5 Reasons To Retire Before 62 With $3.2M in a 401(k)

Can you really retire before 62 with $3.2 million in a 401(k)? Taylor walks you through a real client case study where a couple with $3.2M chose a retirement plan that scored lower, projected less money — and gave them a better retirement than the "slam dunk" plan their previous advisor built.

He'll show you why a 94% Monte Carlo score might actually be working against you, what "Tax-Induced Hesitation" is and how it quietly shrinks the retirement you saved for, and the Roth conversion window that closes every year you keep working.

🎬 Watch next: How Retirement Changes Once You Save $2.5 Million: https://youtu.be/TKj3AGA0d8A

Resources:

Website:  https://www.demarsfinancial.com/

Phone: (509) 536-9556

Schedule an introduction call with Taylor: https://bit.ly/demarspodcast

Check out Taylor's YouTube Channel: https://www.youtube.com/@TaylorMadeRetirement

Taylor's Newsletter: https://demars-financial-group.kit.com/827c64fe0e

Disclaimer: Since we don't know your specific situation, none of this information should be construed as tax, legal, financial, insurance, financial advice, or other advice and may be outdated or inaccurate. It is your responsibility to verify all information yourself. This content is prepared for entertainment purposes only. If you need advice, please contact a qualified CPA, attorney, insurance agent, financial advisor, or the appropriate professional for the subject you would like help with. Demars Financial Group, LLC or its members cannot be held liable for any use or misuse of this content. Advisory services offered through Demars Financial Group LLC, a Registered Investment Advisor. Demars Financial Group is not affiliated with LPL Financial.

Transcript

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Today's content is pulled from Taylor's YouTube channel. If you want to watch the video version or catch more great content, subscribe by clicking the link in today's show description. Welcome to Taylor Made Retirement, where we explore what it takes to build a retirement that works for your money and your life. With third generation certified financial planner Taylor DeMars.

