Retiring Early in 5 Years? Do THIS First

21:47Mindy Jensen:Stress test your portfolio. Look at what your plan actually needs. I think that's great, Scott. If you make way too much money and then your 30s and 40s and 50s go by needlessly, not doing the things that you love, that's a shame, right? But it's also a shame if you're at your peak earning years and you retire a little too early, and then you come back into the workforce 10 years later at a much lower rate with much worse opportunities, right? I think there's a realism that has been lost in some parts of the fire community over the years that has not addressed those risks rigorously enough. And we've been bailed out by wonderful market performance for five, 10 years now.

22:24That's made my prognosticating about being realistic about this completely unnecessary for almost everyone who's retired in the last 10 years, but I'd guess.

22:32Mindy Jensen:But that's everybody that's retired in the last 10 years. We're talking about people that are going to retire in the next five years. Right now, we've got some pretty iffy situations going on in the world at large, and those are going to affect our retireability. Just be aware. That's the new word the FIRE community needed. Retirability. What is your retireability? All right. Scott, what are some action items that our listeners can take to make sure that they are testing their portfolio so that they can be comfortable and sure that it will handle early retirement? First thing you should do is start researching portfolio theory.

23:09And I think there's conflicting information out there from really smart people, maybe even people that go so far as to call genius level in this area. So one of them that we really love is Paul Merriman. And you can go to paulmerriman.com, for example. And he's got a really wonderful set of research on factor investing. That could be really powerful for somebody who wants to keep growing, but doesn't want it to all be in the S &P 500 or one index fund, wants to have exposure to small cap, large cap, growth, value, those kinds of things. He's done some wonderful research on how that can change the smooth the ride of what is still fundamentally a growth portfolio.

23:45Next up is Big Earn. He's the one that I think is most rigorous and perhaps conservative in the space in terms of analyzing safe withdrawal rates and how the 4 % rule applies to early retirees. So that's kind of like the PhD, I would argue, in sequence of returns risk and safe withdrawal rates. Bill Bangin did the original research on this. You can read his work. And then Frank Vasquez has come in and I think would challenge some of the work by Paul and Karsten Jeske at early retirement now by putting in factor investing and risk parity style portfolio that has large amounts of uncorrelated assets.

24:19There are trade-offs in each of those portfolios. And familiarizing yourself with those trade-offs, I think, is a really good intellectual exercise that will make you much more comfortable with early retirement. The second tip I'd have for people that are thinking about their portfolio actually handing retirements is building towards balance in their asset location. So there's what kind of portfolio do I want? Do I want S &P 500? Do I want international? But there's where do I want that portfolio? How much do I have in my traditional pre-tax retirement accounts? How much do I have in my Roth retirement accounts or the equivalents, whatever, if you're Canadian or, you know, has no government or military accounts, But how much is my pre-tax and how much is my post-tax, my Roth accounts?

24:58How much is my taxable brokerage and how much do I have in an HSA or equivalent? And what we want when we go to become early retirees is we want that to be reasonably in balance, right? Nobody's ever perfect with this. But the more balance you have, the better off you're going to be because you're going to be able to pay less taxes now if you're contributing appropriately to a pre-tax account in a high income tax bracket and withdrawing later in a lower one. But you also want to have portions in the Roth and the taxable account to provide flexibility in there. And so I always bias toward balance when I'm looking at these things, because I think that that helps make better decision making and provides reasonable tax efficiency along the way.

25:35So optimal can be the enemy of options in the last few years leading up to early retirement. Right. Like so if everything's in the free tax, that could be optimal, but it also may limit your options and maybe put you in a tougher position later. So balance is the key. There is the bias I would encourage folks to have. And then the last tip, I think, is I'll leave you with Mindy that because you're practicing what you're preaching with this.

26:00Mindy Jensen:Practice with a small portfolio that you actually spend. So a few months ago, actually it was like last July now, Frank Vasquez came on the show and helped me set up a risk parity portfolio with$10 ,000. And as I log in right now into my account to check on my Frankonomics portfolio, I see that my original$10 ,000 that I have been withdrawing, the equivalent of 5 % per year out of, I withdraw$42 a month. And I now have, I've taken that$10 ,000 and turned it into$11 ,032. It just keeps going up and I keep withdrawing from it. There's something to be said for this portfolio. However, this has only been in play since July.

26:47Mindy Jensen:So not even a full year yet. I am having a lot of fun with this portfolio. I don't check it every day. I used to check it like multiple times a day when I first did it. It did dip down into the nines at one point, but then it popped back up. and now it keeps going. Yep. And I think this is just great advice of just taking 10 ,000 bucks. If you're trying to retire early, 10 ,000 bucks should not be a major sacrifice and putting that into one or maybe two versions of the retirement portfolio that you're considering and then actually withdrawing and spending that on dinner, on drinks, on breakfast, whatever it is.

