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Are You A Healthcare Professional Who Plans To Retire Early, Before Experiencing Burnout?

Do you want to make work optional before age 65 and not have to worry about running out of money, being forced to sacrifice your lifestyle later on, or paying too much in taxes? This comprehensive guide will teach you the top mistakes to avoid.

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Mistake 1: Making The Wrong Decisions With Inactive 401(k)s and 403(b)s

Too many healthcare professionals people just assume that when they leave an employer, they should just rollover their 401(k) to  a personal IRA. Or worse, they get sold on this idea by a financial advisor who may not have their best interests at heart. It's important to be aware that unlike my firm, HCP Wealth Planning, most financial planners get compensated based on how much money you invest with them. This usually means that if you keep it in your 401(k), they don't get paid.  So they have a very real financial motivation to convince you to rollover your account to an IRA through them, even if that really isn't in your best interests.

In many cases, it makes sense to leave your investments in your old employer plan, or roll it to your new employer plan. You need to compare the overall costs, investment choices, and resources available in your employer plans and IRAs when deciding what to do. I have literally seen over a thousand 401(k)s and 403(b)s in my career. Some are fantastic and have funds with very low fees, lower than if you held those same funds in an IRA. Others are limited and expensive. Taking the time to understand which category your 401(k) falls under could save you literally thousands or tens of thousands of dollars in fees over your lifetime. 

A potentially big benefit that could apply to you leaving your money in your old 401k is the Age 55 Rule. Normally, you have to wait until 59.5 years old to withdraw from a 401k or IRA without a 10% penalty. One of the exceptions to this is the age 55 rule. The rule states that if you leave your employer during or after the calendar year that you reached age 55, you can withdraw specifically from that 401k without a 10% penalty, and without having to wait until 59.5. If you roll that account over to an IRA, you lose that benefit and are back to waiting until you are 55. There are some other factors you may need to consider as well when deciding if you should rollover such as protection from lawsuits,  NUA opportunities, having access to stable value funds, etc. 

As part of my planning process I analyze exactly what you should do with any inactive employer-sponsored retirement accounts. Since I am a flat-fee advisor, and only get paid on my advice, not the dollar amount of investments I manage, I am one of the rare financial planners out there who can give you an unbaised recommendation on this topic.

Mistake 2: Not Taking Advantage of Roth Conversions When Your Situation Calls For It 

What if you plan to retire a number of years before you begin to receive Social Security benefits and later, Required Minimum Distributions. What if even before retirement, you change to a lower income job, or take a hiatus from work? These situations could present a golden opportunity to convert some of your pre-tax dollars in your 401(k)s/IRAs into Roth dollars.  Doing so could potentially save you a ton of money on taxes and medicare surcharges later in life.  

Most people aren't aware that not everyone pays the same amount for medicare parts B and D.  Your monthly premiums could be as much as as $500/month higher based on your adjusted gross income in retirement. This is due to something called IRMAA (income related monthly adjustment amounts). If you are withdrawing a lot of money from pre-tax accounts, that will increase your modified adjusted gross income. But if you have Roth money you are able to withdraw from, those withdrawals will have no impact on your Medicare premiums.  Just don't forget that IRMAA charges actually are based on your income from two years ago, not the current or past year. This can also create some planning opportunities. 

Another benefit of Roth Conversions is that you aren't forced to take Required Minimum Distributions from Roth IRAs (though you are from Roth 401(k)s. This is especially helpful if really don't need the money. But if all your money is in pre-tax accounts, you could be in a position where you are forced to withdraw even if you don't need to, and increasing your effective tax rate.The key is to determine how much to convert and when, based on your personal circumstances. As part of my planning process, I analayze if and when clients should do any Roth conversions, both pre and post-retirement. 

Lastly, Roth Conversions Can be beneficial from a legacy planning perspective. If oyu have a lot of IRA assets you intend to leave to your children when you pass away, and it's all in pre-tax IRAs, they could end up inheriting the money and having to pay tax on it when they are in the prime of their careers, and in higher tax brackets. However, if they inherit Roth IRA assets, they won't owe any taxes when they withdraw them.

As part of my planning process, I analyze exactly if and when clients should perform Roth conversions both pre-and post-retirement. If you ever want to schedule a complimentary video meeting where I will give you a live step by step tour of my planning process, including this step, you can do that here. 

Mistake 3:  Saving The Wrong Amounts In The Wrong Types Of Accounts

If you have access to contribute to an employer-sponsored retirement plan, you should always contribute enough to that account in order to receive the full company match. That's a no-brainer. But if you want to retire early, you need to be strategic in allocating the rest of your savings.

