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.
Substantially Equal Periodic Payments via IRS rule 72(t) are another option. There’s also the Roth conversion ladder, Roth contributions, and a plain old taxable brokerage account.
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?
16 thoughts on “Early Retirement Checklist Part One: Money Considerations Prior to FIRE”
I do not believe you have previously covered this but do you plan to keep your MD license once you retire from the medical field? If you do keep, what will be the costs to do so and is it significant to factor in to your money considerations?
PoF, thank you. Very helpful however I have a question. I am still working PT at age 72 and began taking the required benefits at 70.5. I plugged in my earnings record onto the calculator you so kindly provided and find that my sum of top 35 years is about 4.31 million, my AIME is $10,265 and both bend points have been reached. I enjoy working in my specialty so am still contributing to SS, but after bending my mind around financial calculations here and at WCI…should I quit?! Our portfolio is modest at Vanguard, btw.
wow, your employer could liquidate your 457b account if they fall on hard times? I had no idea!
thanks for the heads up.
Yes, if it’s a non-governmental 457(b). It may be a mostly theoretical risk, as I have yet to hear of someone actually losing this money, but it still feels like birds in the bush.
I’d rather have the birds in hand.
Actually putting the plan into action is my current challenge. Taking the time to plan out which buckets we’ll empty first and optimizing our investments for withdrawal instead of accumulation is on my list for this year (our last!). Thank you for putting this list together, I’m bookmarking it 🙂
Congratulations – you are almost there! Don’t sweat the financial side of FIRE too much. You are very organized & smart with your money, I don’t expect you’ll have any surprises. Enjoy the transition to FIRE life. Where are you moving to (generally)?
Excellent points Lynne. I probably will be ok with doing Roth Conversions under the desired tax brackets if I do indeed retire early and have a decade or more before can claim social security at normal age. But yes being mindful of taxes is important when choosing delayed or normal social security
I am looking forward to these high yield posts to help transition from W2 to early retiree.
When I pull the plug (several years in the future still) I know I will be quite anxious to see if I did dot all the i’s and cross all the t’s. These checklists will therefore be immensely helpful.
I know ESI did a great post on actually claiming Social Security as early as you can (before reading that I was thinking about delaying but now I am not quite sure).
Regarding when to take SS: Be sure to run your projected income streams through a tax calculator. I plan to live comfortably on an income of $35-45K and was quite surprised by the difference between an income heavy on SS versus heavier on tax deferred money.
Waiting until 70 to take SS allows me some years to do Roth conversions within a reasonably low effective tax rate so I don’t get a big RMD hit later. The only other wrench is that I need to consider the effect of Roth conversions on ACA subsidies. Right now I’m paying full price at $764 a month for a $6k deductible plan. Premiums will rise astronomically each year until I transition to Medicare.
Great review as always.
I wonder about the blanket advice to do Roth Conversions up through the 24% tax bracket. While the Tax Cut and Jobs Act is around through 2025 it seems like this would be good advice, as the 22% will revert back to the the 25%, and the 24% becomes the 28%, so taxes are on sale right now.
However, doing Roth Conversions _is the opposite_ of deferring income into your 401k. That is, you are paying taxes at your highest marginal rate now (24% plus state and local taxes) in hopes that your effective rate is higher in the future. (With tax-deferred, you are saving money at your marginal rate hoping that your effective rate is LOWER in the future).
You write a lot about how to lower your effective rate and control taxes. White it is near impossible to give generalized tax advice as everyone’s situation is so different, I bet most folks will find Roth conversions into the 24% tax bracket is a wash at best, unless their goal is to leave the Roth to their high-income children…
Thank you, FIP, and you make some excellent points. To be fair, these recommendations are not exactly blanket advice. These are considerations, and I only said it’s a no-brainer up to the top of the 12% bracket, and I think that will be true in most situations. One exception would be if it puts you over a cliff for an ACA subsidy. Tax planning and drawdown plans need to be highly individualized.
I think Roth conversions up to the 24% bracket make the most sense for those with 7-figure tax-deferred balances. I hear talk about RMD problems and figure people ought to address them long before 70.
Eliminating future withdrawals / RMDs can also eliminate the annoying 27% marginal bracket with taxable income just over $78,400. Each dollar earned is taxed at 12% and it pushes a dollar of capital gains into the 15% tax bracket. Big ERN wrote about this when it was the “sneaky 30% federal income tax bracket.”
Pof, yes, you are right! It wasn’t blanket advice. Let’s do a thought experiment, though, about what size of an IRA you would need to have to make 24% partial Roth conversions make sense.
