5 Ways To Retire Early

Money Guy Show - Brian Preston and Bo Hanson

This episode of The Money Guy Show explores five practical strategies for accessing retirement funds earlier than the standard 59 and a half

Key takeaways

• Retirement accounts like 401ks and IRAs can be accessed before 59.5 under specific rules, allowing for early retirement without penalties.
• The Rule of 55 allows penalty-free withdrawals from employer-sponsored plans if you leave the job in or after the year you turn 55.

Main topics

• Early retirement strategies
• Rule of 55 for 401k access

Notable quotes

"If you're going to be going through the financial order of operations, we still want you saving in these retirement accounts that have a 59 and a half or 55 access point."

Conclusion

The episode emphasizes that early retirement is achievable through strategic

Transcript preview

Speaker 5 (0:04) The Speaker 4 (0:05) city moves fast, but your vibe, that's different. Sharper, smoother, more alive. Speaker 5 (0:15) The new Speaker 4 (0:20) Honda City isn't just made to drive, it's made to feel. The new Honda City, all new vibe. Speaker 2 (0:28) A lot of people want to retire early, but how do you actually access the money when it's tied up in retirement accounts? And Brian, Speaker 3 (0:34) I am so excited because today we're covering five ways to retire early, including some that you may not even know about. Speaker 2 (0:41) I'm Brian, he's Beau, and this is The Money Guy Show, where two financial advisors share strategies to help you grow your wealth and get access to it when you actually need it. Speaker 3 (0:57) Yeah, Brian, a lot of people want to retire early, or at least they want the option to. They want to get to financial independence so that they then have the ability to own their time to do what they want, when they want, and the way they want to do it. Speaker 2 (1:11) But let's face it, this system is designed for you to get access to your money after you're 59 and a half. So what do you do if you actually want access to that hard-saved money? much, much sooner. Speaker 3 (1:23) And if you listen to us for any amount of time, you know, we talk about the financial order of operations all the time. Brian, you know the thing for me? We have a nine-step process to help you figure out what to do with your next dollar. And a lot of people say, okay, well, if I want to retire early, if that's what I want to do, then I probably need to break the financial order of operations or whatever that happened. Brian, is that true? Speaker 2 (1:42) No, I do not think you have to break the financial order of operations, but it is going to require you to kind of use all the tools that are in the tool belt of the financial order of operations. And with that, we're going to kind of give you all the different things you can do. Because first of all, if you're going to be going through the financial order of operations, we still want you saving in these retirement accounts that have a 59 and a half or 55. access point. Yeah. Speaker 3 (2:08) So why are retirement accounts a big point? For exactly that reason, there's a good chance that you're going to need these dollars even after age 59 and a half. We think so much about early retirement and what that looks like in our 40s and 50s, but there's a big chunk of our assets that we're going to need to optimize in our 70s, 80s, even 90s. So why not take advantage of the accounts that are designed exactly to do that? Speaker 2 (2:30) And we're going to show you today that there's actually easy ways to access these accounts earlier, then yes, you taking the easy shortcut of just opening up a taxable brokerage account. Speaker 3 (2:41) So we're Speaker 2 (2:42) going Speaker 3 (2:42) to walk through five different ways that you can access your money that you may not know about. And the very first one is the one that you actually just said. This is utilizing a regular after-tax brokerage account. Speaker 2 (2:55) Now, look, we like after-tax accounts because these are still tax favored. Because we'll talk about what the dividends can be lower tax rates, capital gains can be lower tax rates, but they don't get the tax deferred or tax free growth that you see with a lot of the retirement accounts. So it better make sense, make sure you understand tax rates when we're talking about investing in this structure. Speaker 3 (3:21) Yeah, so a lot of people will say, okay, I'm just going to do the taxable brokerage account. I'm not going to do the 401k or I'm not going to do the other types of accounts. The reason you may be missing out on that is because historically, this is true now, and it's been true for the last 30 years, ordinary income rates are higher than capital gains rates. So if I can save some money today and I can save at the ordinary income level, that's likely going to be more advantageous to me than just saving in an after-tax account and being able to take of long-term capital gains. Yes, long-term capital gains are favorable and they are a tax. advantage, but it's not more advantage than it's not more advantageous than