It’s never too early to start checking boxes on an early retirement checklist, even if you don’t plan on retiring early or at all.
Preparing your finances for the future does set you up for retirement, but there are other aspects, like planning for future taxes, Social Security, and perhaps charitable giving, that can apply to anyone.
I checked a lot of boxes on a pre-retirement checklist before I retired from medicine in 2019. Some items were taken care of months and years ago; some happened as I retired and even after retiring.
Before leaving the workforce, potentially for good, you’ll want to take care of items related to money, insurance, and family and social matters. We’ll cover the money part today; insurance, family, and social considerations are covered in Part II.
Early Retirement Checklist Part One: Money Considerations Prior to FIRE
Can I Afford to Retire?
First things first. Can you afford to retire? This topic has been covered thoroughly here and elsewhere. In general, a minimum of 25 times your anticipated annual expenses, passive income that meets or exceeds your expenses, or a combination thereof is what you’ll want to have.
Hopefully, you won’t get tripped up here in step one. If you’re checking off the boxes, this is the biggest and most important box you need to check.
Set up Withdrawals from Deferred Compensation or Defined Benefit Plans.
I’ve got a non-governmental 457(b) with between two and three years worth of our anticipated retirement expenses in it. I’m planning to take that money over about four or five years to have the account drained before the current tax rates sunset at the end of 2025. The tax code could change before then, but it would not be advantageous to take a lump sum and pay the taxes on all that income at once.
My plan states that I must elect a distribution plan by March 1st of the year after I separate from service. If I do not, a lump sum of the full balance will be issued, potentially creating a tax headache. I sent in the paperwork while writing this post.
The money in a non-governmental 457(b) belongs to my employer and could be subject to creditors if the hospital falls on hard times — another reason to drain the account in relatively short order. A governmental 457(b) is less risky and can be rolled over into an IRA, a feature that the non-governmental 457(b) lacks.
If you’ve got another form of deferred compensation like an NQDC or a defined benefit (a.k.a.) pension plan, you’ll want to determine how and when you’ll access those funds, as well.
Have a Plan for Your 401(k)
If you’ve got a 401(k) (or a 403(b) or 401(a)), as most employees and many self-employed individuals do, you’ll want to decide what do with it.
If you’re younger than 55, your options are to leave your money where it is or roll it over to an IRA or another 401(k). I’ll be rolling my 401(k) balance over to my individual 401(k) to save some money on quarterly fees.
If you’re turning 55 or older in the year that you separate from your employer, you have the option of taking withdrawals from the account as you wish without penalty. Note that if you roll the balance over to an IRA, you’ll have to wait until you’re 59 1/2 to access it penalty-free.
As a side note, if you’re retiring mid-year, you may want to make the maximum contribution to the account while you have the opportunity. Doing so may require a different biweekly contribution amount than you’ve used in past years, so be sure to double-check your automated contribution schedule.
If you have a 403(b), the rules are nearly identical. You should be able to do all of the same things with this account as the 401(k), but you should doublecheck with your plan rep or accountant.
Other Work-Related Items
Does your workplace pay out unused PTO (paid time off)? Be sure you get that.
Do you have a computer, phone, or cell phone plan provided by your employer? If so, you’ll need to replace those.
Look at all of your workplace perks, and decide which are worth paying for yourself and which you are comfortable letting go. These may include a gym membership, meal services, child care services, and all kinds of other goodies that most of us physicians have never had (but have heard of from other industries).
Has your workplace offered severance packages to those taking voluntary retirement in the past? If so, try to negotiate a similar package to one that’s previously been offered.
If you’re going to lose the contact information of people you want to be in touch with after you leave, be sure to find a way to maintain contact after you stop clocking in.
If your employer offers free basic legal services, you may want to take advantage of them before you leave. For example, a past employer partnered with a legal service that helped me create a will at no cost to me. The same is true for counseling if you want someone talk to through the transition.
Finally, be sure to clean out your locker / desk / cubicle / office. No one wants to clean up after you once you’re gone.