On my Roth conversion piece, the couple had an IRA of 2.5M and conversions only into the 12% bracket made sense.
Shall we create a couple and see what size of an IRA they would need to have in order to make 24% conversions make sense? Say they are 55 and retired. Will look at IRAs between 1-10 million to see what bracket they should convert in over the next 15 years. Say 1M brokerage account, 500k Roth. Goal is largest amount left to kids who are in the 25% tax bracket. Other variables to consider? Should I run the numbers and see how they look?
How they will look is like a sorr on the front end of conversion and a boost in income on the back end post conversion. Effectively the curve for Roth conversion starts horizontal and then asymptotes vertically while the curve for TIRA with progressive taxes and RMD starts with a curve vertically and asymptotes horizontally. The curves cross at some point. In my analysis the cross was 15 years into retirement. Part of the falicy of not Roth converting is the notion of being at a “lower tax bracket” Lower compared to what? It may be lower compared to a $400K income but it may very well NOT be lower when 30 years of progressive taxes are taken into account. In my analysis that “lower” stops once you leave 12%. The tax code is set up to soak the rich. PERIOD. Pretax accounts are set up so you will help the government pay their obligations partially from your retirement money machine. PERIOD. That assessment increases continuously for every dollar over 12%. If you graph tax rates each rate abuts the next rate and they are a pretty steep growth curve until you max out the progression and then taxes become linear when you are rich as hell.
I’m not a fan of the top of the 24% because you incur excessive surtaxes on the conversion. My analysis is 250K for MFJ is the sweet spot, but if your racing the expiration of the current tax law you may have no choice. Also I’m not a fan of 100% Roth conversion. If you analyze the tax code it’s set up to leave true middle class pretty much alone with a gently rising tax rate up to 12%. Beyond 12% the government thinks you are wealthy and need some soakin’ and the more you make the more soakin’ you deserve. That’s not a political statement it’s a mathematical statement.
Given the tax law the most efficient conversion is done while living on cash so all of your ordinary income goes into conversion. That strategy generates the smallest tax bill. In my case I retied among other things especially to Roth convert in the 5 years prior to RMD. The passage of the SECURE act if it passes may extend that to 7 years for me.
I’m leaving a TIRA sized to keep my ordinary income in the 12% bracket for 15-20 years reducing the ordinary portion of my tax bill. By staying in the 12% I do realize the “taxes may be lower” promise of going with a pretax account. A small TIRA risked in a 20/80 portfolio won’t grow me out of the 12% for a long time allowing me to realize that promise. Once you hit 22% it’s game over and the government owns your retirement. I supplement my income from a brokerage.
I said the curves cross so you should consider what crossing means to you in retirement. If you cross at age 85 you will have more money in your old age when you may need it for end of life care. If you are paying ever increasing taxes you have ever increasing LESS to spend on your needs, so conversion tends to bias toward success in very old age. Also there is the surviving spouse conundrum. A surviving spouse suffers a huge tax/income hit when one spouse dies. Taxes can go up as much as 2 brackets and one SS income is lost. Conversion tends to tame that boogeyman. This article is about early retirement but early retirement leads to late retirement and what you do now affects then
Increase the taxable account to match the IRA.
My portfolio is a bit out of whack in that I’ve got about 4x in taxable vs. IRA.
But for the thought exercise, let’s make them equal.
I’ll be curious to see what you come up with.
FIP and Gasem, I appreciate the simulations both of you have done to assess the effectiveness of Roth conversions. For super savers with large pre-tax accounts it may be difficult to effectively convert enough in the lower tax brackets by 2025. Although near retirement, unlike Gasem, I don’t have the same amount of space for low tax conversion since I’m still working part-time. I think I’ll need all the space up to the 24% bracket, stop working at some point, and reassess how much more if any I still need convert after 2025.
One thing rarely addressed is that for a super saver the RMD may force you to remove more than you actually need. Most blogs assume some standard withdrawal plan e.g. the 4% rule etc. Whether I work or not, I have enough taxable to get me to 70 and pay conversion taxes as needed. Once SS kicks in, I estimate a 1.5-2% withdrawal rate from my tIRA would be sufficient if I don’t do any conversions. At 70 my first RMD is 3.65%, so right from the start I’m forced to take out more than I need and get to pay taxes on the excess. Since the RMD increases every year as I age the problem only gets worse. If I do nothing, I would likely be in one of the upper two brackets by my mid 80s based on projections from an RMD calculator. Narrowing the differential between need vs required withdrawal is where the Roth conversions make up ground. As Gasem notes, at some point the Roth conversion and the tIRA curves cross. Right-sizing my tIRA towards the 12% bracket seems like a solid plan to me.