A Keen Wealth Case Study: Planning for Early Retirement Before Age 60
"Sam" is 58 and he retired at the end of the first quarter of 2024. His wife, "Alice," is 65 and still working as a paid caretaker for the couple's son with special needs. Sam has $400,000 in a Roth IRA, $2 million in a traditional IRA and they have $400,000 in a joint taxable account. In 2024, Sam earned $75,000 and Alice earned $20,000.
And, like so many couples in their age range, Sam and Alice want to know if their nest egg is ready to support them as they prepare for retirement.
On today's show, we use Keen Wealth's comprehensive planning process to help "Sam and Alice" analyze their financial situation and identify some key decisions they'll need to make to keep their money and their lives in sync.
1. Health Insurance
Alice is eligible for Medicare. At 58, Sam is going to have to build a bridge from his old employer-subsidized plan to his own Medicare eligibility. That means either paying for COBRA to keep his old plan -- often at an out-of-pocket cost of 100% or more of the total monthly premium -- or buying insurance off his state's healthcare marketplace.
Since its initial bumpy rollout, HealthCare.gov has developed into a very useful resource for folks who need to price health insurance. The website will ask for your zip code, some very basic health information, and an estimate of your annual income, which will determine if you're eligible for any subsidies. You can then look at different levels of plans covering various specific needs and deductibles.
Using Sam and Alice's combined income of about $105,000, Sam was eligible for a $400 per month subsidy, and the plan he ultimately chose cost $300 per month out of pocket. As for Alice, the standard premium for Medicare Part B in 2025 will be $185 per month.
2. Lifetime Tax Liability
Without knowing exactly how long someone will live or what government policy will be like for the next couple of decades, it's impossible to calculate an exact lifetime tax liability. But we do have some important data that we can plug into financial simulations and plan around using Keen Wealth's expertise and our personal knowledge of Sam and Alice.
We started by considering their asset base and their ages.
Sam's $75,000 in annual income will be coming off the books next year. Understanding that the couple cannot live solely off Alice's $20,000 per year, they'll have to consider making withdrawals from their taxable account, consume some of the after-tax principal of Sam’s Roth, or pay a 10% penalty to make withdrawals from Sam's IRA until he turns 59 1/2. Tapping into cash reserves and taxable accounts like brokerage accounts first is a typical withdrawal sequence and tax strategy even for folks over 59 ½ because it's usually best to let tax-advantaged accounts grow as long as possible. So, in the short-term Sam and Alice have to budget for their monthly needs, any bucket-list splurges they want to enjoy, and major expenses they see coming up (like a home repair), and consider how a withdrawal strategy that covers those costs will affect their tax bracket.
In the long-term, Sam has a 15-year runway until he has to start taking required minimum distributions (RMDs) at age 73. We can start reducing that long-term tax liability by making conversions from his traditional IRA into a Roth IRA. Funds in a Roth grow tax-free, and Sam will be able to make tax-free withdrawals from his Roth when the time comes. Because of Sam's age, making Roth conversions can trigger some tax consequences, so we worked with him and Alice to find a sweet spot between an amount of money they were comfortable putting into a Roth for long-term growth and a tax bill they were comfortable paying this year.
3. Flexibility for the Future
One common discussion point in the year-end planning sessions my team has been having with folks like Sam and Alice is some lingering anxiety about the recent presidential election. Anytime there's new leadership in Washington, people worry about what new policies are coming and how potential changes could affect their personal finances.
We won't really have any answers about President-elect Trump's economic agenda until he and our new Congress get to work in January. One might reasonably assume an extension of Trump's 2017 tax cuts, which are set to expire next year. Some commentators have theorized that Trump might have the political capital to make some of these cuts permanent, which could make the savings from Roth IRA conversions less attractive if the lower tax rates hold well into the future.
But while my team at Keen Wealth always has an eye on the future, we plan around the present as well. If we determine a Roth conversion is the best move for a couple this year, it's not because of what we think any politician might do in the next four years. It's because that strategy projects to have the most benefits right now and well into the later years of retirement when folks will have to rely on their assets for the safety and comfort they deserve.
And if the facts on the ground do change dramatically next year, either in Washington or in your own home, Keen Wealth's planning process will be ready to adapt and help you stay on track to meet your retirement goals.
Thank You from Angel Flight Central!
Finally, I'd like to take a moment to thank everyone who helped make the 2024 Angel Flight Central Wine Flight Gala such a tremendous success, especially the event chair, my wife Carissa.
The $530,380 this event raised will provide over $2.4 million in transportation services to folks in need of life-saving medical care next year. Serving as a board member and volunteer pilot for Angel Flight has been one of the great honors of my life, and I look forward to all the good work we have ahead of us in 2025.
For more information about Angel Flight and how you can contact them, click here to learn more.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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