27:21That was a great tip from Frank that I think has been really helpful. I've done that with a similar version of the portfolio there as well. Although I have much more illiquid assets like real estate in my portfolio.

27:32Mindy Jensen:Scott, you touched on this, but we're going to go a little bit further. Healthcare is the biggest wild card in your early retirement because you are leaving your job that is providing you with healthcare. Now you've got to go out and get it yourself. It's the biggest wild card, but it's also not the biggest wild card. I mean, people have inflated this to be such a huge thing. Healthcare is going to be a fixed cost in your budget moving forward when you no longer have employment. And it is either going to be the entire amount of the plan that you get on the ACA. And I don't care what politician is saying what they're going to do.

28:13Mindy Jensen:The ACA is not going to go away. And if it does, you can email me and tell me I told you so. But the ACA is going to be around. It is just not tenable to remove it. So your ACA price is X. Let's say it's$1 ,300, but with subsidies, you can get that down to 500. Great. That is your choice to take subsidies or not if you qualify for them. Subsidies were not intended for millionaire early retirees to get cheaper health insurance. So plan on the$1 ,300 line. Make that part of your budget. You think you need$3 ,000 a month or$4 ,000 a month. Now you need 5 ,300. I think that, yes, it's probably wise to plan on the ACA continuing and not the subsidies for those plans continuing for the fire population.

29:00Maybe they do. Maybe you could spend the next 20, 30 years in early retirement having taxpayer-funded federal poverty, low-income tax credits, offsetting your health care costs. That's fine. Take them if they're available. but I think it's a bad plan. And it's a very specific political bet that you're making that the American taxpayer is going to fund your early retirement as a possibly able-bodied millionaire and defray your healthcare costs. I think that's not going to happen. And I think that's a bad plan A, but I think again, it's not bad to take them. In addition to Minnie's great point about planning on paying the full amount, remember that that amount, that premium is going to go up every year, right?

29:35I'm going to pay what, like$20 ,000 in premiums for my family of four. if I did not receive any subsidies for health insurance on an ACA bronze plan in 2026. If I just change those numbers and I'm 60 years old with two adult children, those premium costs go up to like$35 ,000 or$40 ,000 per year. That's not inflation. That's the insurers being allowed to charge you more as you age, and you've got to bake that into your plan. So that's a real threat to a lean fire portfolio within the million dollar range. And it's noise in the chubby fire portfolio in the three to half to$5 million range, right?

30:10And so know where that is. If you're in lean fire, you're going to want to plan and set aside some additional cash to defray that risk, maybe delay your fire timeline by a little bit. If you're chubby fire, it's probably noise and there's going to be enough wiggle room in your budget and your flexible spending. You don't have to worry about it. And that's where this is all gets so context specific. The best thing you can do though, is as you're approaching fire and after you fire is maintain excellent fitness, right? hit you, go running, get that VO2 max up, lift weights, that's going to defray or reduce a lot of the risk associated with healthcare costs.

30:45And that can only mean good things.

30:46Mindy Jensen:And Scott, that's not available to everybody. If you've got a chronic health condition, this might not be an option for you. But while I said that the ACA is never going to go away, I can absolutely see a net worth cliff as well for the subsidies so that people who don't need the subsidies aren't getting them. And that does include the FI community. We don't need these subsidies. We can afford healthcare without them. They were meant for people who couldn't afford healthcare without them. That's where they came in. So plan for the highest healthcare premiums to be a line item in your budget. And if that doesn't come to fruition, you just have a little extra money.

31:29I think the takeaway for healthcare is you need to model this out and understand that, So I would go to kff.org and look at their healthcare cost calculator. And I'd put in your information today, in five years, in 10 years, in 15 years. And I'd put your income at like a million bucks, something so high that you won't confuse yourself by seeing what's subsidized in your premium costs. And I think that will be really powerful for you to see. Here's what I would pay if I didn't receive a subsidy today. Here's what I'd pay if I didn't receive a subsidy and I just changed my age to 45 or 55 or 60 or 65.

32:07Right. And look at those numbers and watch them grow. That's not inflation in health care costs. That's the cost of your premiums today. If you change your age, that that's the risk I'm trying to talk about here. and then take those numbers and feed them into your favorite AI. I'll try to build a model for this at some point in the next few months. But for now, put it into an AI and ask it, what's this curve look like for my healthcare costs based on these numbers? And how much more will I need to retire early than a traditional 4 % rule? If I assume the rest of my spending will grow at 4 % and healthcare will outpace it at these levels.