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Steve is 60 years old with$3.2 million saved for retirement. His original plan was a slam dunk, a 94% probability of success, and over$14 million in ending projected wealth. But Steve did something that most financial experts would call a mathematical disaster. He threw that plan in the trash and instead chose one that projected half the money and had a significantly lower probability of success. But why would a rational person leave$7 million on the table just to retire three years earlier? I'm Taylor Domar's third generation retirement planner, and today I'm going to show you the hidden variable that your planning software is completely ignoring and why the perfect plan on paper might actually be the most dangerous one for your real life. Now, Steve is a senior IT manager at a Fortune 500 company, been there about 28 years. He's the kind of guy who pushed through aching knees and stiff shoulders through his 50s, but now that he's 60, the wear and tear is getting harder to ignore. His wife Diane is 58 and recently left her marketing director role after a company restructuring. Of their$3.2 million nest egg, about 2.4 of it sits in their 401ks and the rest in a brokerage account. They want to spend around 12 grand a month in retirement and around$20,000 additional per year in vacations while they're still healthy enough to enjoy them. Their advisor at Fidelity had run a Monte Carlo simulation saying, you're in great shape, and told them to keep working until 63. And part of that thinking was so that Steve could get to 63.5 and then start Cobra for the 18 month of healthcare coverage to cover the gap till Medicare. And that felt like a wall they otherwise couldn't get around. I'm going to show you later in this video why that wait for Cobra thinking was a costly mistake and how we solved for the healthcare gap for less than they expected. But first you need to see what their advisor built for them. Because when Steve saw it, he smiled, nodded, went home, but continued to watch retirement planning videos until 1 a.m. Not because he was casually browsing, but because he couldn't stop the numbers from running in his head. Maybe this sounds familiar. This is what I call the your fine trap. It's the most common thing I hear from clients who sit down with me for the first time, where their former professional says, You're fine, and it sounds reassuring until you realize it doesn't actually answer the questions that really matter. It doesn't tell you when you can retire, how you can fill the income gap between now and Social Security, or what's happening inside your 401k that could cost you six figures over your lifetime. Your fine isn't a plan, it's more like a pat on the head. And when Steve and Diane came to work with us, we started working with them on what we call our retirement readiness roadmap. The first step isn't what most people expect. We don't open any financial planning software in that session. Instead, we call it a discovery conversation, learning about their life capital, not their financial capital. Instead, we want to know what matters to them, what scares them, and what a ideal and successful retirement really looks and feels like. Things like spending 20 grand a year on vacations, the mornings that they wanted back, the time and financial means to see their grandkids on a regular basis. And that's when Steve told me about his own dad, who had worked until 68, but had plenty of money to retire sooner, and only 18 months into retirement was unfortunately diagnosed with Parkinson's. Steve's here was having the same thing happen to him. That initial conversation shaped every decision we made from that point forward. Because after that discovery session, the next step we do in our process is to build the first draft of our client's retirement plan, mapping out their income sources, spending, goals, and stress testing it all. And for Steve and Diane's case, the numbers look so good that most advisors would have just stopped right there. Let me show you why we didn't. When we look at Stephen Diane's plan through the lens of a financial planning software, the Monte Carlo simulation looks fantastic. A 94% probability of success with an estimated$14 million in ending assets in today's dollars. This includes the$12,000 a month they want to be spending month to month in retirement, the$20,000 they want to spend every year on vacations, retiring at his age 63, Diane's age 61, and the other miscellaneous goals that we want to make sure that are factored into the plan, like healthcare costs, long-term care expenses, estimated longevity, and even an estimated cost of healthcare costs pre-65. But that's not what's most important here. To me, I see 94%. And while others think that looks like an A or an A plus, to me, that seems like failure waiting to happen. All you're telling yourself with an overwhelmingly positive Monte Carlo score like this is that you're going to underlive your retirement. Why? Because what this is projecting is a thousand plus scenarios with the best of the best, with the worst of the worst scenarios, and saying, well, if you don't change anything in your plan, you've only got a 6% chance of running out of money. So my preference instead is aiming for a sweet spot up around an 80% Monte Carlo score. Of course, there's other context around that to define an optimal plan, but for me, seeing that is where most advisors stop and where we get where we get excited about additional planning opportunities. So when I say a different story entirely, I'm looking at these two scenarios currently being the same, having him retire at 63 as the original plan described, like his Fidelity Advisor said, versus a tax-optimized plan having him retire now at age 