Craft a Drawdown Plan
It’s one thing to know you have enough, but you also have to have a plan to access that money. There are a number of ways to access retirement money before age 59.5.
I already mentioned the 457(b), which is accessible at any age and the fact that a 401(k) can be easily accessed if you retire during or after the year in which you turn 55.
Your plan will be highly individualized, and the source of funds will change as you progress through the different epochs of early retirement. Eventually, you will have full access to your retirement assets, and by age 70.5, you’ll be forced to take Required Minimum Distributions if you still have tax-deferred dollars to your name.
Basic Tax Planning
After years of paying substantial income tax, your income is likely to drop dramatically, and your income tax should plummet right along with it.
Since you need to include taxes as a part of your anticipated annual expenses, you should have a rough idea of what you’ll be paying in future years. It’s easily possible to pay nothing in federal income tax when retired if your portfolio consists of a variety of pre-tax and after-tax money.
However, if you have a healthy fatFIRE budget or most of your retirement money is in tax-deferred dollars, you can expect to pay some income taxes. Taxcaster is a great tool for estimating your future tax burden.
There will also be property taxes for homeowners, sales taxes, vehicle registration, etc…
Depending on what you come up with after outlining your drawdown plan and tax expectations, you may want to consider a couple of smart tax moves that you can benefit from now that your income is much lower.
Tax gain harvesting (not to be confused with tax loss harvesting) is an easy way to increase your cost basis in a taxable account if you’re anticipating taxable income of less than $78,400 in 2019, the top end of the 0% capital gains tax bracket.
Another option is to make Roth conversions. I think the ability to move tax-deferred dollars to Roth dollars makes sense in the 24% federal income tax bracket. You’ll increase your taxable income with every dollar converted, but with the top of the 24% bracket at $321,450, you’ll likely have lots of room in which to do so.
Roth conversions are a no-brainer if you have room in the 12% tax bracket, which is very similar to the 0% capital gains bracket, and have no plans to tax gain harvest.
A Giving Plan
If you’ve been donating to charitable causes while working, I would assume you’ll continue to do so in retirement. If neither are true, skip to the next section.
One way is to keep giving is to simply include charitable giving as a line item in your post-retirement budget, much like you will with the taxes you expect to be paying.
The downside is that you may not get much of a tax break for those donated dollars after you retire. In other words, for every dollar you part with, the charity will receive less than if you had donated in a tax-advantaged manner.
If you’ve paid off your mortgage, you will probably be taking the standard deduction ($24,400 if married filing jointly in 2019) rather than itemizing deductions. In this case, you get no deduction for charitable giving. If you do have itemized deductions exceeding the standard deduction, you will be taking that deduction at your now-low marginal income tax rate.
Another option, which I believe is a better option, is to build up your giving fund while still working. A donor advised fund allows you to set aside a large pool of money from which you can donate over the rest of your lifetime if you wish.
If you grow this balance while working, you’ll be taking a tax deduction at a higher marginal tax bracket, the result of which is more money for your chosen causes for every dollar that you give away.
Consider Social Security
You may be years or decades away from taking Social Security, but it’s best to take a look at your potential future benefit before you take the leap.
With a calculator that I update annually, you can determine what your check might look like (using today’s dollars) when you actually begin to collect.
If you haven’t yet reached the second bend point, you’ll see your benefit increase a decent amount with each “one more year” you work. Beyond the second bend point (based on contributions to date), the increased benefit is greatly reduced for every additional dollar contributed.
You should also give some thought as to whether or not you’ll delay collecting to the latest age possible, which is currently age 70. The White Coat Investor and Dr. Cory S. Fawcett had a healthy debate on whether or not that’s a good idea.
If I delay to age 70 and my wife begins collecting at age 67, we’d receive about $43,000 in 2019 dollars. That’s over 50% of our anticipated initial budget.
Yes, the program can and will change between now and then, as will our budget, but it would be foolish to disregard this significant fixed income stream entirely.
Continue to Part II for a rundown of insurance, family, and social considerations prior to FIRE.
What other monetary considerations would you recommend prior to FIRE? Which do you feel is the most important? Or the most overlooked?