actually saving money at the ordinary income tax. Speaker 2 (4:02) So let's talk about the benefits of using a taxable brokerage account. Cause this is the easy button. If you think about it as, Hey, let's go out and load up this after tax account, you know, but Look, we don't want you cutting the corner off, and that was the whole point we were making, but we can start with the pros of this is accessible for everyone. If you think about the fact that there's not any early withdrawal penalties, there's no contribution limits, this is one that really does make it easy. Speaker 3 (4:28) Yeah, it has a ton of flexibility. You don't have to be working or not working in order to do it. You don't have to be a W-2 or a 1099 employee. There aren't contribution limits. There aren't age requirements. And we've already alluded to this. When you invest in an after-tax brokerage account, the gains on that, when you go to sell the securities, are taxed at long-term capital gains rates. They're not taxed at ordinary income rates like the money that you pull out of your 401ks and IRAs. And Speaker 2 (4:55) this is what we were talking about earlier on the con side of this is that Yes, there are tax favorites parts of it, but it's just not as good. I mean, how do you actually compete with tax-free growth or tax deferred for the next 20 to 30 years? So that's what the part we want to cover is, yes, this might be a good bridge account and more to come on that. But we do want to make sure you understand that there are actually four other ways that you can get access to some of these more tax favorite accounts. And that's stuff we want you to lean into and pay attention for. All Speaker 3 (5:24) right. So strategy number two, again, we've talked about this a little bit, but this is the rule of 55. And we won't spend a ton of time on this one because this one is actually pretty straightforward. What it suggests is that if you are employed with a company that sponsors your 401k or your employer-sponsored retirement plan, in the year that you turn 55, you can begin accessing those dollars penalty-free before 59 and a half. But you have to make sure that you do not retire, do not leave work until the year that you turn 55. Yeah, Speaker 2 (5:54) this is one that I... It's rule of 55, not retire at 53, leave it in that account for two years and then pull it out. No, you have to literally be working at this company in the year that you turn 55 for this rule to actually work for you. Speaker 3 (6:09) So how do you need to structure your accounts if you want to do this? Well, obviously you're going to be building inside of a pre-tax 401k, inside a traditional 401k where you get a current year tax benefit. you decide to contribute to a Roth 401k. It can work, but you need to recognize that any dollars you go to pull out of your Roth 401k before 59 and a half, if any of them are earnings, they will be subject to taxes and penalties. So you can only pull out your basis in the Roth 401k. So the best setup, if you're going to take advantage of the rule of 55, is doing so inside of a pre-tax 401k. Speaker 2 (6:45) So let's go through on rule 55. What are the pros and what are the cons? For the pros, This is pretty simple. I mean, it's a pretty binary decision of, hey, am I in the year that I turned 55 and did I have separation of service? If the answer is yes, hey, voila, you've unlocked. We have full access to immediate and full potential without having to pay an early withdrawal penalty. Speaker 3 (7:06) And it's tax advantaged if your tax bracket's going to decrease in retirement. put money into my pre-tax 401k when I was in the 30 % tax bracket, but then I retire at 55 and I'm going to be in the 22 % tax bracket. Obviously, that was a more advantageous tax arbitrage than I was able to take advantage of. Speaker 2 (7:26) Now, if we're talking about the cons of this, it is dependent upon the plan design. You have to, because when your company set up their 401k, They did have to make the election to choose to allow the Rule of 55 to be something that they wanted their participants to have available to them. Speaker 3 (7:45) The other limitation is this has to be with your current 401k, the actual retirement plan that you are currently participating in. If you have an old 401k or an old 401k that you rolled into an IRA, where those assets are now would not qualify. But there is. a little bit of a hack. There is something you can do if you know that you're going to retire and you do have other pre-tax assets or old 401ks or old employer-sponsored plans. You can actually roll them into your current plan, thereby allowing you to access those dollars after you turn 55. But if you do not do that account consolidation, you do not roll them in. those other assets would not be available. Speaker 2 (8:22) And this last con, this is Captain Obvious stated this, is you can't retire until you're 55. Remember, this is rule of 55. If your goal is to retire at 50, this probably isn't for you. Speaker 3 (8:33) All right, so we're talking about ways to retire early. And I don't know if we did this on