60. Instead, his Monte Carlo score drops to about 82% probability of success with$8.1 million of ending assets in today's dollars, versus the 94% with$14 million. So you may be saying, why would anybody be rationally thinking about why this is a better plan? I'll show you why under the hood. Because when we look at the cash flow forecast for the retiring at 63 scenario, we see that this is the RMD view year by year, what that looks like. And there's this little tax time bomb that goes off here around his age 75 when RMDs begin, to the tune of$216,000. You might say, okay, fine, maybe he was going to spend that much anyway, probably not, but the problem gets worse. You're forced into a corner, you can't change anything once the engine has started. Meaning, even just about 10 years later, he's now taking a million dollars out, just in RMDs at that age 87. And the problem continues to compound. The tax optimized plan, with he retiring at age 60, tells a different story, where at his age 75 instead, his RMDs are less than 100 grand. While they do get quite significant over time because he has significant tax-deferred assets anyway, it doesn't get anywhere near as high as it was previously. Let me show you another angle of what I'm talking about. Instead of looking at the RMDs, we can see why the difference is by the balance of the accounts. Let's go back to the original plan where he ends up with$14 million. We can see here where his assets are in the realm that I described today: minimal Roth assets, majority in tax deferred and some taxable accounts. But by the time he gets to his age 75, he's got$9.2 million in tax-deferred funds. This is after he's taking out all the withdrawals and everything else. The engine is growing faster than he can spend it down. A good problem to have. But still at that point, he is painted into a corner where he has no other assets to draw down. Instead, a$9.2 million machine that keeps growing and forcing him into higher and higher tax brackets. First world country problems, I know. But without working a day longer, in fact, retiring earlier and without saving any more money with a tax optimized plan, the forecast tells a very different story. Where in early retirement, he's actually making significant withdrawals from his taxable account. And his 401k is still significantly high, but we are funneling a Roth IRA strategy, which I'll detail here in a minute. So by the time that he gets to his age 64, basically all those assets that were taxable outside of retirement accounts before, about 700 grand worth, are now inside of that tax-free bucket. You might say, well, was it worth it to transfer the same nearly identical amount of dollars from one bucket to the other? And the answer is for me is a resounding yes, because we now have them compounding within the tax-free bubble. So let's fast forward to that RMD age again, where you might recall before it was north of$9 million in the tax-deferred fund. Now it's shy of$4 million. But his Roth, his tax-free funds are north of$2 million. And that gets better and better. Going out to his age 90, for example, he's got$10 million inside of a tax-free Roth IRA and$5.5 million inside of a$401. So with just a bit of engineering here, there's a massive difference. Why? Well, because we're being intentional about being able to set up the Roth conversions in this fashion right here. In the early years, like I described, they're withdrawing down from those taxable funds to the tune of these specific dollars, which gets evaluated year by year, so that we can be able to convert a specific amount on a year-by-year basis. And the reason that happens is because we're able to withdraw for his their needs, wants, and wishes from their taxable account to the tune of these dollars here, which of course get calibrated on a regular basis. What also gets calibrated is being able to, therefore, fill up Stephen Diane's tax bracket up to the 12% marginal bracket in their case with significant Roth conversions. Had he retired at the age 63 scenario, there would be no elbow room, no opportunity for Roth conversions, which we're taking advantage of with off earlier retirement. Therefore, we're able to see this tax-free account do the same thing I just showed, where the Roth funds are growing significantly over time to be bolstered for retirement income. And so even though going back to the comparison of the two scenarios, it looks like he's got significantly less assets, they are much more powerful. I would rather have a million dollar Roth IRA than a$2 million tax deferred account any day of the week. Now, in his scenario, that specifically is because he's able to stay within certain thresholds of the tax brackets. So without doing the proactive Roth conversion strategy, one might say, hey, I'll do the same thing and keep my income low in early years, which makes sense to stay within certain ACA subsidy thresholds, right? But then Medicare starts, so you don't need to do that anymore, and you're taking regular withdrawals until the point that that tax time bomb goes off around your RMD's land, forcing you into north of 22%, even 24%, and eventually by their age mid-late 80s and to the 32% income tax bracket. And there's nothing they can do about it. But with this proactive strategy, we're able to do the Roth conversions with this green line instead, staying within, underneath the 22% threshold for life, nearly, nearly for life. In their late 80s and early 90s, they're projected to still have too much in tax-deferred assets, but we'll cross that bridge when we get there. I like to think of this comparison as the blue scenario is just deferring, delaying, and doing what most people default to for a retirement income strategy, like you're just putting a cold gob of butter on the