32:44I think that's the responsible way to plan for fire and healthcare costs in 2026.

32:49Mindy Jensen:Yeah, that's K as in kilo, F as in Frank, F as in Frank.org. Yeah. Okay, Scott, next up, you need a bridge strategy. If you are going to retire early, you are not going to be able to get access to your retirement accounts until age 59 and a half without paying taxes and penalties. Of course, you can always access your money. You are going to pay taxes and penalties, but I know the FI community and they don't want to pay anything. And I don't either. I'm not throwing them under the bus and being like, oh, I'd love to pay taxes. I don't want to pay them either. So what are you going to do between the time you retire and age 59 and a half?

33:27Mindy Jensen:And one of the things that pops up all the time is the 72T. And this is great if you're my age. I'm 53 years old. 72T, you have to take for at least five years or until you're age 59 and a half, whichever is longer. So if you're a 50 year old early retiree, that's not nearly the commitment as if you're a 40 year old early retiree. So while you might be thinking to yourself, oh, I'll just do a 72T, that might not be the best option for you. This is where the fun begins. You can do this on your own. There's a great book called Tax Planning to and through Early Retirement written by our friends, Cody Garrett and Sean Mullaney.

34:07They've been on Bigger Pockets Money to talk about this book. It's fantastic. And it talks about this stuff. The challenge with realizing income and early retirement is accumulation is so simple, right? You pick your account and then you invest in, I think a lot of people would argue, invest in low cost, broad-based index funds until you get pretty close to fire, until you get to the five-year mark here and begin thinking about these changes. Once you go to decumulate though, you now have like seven different things that you need to be considering here, right? First, you're going to get yield from your cash that you're holding.

34:38You're going to get some kind of yield from the dividends if you hold index funds, for example, in your after-tax accounts. Then you're going to have an income challenge. How much income do I want to realize? And am I staying below the Affordable Care Act subsidy cliff? Because you don't want to have your income going over 400 % of the federal poverty line. So you disqualify yourself from healthcare subsidies, at least in the next few years. That's the binding constraint for all of these withdrawal strategies, right? You can pick and choose what you have in theory all you want, but you're not going to forego those while you're out there.

35:09So that becomes the first factor. Then it's how am I going to access the rest of my funds here? If everything's in a 401k, that's all ordinary income for every withdrawal. And like Mindy mentioned, there are real challenges for accessing those early. 72T is a very real way to access them, but it also requires pretty sophisticated and clear planning and income planning for the next five years. and you better not overshoot it or you're gonna hurt yourself on the ACA side. And the other option is to do a Roth conversion, which requires the conversion amounts to season for five years in the Roth accounts before they can be withdrawn penalty-free.

35:44These are complicated, convoluted strategies that require careful several-year planning in advance. And I think that if you're at that phase, this is where I think it can make sense, a lot of sense to engage a certified financial planner, right? We like hourly advisors, advice only planners, and we like flat fee planners. And we've partnered with Domain Money and David Jackson, who actually is the financial planner for Mindy and I. And we have a partnership with them. Those guys can be found if you want to learn more about that at biggerpocketsmoney.com slash CFP. If you want to chat with David and interview him as one of the potential CFPs that you work with.

36:22But I think that this is a great case for engaging somebody to go through this. look at where your accounts are, and maybe think about what I'm going to do over the next few years and how I'm going to withdraw in the first year of early retirement to make sure that you don't go over that ACA subsidy cliff. And you're also making a thoughtful decision about using up the 0 % and 12 % income tax brackets.

36:42Mindy Jensen:Yeah. Carl and I started talking with David because we didn't need help with the investment side, but we definitely needed help with the strategy and the withdrawal plans. This is a legitimately complex planning challenge. We plan to provide free resources on this and it will still be overwhelming and there will be judgment calls no matter what, right? What our tax bracket is going to be in the future. What's going to happen to ACA credits? Am I really going to plan 30 years on that? But I'm certainly going to plan on the next two or three years on receiving them and optimizing income around there.

37:09So it's a real challenge, I think, here that that is appropriately discussed in, again, in Cody and Sean's book, great place to start. And the other place is maybe to think about hiring a CFP to help you with that.

37:21Mindy Jensen:Next up is your spending. In retirement, your spending needs to actually be real, not theoretical. So Carl and I first started our financial independence journey with the idea that we would be spending about$40 ,000 a year. We don't spend only$40 ,000 a year anymore. And it It took many years for me to realize that. I think in my mind I'm spending 40, but I'm actually spending 60. Well, if I only had a million dollars, then that would really mess up my retirement plan. I'm spending 1.5 of the 4 % rule instead of 100 % of the 4 % rule. So a lot of people build their retirement plans around a number that they think is true or that they want to be true, but it's not actually reflecting how they live.

