that I have clients with me in their 70s who are like hey, you should have pushed harder, like I was like in the moment I thought I did. They're like oh no, you think you did, but you didn't. I said why they go? Because I didn't retire and you were so confident you were showing me all these numbers and graphs but you didn't find a way to connect it and I'm like great point. Like then, what good is it? So the point here is I want everyone to know the earliest time, work is truly optional for this particular couple.

Ari:

I encourage them to pay off at least one of their children's college, which is going to be two years, save more money to a brokerage account and do a bathroom remodel. Then I'm asking them to reevaluate. So the following year I'm going to be checking in and we're going to be having a conversation about hey, is this happening? Like, did we actually do the saving we talked about? And they might be like we did more than you projected because I got another bonus. Great, then maybe they could retire, then they might go. You know what I know? I said I was going to save that amount of money, but there's this really cool new Maserati that I didn't tell you and I kind of got a new obsession. So that's what I bought. I bought four of them. I said, okay, that's cool, I want you to buy the cars maybe not four of them, but you're going to work till you're 62 now and they might be like that's cool Cause I just love cars so much. Great, it's not my goals, it's their goals and it's my job to make sure what's happening properly. Is them accomplishing their goals?

Ari:

So that is the quick little story for this couple of what is head trash? Well, head trash is where you're thinking. Hey, I saw an article online that says I need 2 million to retire. I don't have 2 million, so, like I can't retire. That's head trash. That does not mean you cannot retire. There are people that retire with $500,000. There's also people that go I can't retire Like the people I'm around. They've got 5 million bucks and I want to live like them. Okay, maybe you can't retire. Maybe you do need more because you want to spend more. But do you really want to spend more? Like, what is it you really want? Is it we're keeping up with the Joneses, or is it? No, those are my specific goals. So I encourage you map out how often are you buying new cars? Okay, are there new cars? How many vacations do you want to take? What is your health like? Do you have a specific legacy goal?

Ari:

Build a custom plan, either with root or another advisor, or, as I've shared with many of you, start with the software, go, project out, see what you're on track for and then, after you kind of run some analyses, you can see okay, I kind of loosely know what I'm on track for. I now I'm going to work with an advisor to help me execute this. But for a lot of you I don't think you need an advisor. If you're in your 30s and 40s saving money to your 401k or brokerage account, but as you get closer to retirement you're in your 50s, 60s going hey, I think, like an early retirement is probably possible. I would then seriously encourage you to go okay, either take the time yourself to learn tax strategy and go deep on that front, because that's the biggest value an advisor can add. Or you hire an advisor for quality of life to go, hey, my life's way better having an advisor. I want someone in my corner to help out with all of this and I don't want a new job as an advisor.

Ari:

So I hope that this was helpful and insightful, quick story on this kind of head trash concept talk about. I have a lot of different phrases I like and I try to make these fun. So hopefully you guys liked this video and if so, please like it and I'll see you guys next time. Thank you all, as always, for listening to the early retirement podcast. I love getting to host these shows and make different content for you guys every single week. I've not missed a single week in years and that is because I love getting to do this.

Ari:

Now, please be smart about this. Before you actually execute any strategy that you see me talk about or hear me talk about, should I say Please talk to your financial advisor, your tax preparer, your estate attorney. Please be smart about this. None of this should be construed as financial advice. This is for fun, educational, informational purposes only. Once again, just quick disclaimer here. Guys, please be smart about this. Appreciate you listening, as always, and you can, of course, submit a question on my website, earlyretirementpodcastcom, if you, of course, want me to address a specific case study or topic. I will not promise I can get to it, but I respond to every single person and if I find it will be helpful for a lot of people. I will absolutely make an episode on it. At the very least give you some insight, that's.