middle of your toast and chomping through it. No one does that, right? No one delays to have a huge chunk of their butter towards the end that they have to munch through. What we prefer to do instead is spreading that tax liability across the years, which is part of being able to take advantage of each tax year because you have a limited window and a limited threshold to be able to pull that trigger. And yes, this sounds convincing from a financial standpoint with the nerdy numbers and all. And now you better understand why we're willing to accept a lower amount of assets that are much more powerful. But most importantly, outside of the quantitative element is this qualitative element, not the financial capital, but the life capital, where Steve and Diane are able to really make the most of these early go-go years. His knees aren't getting any better, and he's not getting any younger. As you might imagine, the reason I get so passionate about being able to retire earlier than the status quo tells you to is that these years don't wait for you to feel ready. They're happening right now. While your financial capital keeps growing while you sit at your desk, your life capital, that health span of good years you have left, is drawing down every single day. And unlike your 401k, it doesn't compound. Now in Steve's dad's case, he had the money, but he never got to use it in the way that he planned. So the way I like to describe it for clients who are continuing to work beyond when they financially need to, is that they're kind of going through a toll booth every single year. And that toll is not only charging them in dollars, but in time. And the receipt tends to be bigger than you would think. Let me show you what I mean. But first, if you realize that no one's ever shown you what's underneath your Monte Carlo score, feel free to book a call with the link in the description where we can map out your full picture together. Now, when I showed Steve that side-by-side scenario with the Monte Carlo scores, Diane looked at me and said, Yeah, but we'll sell how six million dollars less. And that's a fair question, which is where we unpacked what was underneath the picture. Because in the retire at 63 plan, eventually every single dollar has to be go through tax-deferred accounts, and every dollar has to pass through the IRS before Steve or Diane can touch it. And that's where it stops being a spreadsheet exercise and starts being about real life. Now remember that healthcare wall that they thought they couldn't get around? When we built out this earlier retire at 60 plan, we found that covering their own premiums before Medicare was actually a fraction of what they feared. By managing how they took income in these early bridge years, they qualified for marketplace subsidies that brought their premiums down to less than they were paying through Steve's employer. The healthcare crisis turned about to be to be more bark than bite. The real cost they didn't see was not healthcare, but the tax situation. For example, another way to think about the angle between the two scenarios is not just by the dollars, but how it affects your day-to-day life and your bucket list. Imagine when Steve and Diane's daughter calls. She says, I found a beautiful place in Montana where the whole family can stay for two weeks and it's going to cost about$30,000 to$35,000. Sounds like a dream. But to pull$30,000 from a large pre-tax account, they don't need$30,000. They need north of$40,000 because every dollar is coming out as taxable income. And that creates something that I see all the time in my office. I call it tax-induced hesitation. It's the moment when you look at what you want to do and you look at the cost of being able to do it from a tax perspective. And I see clients all the time having something in their gut that says, uh, not right now, or maybe in six months, or perhaps next year, despite them being able to afford the trip. What actually happens more often than you think is they say, let's just do something smaller. And the friction wins, and the retirement that they save for starts to shrink. One deferred experience at a time. Now compare this scenario with someone who has$2.5 million sitting in a Roth at the time. They write a check,$30,000 out,$30,000 spent. No tax event, no hesitation, and no friction. They get to experience the same trip with their same family members, but it's a completely different feeling. And this friction doesn't stop at just your wants and vacations. If something happens to one of them with a major medical event or even a chronic health crisis, they are able to take all of that tax-free income without having to worry about how it's doing a double gut punch to their portfolio. And speaking of double gut punches, when there's inevitably only one of the spouses still around, either Steve or Diane, their lifestyle doesn't get cut in half, but the tax brackets do. And the RMDs on a pre-tax scale, they get massive. And it gets left to be a very ugly scenario where Diane's looking at being pushed not just into the 22% bracket, perhaps 32% or even 34% on top of state income taxes. As you can tell, the person with more money on paper doesn't always have more freedom to use it. And isn't freedom in retirement the whole point? If this resonates with you and your spouse isn't in the room, feel free to send this on to them. Not because you need to convince them of anything, but because the decision of your retirement timing affects both of you, and you'll want to be looking at the same picture before you talk to anyone or pull any triggers. So after describing the pros of being able to retire earlier and the tax-optimized income strategy, Diane still had one question that held her back and almost stopped the entire early