38:18Mindy Jensen:They'll list out expenses in a spreadsheet and then they forget about, like, this is my monthly expenses for three months in a row. That's clearly what it is. Well, was that the month that you paid your annual homeowner's insurance, your annual car insurance, all these annual payments that you're not really remembering because it's been six months since you paid them. There's like all the irregular stuff. I think you should be tracking your spending for the last five years leading up to your retirement. So you can see, oh, I thought I was spending 60. I'm actually spending 61. Okay, that's probably more like a rounding error.

38:54Mindy Jensen:But I thought I was spending 40. I'm actually spending 61. That's a problem. Yeah, we polled the BiggerPocketsMoney audience and half of you guys said, you're sort of confident in your spending, but buyers so far away, that doesn't really matter at this point, right? But for the other half of you, you know, you're basically split down the middle about whether you're very confident, 95 % plus confidence in your annual spending target, or whether you, if you're being honest, you call it a moving target. And the 4 % rule, all the safe withdrawal research that goes around retirement planning or early retirement planning is based on converting a portfolio into a reliable and sustainable income stream.

39:31And if you're not clear on what you need that income stream to be, you're at really big risk because that's not a risk that you can analyze away in all this rigorous safe withdrawal rate research that people like Big Earn have done on this. You have to nail that number if you want to do this or have a big margin of safety if you don't have it nailed. And so these next five years are a great time to really dial in what your actual annual consumption is and what it ought to and you can practice that skill. You can get much, much, much more confident in your early retirement number.

40:02Mindy Jensen:And Scott, the best way to do this is to either track by every penny or sign up for an account with Monarch. Monarch.com is the best way to track your entire net worth, your entire financial situation. I have set up the dashboard a little bit differently than you set up your dashboard, but in my upper right corner is my monthly spending. And it's so easy to just jump into my account and look and say, oh, I'm on track for this month. We're on day 15 and I've spent about half of what I thought I was going to. Or I spent a little bit more because my mortgage comes out first and there's things that are front loaded in the month.

40:42Mindy Jensen:But once you get used to tracking it, it's just a glance. You can see this month versus last month. You can see this year versus last year. It's really easy to get an idea of where your money's going. And you can either make changes in your spending or make changes in your FI number five years beforehand, not be retired and say, oh, looks like I needed a lot more money. I'm going to have to change my whole spending habits. Yeah. So that's what we got. I think those are the big five things to do here, right? Have something to retire to and use the toolkit at biggerpocketsmoney.com slash resource, the goal setting workbook.

41:19If you're not clear on what that looks like, that's a moving target and allow it to iterate a few times. So you're not making that guess and highly likely to be wrong with your first guess right at the time when it's time to transition out. The second is make sure you actually have an intellectual basis for what your portfolio ought to look like. That's real work. Dozens or hundreds of hours, I believe, for an early retiree to get comfortable with it. And you should read the conflicting schools of thought from really serious, smart people that have strong opinions on this, sometimes conflicting.

41:51The third is map out healthcare costs. KFF.org has got your back there. The fourth is to make sure that you have your asset location dialed in and you have the beginnings of a plan for how you're going to withdraw that. I would say that at this point, this requires another serious round of self-study and is probably a great time to engage some kind of CFP that is very valuable with that. And again, we have the partnership with Domain Money at BickerPocketsMoney.com slash gfp if you'd like to include dated as part of your interview process. And then fifth, you need to dial in that spending number.

42:26And the best way to do that is to maintain a rigorous budget and make sure you adhere to it and track it rigorously over the course of the next several years. We think Monarch is the best tool for that. And we're very lucky to have partnered with them as well. That's our five years out roadmap there.

42:42Mindy Jensen:Yes. And if you are five years out and you think you should be looking at something different, please let us know. Comment below or reach out to Mindy at BiggerPocketsMoney.com or Scott at BiggerPocketsMoney.com and let us know what things you think you should be focusing on in the five years leading up to retirement. All right, Scott, this was a lot of fun, but we're done. Should we get out of here? Let's do it. That was great. That wraps up this episode of the BiggerPocketsMoney podcast. He is Scott Trench. I am Mindy Jensen saying see you soon, Loon. You know how the change in seasons hits and suddenly you just want to declutter the garage, clean out the closets, and get everything all organized?

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44:06Mindy Jensen:Need a flat fee or hourly financial advisor who actually understands FIRE? Scott and I built a list of FIRE-friendly professionals to help you on your FIRE journey. And we're constantly vetting and adding new pros to the list. Find yours at biggerpocketsmoney.com slash FIPRO. That's biggerpocketsmoney.com slash F-I-P-R-O.