5 Reasons Why You Can Retire Earlier Than You Thought Possible in Minnesota

Hello everybody. My name is Ty Bernicke, and today I’m going to be going over five reasons why you can retire earlier than you thought possible in Minnesota.

1. Spending Decreases With Age

The first reason why I believe many people can retire earlier than they thought possible is that most traditional retirement planning software programs assume that when you retire, you’re going to have X amount of money that you’re going to want to spend, and each year after that, you’re going to have to spend a little bit more to keep pace with inflation. But in reality, in my opinion, based on studies that have been done by the Bureau of Labor Statistics and what I’ve noticed in 28 years of being in business, people tend to spend less as their age increases, not more.

And if you believe you’re in that situation and you’ve had a traditional retirement plan done for you that suggests you can’t retire until a certain date, it might be overstating how much you actually need. According to the Bureau of Labor Statistics, people tend to spend less as their age increases throughout retirement. The interesting thing about this is that most people, as they age throughout retirement, are more financially comfortable.

There was actually another study done by the National Bureau of Economic Research that suggests that people are more comfortable with their financial situation. So, to me, that implies that people spend less as they age throughout retirement, not because they have to because they spent their nest egg down, but they’re spending less by choice just because they’re not as active as they were in their early retirement years.

I’ve actually written a couple of articles on this topic if you want to read more for the Journal Financial Planning, and I also wrote an article more recently for Forbes on this topic. So if you want more information on why people tend to spend less in retirement and the implications that has for you, and why you can maybe retire earlier than you thought possible, those are a few places you can get more information.

2. Health Insurance Costs Are Lower Than Expected

Reason number two on why I believe many people can retire earlier than they thought possible is that a lot of people tend to believe that the cost of health insurance is more expensive than it actually is. In Minnesota, people are eligible for something called MNsure. And MNsure is the type of health insurance many people will get when they retire prior to age 65 if they don’t have a retiree health insurance option from a previous employer that is provided for them to cover that gap until Medicare kicks in at age 65.

The cost of MNsure health insurance is partially dependent on one’s modified adjusted gross income.

If you look at some of the different things that are included in modified adjusted gross income, it includes things like wages, salary pay, Social Security income, pension income, IRA distributions, and you can go through the rest of the list.

All of these things count towards modified adjusted gross income. So, as your modified adjusted gross income goes up, the cost of your health insurance generally goes up to a certain point. And if the total of your modified adjusted gross income goes down, the cost of your health insurance goes down. Now, even more important than what counts is what doesn’t count.

Qualified distributions from Roth IRAs do not count towards modified adjusted gross income, and applicable distributions from non-qualified investments are what I call the non-qualified bucket, which basically means any after-tax money that you have saved up for retirement. So if you have a bank account and you take money out of it to supplement your income in retirement, the money you’re taking from the bank account isn’t going to count towards your modified adjusted gross income.

So, for people who properly plan where their retirement savings are, they can really reduce their modified adjusted gross income, which makes the cost of their health insurance quite affordable. Not everybody has this luxury, but we find that many investors do. Even people that have saved well over $1 million for retirement can benefit greatly from planning to keep their health insurance costs down.

3. Lower Retirement Tax Burden

Now, the third reason why I think many people can retire earlier than they thought possible is that I believe many people overestimate what their tax burden is going to be in retirement based on the level of income that they need to provide them a satisfactory lifestyle. So, retiree taxes on income are generally less than working income for a variety of reasons.

Number one, there’s no FICA tax on retirement income. There is FICA tax during your working years. So that approximately 7.65% of FICA tax that you have to pay on your working income goes away on your retirement income. Not all Social Security is subject to federal income tax. That’s another reason why the income that you have coming in in retirement tends to be better than working income during your working years.

And many states do not tax Social Security. Unfortunately, that’s not the situation for Minnesota. But, if you are going to be retiring in a different state, there’s a good chance that the Social Security income that you have coming in will not be subject to any state income tax. Not all investment income is subject to tax, such as the basis from non-qualified investments, which I mentioned earlier, and qualified Roth IRA distributions; those sources of income aren’t taxed at all. So if you have money built up in those areas, that’s not going to be subject to any income tax as it’s being distributed for income in retirement. In addition to that, it’s important to know that if you do have $100,000 of spending needs in retirement and you have $100,000 of income during retirement years; therefore, $100,000 of retirement income is going to net you more than $100,000 of working income for all the reasons I just mentioned.

4. Reduced Living Expenses in Retirement

The fourth reason why I believe many people can retire earlier than they thought possible is that the amount of income they need to maintain a comfortable lifestyle, for several reasons, including what I’m about to mention here, is less. As many people age throughout retirement, they don’t have a mortgage, or the size of their mortgage and other payments goes down because it’ll eventually go away, and the size of the interest expense you’re paying on that tends to get lower as your age increases throughout retirement and the size of the debts go down.

In addition to that, hopefully, if you’re pretty lucky, there are no more kids to take care of financially, and taxes are less because not all investment income is taxed, for the reasons I just mentioned previously.

5. Greater Access to Retirement Funds Without Penalty

The fifth reason why people can retire earlier, and one of the things that I’ve seen many people tend to delay retirement for, is they don’t think they’re going to have enough access to their retirement funds, but many times people have more access to their retirement funds than they think, and they don’t have to pay the penalties that are making them not want to take that income.

So if you have a 401(k) or 403(b) from a previous employer and you left that employer in the year you turned age 55 or later, you can withdraw that money penalty-free, and you don’t have to wait until that 59.5 age you’ve probably heard a lot about. You can actually get it out of that employer’s retirement plan if you retire in the year you turn 55 from that employer, from that 401(k), or from that 403(b); you don’t have that penalty that you hear a lot about on early withdrawals from retirement funds. In addition to that, if you have an IRA, you can get money out of an IRA prior to age 59.5.

There are special rules that you have to follow to do that, but you can get it out prior to the age of 59.5 through something called 72t distributions. So 72t distributions, it’s a special rule that allows you to retire early without having to pay that penalty. There, again, there are several things that you have to make sure you do correctly to avoid the penalty once you start taking 72t distributions, but it can be done. So, people can have more access to their money without penalties than they believe for these reasons.

Hopefully, that helps you understand some of the different reasons why I believe many people can retire earlier than they thought possible. If you want to talk to somebody on this topic, we’ve got a group of certified financial planners.