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

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

Reason 1: Spending Decreases with Age

The first reason why I believe many people can retire earlier than they thought possible is because many people tend to spend less as they age in retirement. And unfortunately, most of the retirement planning software programs out there will not include this as a variable.

Most retirement planning software assumes that when you retire, you have a certain amount of money you need, and the certain amount of money that you need grows every single year with a predetermined inflation rate. But in practice, I do not see that to be true. I’ve been doing this for 28 years now, and I can say that, on average, most people tend to spend less as they age in retirement because they’re simply less active.

And according to the Bureau of Labor Statistics, this has been something that’s been going on for many years. People tend to spend less as their age increases in those key retirement years. And according to the National Bureau of Economic Research, most people are actually financially more comfortable in retirement than they were during their working years, which would tend to imply that people aren’t spending less in retirement because they need to; they’re spending less because they just aren’t as active as they once were. And this isn’t incorporated into traditional financial planning software that models how much income you’re going to need for retirement, how big of a nest egg you’re going to need to support that income.

I’ve actually written a few articles on this topic if you want more information on it. I wrote an article for the Journal of Financial Planning that you can Google, and I also wrote an article for Forbes on why you can retire earlier than you thought possible. This article is much more recent and it’s easier to read. The other one is a little bit more technical, but if you like to read on this stuff, those are two places you can find more info.

Reason 2: Health Insurance Costs May Be Lower Than Expected

Reason number two I think many people can retire earlier than they thought possible is I believe many people tend to believe that health insurance is going to be more expensive than it actually is for the average person. And the reason I think that occurs is because many people who are going to retire before the age of 65, which is when Medicare kicks in, they’ll go on something called, in Wisconsin at least, they’ll go on Affordable Care Act insurance.

The cost of it is partially dependent on the amount of modified adjusted gross income you have. So as your modified adjusted gross income goes up, it’s more expensive. As it goes down, it can actually be very affordable depending on what that level is. And if you look at what’s 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—but these are all the things that are included towards counting towards modified adjusted gross income. But more important than what counts in modified adjusted gross income is what does not count. Qualified distributions from Roth IRAs and applicable distributions from non-qualified investments—we call it at our office the non-qualified bucket of investments.

So this would include things like brokerage accounts that aren’t in IRAs or retirement plans. If you have a bank account, if you take money from a bank account and you take the distributions from it, that doesn’t count towards modified adjusted gross income. So for people who have planned well in advance of retirement that have enough money over here, that money coming in does not count towards modified adjusted gross income.

So people can actually get the income they need to maintain the lifestyle they want prior to age 65 if they have sufficient money over here in this category to get them to that age 65 and to keep their health insurance costs actually quite reasonable for even people that have well over $1 million in their investment portfolio.

Reason 3: Lower Tax Burden in Retirement

Reason number three, why I think many people can retire earlier than they thought, was possible is because many people tend to overestimate what their tax burden is in retirement because they tend to think, well, whatever I made during my working years, that’s going to be similar to how it works in my retirement years.

But that’s generally not the case because retiree taxes on income are generally less than the income that you made during your working years because there’s no tax like a tax on your retirement income sources.

Not all Social Security is subject to federal income tax. And many states, including Wisconsin, do not tax Social Security income at all.

So there’s no state tax on people who are residents of Wisconsin who have Social Security income coming in. And in addition to that, not all investment income is subject to tax, such as the non-qualified investments I just mentioned and qualified Roth IRA distributions. So for all of these reasons, if you need $100,000 of retirement income, the taxes are going to be quite a bit less than $100,000 of working income for all the reasons I just mentioned.

Reason 4: Reduced Expenses in Retirement

Reason number four why I believe many people can retire earlier than they thought possible is because your expenses tend to go down when you retire for a variety of reasons. The interest payments that you’re paying towards a home mortgage or other debt tend to go down for many people because they just don’t have as much debt entering into retirement.

In addition to that, if you’re lucky, hopefully you don’t have to take care of the kids financially anymore and that cost goes down and taxes are less because not all investment income is taxed. So for all of these different reasons, the amount of money people need coming in during retirement compared with during their working years tends to be less.

Reason 5: Accessing Retirement Funds Before Age 59½

Another reason why I see people delay retirement that can be somewhat of a false notion is that many people think that they simply will not have access to certain retirement funds like 401(k)s, 403(b)s or IRAs prior to the age of 59½ without a penalty. But that’s not always the case. If you have a 401(k) or a 403(b) plan from an employer you left in the year you turn age 55 or later, there is no penalty for withdrawals from those accounts prior to 59½. And similarly, if you have an IRA and you want to get money out of that IRA prior to age 59½, as long as you properly use something called 72(t) distributions, you can actually get a steady stream of income from that IRA without any penalty on those monies either.

There are rules—specific rules—that have to be followed but you can do it. And so that’s another reason why I sometimes see people delaying retirement—they don’t think they have access to their money without having to pay a penalty prior to the age of 59½. But if you do want to retire prior to the age of 59½ there may be more liquidity options than you think for the reasons I just mentioned.

With that said, I know I went through everything fast. If you want to have a conversation with one of our certified financial planners on this topic—this is all we do all day—we specialize in helping people with retirement.