retirement strategy altogether. Because if you've also felt a sense of guilt about retiring early, this is something you might need to hear. The Roth conversions, the ability to be able to create this tax-efficient income stream in retirement, is only possible for them by retiring only three years earlier. So it's a limited window that they had to capture. Otherwise, the 12% tax bracket would be blown up by starting Social Security, starting RMDs, and everything else that life would throw at them. The way I like to explain this to clients is the IRS is running a flash sale right now on your 401. Right now, you can move those dollars to the tax-free bucket for only 12 cents on the dollar. But that sale has an expiration date. And knowing exactly when that is for your situation makes all the difference before the window closes and you're back to paying full price. For example, 24 cents, 32 cents, or more on every dollar. For Steve and Diane, that sale lasted only five years. Five years where every dollar they moved was taxed at 12% instead of double or more down the road. And that's not a rounding error. Over 25 years of tax-free compounding is the difference between the Montana trip happening and the Montana trip being pushed to next year for the rest of their lives. Steve was just three years away from letting that sale expire without even knowing it existed. And every year you keep working at your current salary, you're paying the toll to keep that window closed. That's the toll booth. Not just in years of your life you can't get back, but in dollars you'll never recover. And here's what gets me Nobody ever explained this tax side to Steve and Diane. Not their advisor, not their CPA, nobody. Their advisor saw$3.2 million, ran the simulation, and said, You're fine. But in my opinion, that's not the full picture. It's just one piece of the puzzle. And when it's just one piece you're looking at, you miss the picture that changes everything. So after seeing all this, the composition, the tax window, the freedom the plan creates, Dan looked at me and asked a question I hear almost every week, saying, What if we're missing something? And I get that. When you are spending 30 years of your life saving, maxing out your accounts, living below your means, watching the number on a balance sheet grow, the idea of stopping feels wrong. And not just financially wrong, but personally wrong. Like you're breaking a rule that you've meant to follow your entire adult life. Where you're the responsible one, the disciplined one, the one that says not yet, while everybody else is spending frivolously. And now that someone's telling you that it's time to spend, it doesn't feel like freedom, but more like a risk. And it's not a math problem, because it makes sense on the software in the spreadsheet. The problem is an identity shift where our most of our whole financial lives are built around accumulation, and retirement asks you to do the opposite. No Monte Carlo score in the world can help you close that gap. So here's what I told Diane. Your retirement plan isn't a route you set once and hope for the best. It's more like a GPS. You set your destination, you start driving, and when conditions inevitably change, like the market drops, healthcare costs spike, and other things that life throws at us that we can't necessarily predict or plan for, the GPS will recalculate. You don't pull over and go on home. You take a different road to the same place. And to me, that's what this 82% score for the revised plan actually means for Steve and Diane. Not that there's a 18% chance they're going to fail, but that there's an 18% chance that something is going to need to be adjusted. And you want someone in the passenger seat who's already mapped out every alternative route, not a plan on paper that can't adapt when the highway is closed. So for our structure for clients in the retirement readiness roadmap, the discovery session and the income session helps clients get this started. But the tax plan is where we uncover the real opportunities. And we still had three more pillars to build out the investments, the healthcare, and the state planning, all around Steve and Diane's specific situation. We don't prefer just a score and a handshake, but a strategy designed around your actual life. I feel passionate when clients understand not just the what, but the why behind the numbers in the plan, they gain that much more confidence that how allows them to take the leap of faith to retire three years earlier, to retire at 60 years old rather than waiting to the conventional 65 or later. The question stops becoming: can we do this, but will we let ourselves do it? So for Steve Scenario, where he started with a$14 million projected nest egg at the end of his life and left with a much smaller one, he didn't hesitate to pull the trigger. Because once you see what's underneath the numbers in the bigger picture, it stops looking so threatening and more like the better answer. Fortunately, you've already done the hard part. 30 years of discipline, 30 years of saying not yet, which takes courage and diligence. But knowing when to stop takes a different type of courage. And if you've been looking for someone to tell you it's okay, it's best to measure twice and cut once. You don't want to be the richest person in the nursing home. You want to be the person who takes the family to Montana. Our retirement readiness roadmap is meant to do this comprehensive lens around your specific situation. If you want to see what your full picture looks like, click the link in the description or scan the QR code on screen and book a call. And if you want to go deeper on what changes happen once you cross the$2.5 million mark for saving for retirement, watch the video on screen right now.