“So I’ve had three clients in the last year retire early before the age 60 to Honduras, Mexico and Costa Rica,” she says. She says a three-bedroom house on the water in many countries can cost $300,000 and the health care is cheap or free depending on what services, public or private, that you use. While she would avoid mainland Honduras, she says the island of Roatán has just built a new hospital. By reducing housing and health-care costs, the client facing penury at 82 could stretch retirement savings to his early 90s, Failla says.
Taxable Vs. Qualified Plans
One of the most important things to know if you want to retire early is whether you have adequate cash flow before qualified retirement plans start paying out. It’s often better to have large reserves outside those plans to help with tax planning, says Mike Salmon, a principal at Moisand Fitzgerald Tamayo in Orlando, Fla.
Salmon says that he helped two different federal government law enforcement employees retire early two years ago. One was 51, the other 52, both with pensions, and both had contributed to the Thrift Savings Plan. “They were able to use the public safety employee clause in retirement plans that allowed them to access TSP money at age 50 without the 10% penalty.”
In one case, Salmon rolled over part of one plan into an IRA so that the client got more diversification. Since the TSP money is being used sooner and being paid out, it’s allocated more conservatively. The Roth IRAs in these cases are usually allocated most aggressively since those are usually the last touched in a plan, Salmon says.
Knowing how much to keep in a retirement plan is tricky. Employee plans aren’t usually as good in their investment choices as an IRA would be, but if you roll it all over, you lose the ability you would have under the employer’s retirement plan to start withdrawing at age 55 without a 10% penalty under IRS rule 72(t). That means you might want to keep a buffer within an employer’s plan you can withdraw from to meet cash flow needs and roll over only a portion.
Cash flow planning is important before the client is retiring before 591/2, Salmon says—knowing where you can take assets from before retirement assets and Social Security kicks in. For tax planning, it helps to have funds outside qualified plans so that you can harvest tax losses and gains. Sometimes, clients at age 71 hit the “tax torpedo”—when higher required minimum distributions kick in and all of a sudden clients have to pay tax on their Social Security, too.
Health Care And Insurance
Not only could a big downturn in the market destroy the dream, a health crisis can derail an early retirement plan as well, advisors say. Even without an emergency, different sources put the entire cost of health care for a couple at somewhere between $245,000 and $280,000 over their total retirement years.
“It’s the first couple of years of retirement that are going to set the stage for whether the retirement is successful or not,” says Michelle Maton, a partner at the Planning Center in Chicago. How much clients keep in cash on hand depends on their risk tolerance. Some people might need six months to a year of spending in cash, or they might otherwise keep it in bonds.