Too many people don't fully understand the eligibility rules and contribution limits for 401(k)s, 403(b)s, 457(b)s, Traditional IRAs, Roth IRAs, HSAs, and if you are a healthcare professional who is a 1099 worker and have self-employment income, SEP IRAs, Solo 401ks, and Cash Balance Pension Plans. Not getting this right could mean you are missing out on contributing to an account that could play a vital role in your retirement.  Choosing the wrong strategy could cost you tens of thousands, if not hundreds of thousands of dollars in lifetime taxes. Or it could mean you are making ineligble contributions to an account which could lead to you paying the IRS penalties. 

Not enough people are aware that even if their income is too high to make direct contributions to a Roth IRA, they have other options for funding a Roth bucket of money for retirement via a Backdoor Roth IRA, or if your 40(1)k or 403(b)  allows, the Mega Backdoor Roth. This Roth money can be especially helpful for early retirees as the contributions (not the earnings) can be accessed at any age without taxes or penalties. Plus, when RMD's (required minimum distributions) kick in later in life, you will be glad to know those don't apply to Roth IRAs for the orginal account owner. However, you must be aware of the Pro-Rata Rule.

Brokerage accounts should also not be ignored. This is because of they way they are taxed. Unlike a pre-tax 401(k) or IRA, when you take money out of a brokerage account, you pay capital gains taxes which are normally less than ordinary income tax rates, and you can tap into them at any age. 

Mistake 4: Not Planning For Healthcare Expenses In Retirement

If you are trying to determine if you will have enough money to make work optional at a specific age, its extremely important to accurately project how much healthcare is going to cost you over different stages of your life. Most people benefit from reduced group health insurance premiums while they are working. Or if they are self-employed they can at least deduct their premiums in some cases. Once they are 65, they can rely on Medicare. But Medicare premiums can vary widely depending on your income. You need to factor in how much those premiums and out of out of pocket expenses may cost you in retirement. 

And what if you retire five, ten, fifteen years before you turn 65 and are eligible for Medicare. If you don't properly evaluate how much healthcare will cost during those years, you may think you have enough money to retire when you don't, since you may be forced to draw down from your assets to cover those expenses sooner than you thought.  This is on top of planning for the very real possibility that you may need long term care at some point towards the end of your life. You have to decide if its worth it to pay the expensive premiums for long term care insurance, versus planning to pay for these expenses out of your assets. If its the latter, how much of your assets would have to be used to pay for various types of care (in-home care, assisted living, or a nursing home). And don't forget inflation. Healthcare costs typically rise at a faster pace than normal costs of goods. 

Part of my planning experiences inludes helping clients to estimate in detail what their healthcare expenses will be post-retirement, but pre-medicare age, after medicare eligibility, and for long-term care expenses. This is extremely important as using general rules of thumb may provide you with a false sense of security.

Mistake 5: Not Having A Tax Efficient Distribution Strategy

Many people end up retiring with multiple types of accounts that they plan to use for retirement. For example, you could have savings in a pre-tax 401k, a Roth IRA, and a brokerage account. Many healthcare professionals also save in a 457b. Knowing exactly when and how much you should withdraw from each account could end up making a huge difference in the amount of taxes you pay over the course of your retirement.  Should you withdraw a little out of each account at the same time? Should you use your brokerage account savings first? The correct order of operations for withdrawals in retirement needs to be determined before you actually pull the trigger on retirement. I leverage planning software that enables us to visualize the future potential tax impact of these decisions, along with Roth conversions,  so you can  determine the best course of action.

Mistake 6: Not Properly Taking Advantage of an HSA

One of the best ways to help prepare for healthcare costs in retirement is to take advantage of an HSA. They come with a triple tax advantage meaning you get a tax deduction when you contribute to them, the money grows tax deferred, and when you withdraw from them for qualified medical expenses, those withdrawals are tax free.  Oh yeah, and unlike an FSA, they aren't a "use it or lose it" account. You can continue to rollover the account balance year after year. Since you can actually invest in the stock market with them, the earlier you start, the better, so that you can let the power of compounding do it's thing.  This makes them one of the most powerful financial planning tools for early retirees. 

One of the biggest mistakes people make with HSAs, is they don't actually invest their contributions. They let the money sit in a cash position not really working for them. But to get the biggest benefit out of them, you need to invest them in the stock market for the long term.

The second mistake I often see is people spending their HSA money while they are still working. To truly take advantage of the triple tax benefit, you should treat them like a 401(k) or IRA and assume you won't touch them until retirement. Most people aren't aware that you can do this, but ideally you would wait until you are 65, then use your HSA to pay for your medicare premiums. 

Mistake 7: Making Investing More Complex and Expensive Than It Needs To Be

There are a lot of advisors out there who will attempt to convince you that investing is extremely complex. They will show you a model of a portfolio that contains way too many funds, many of which needlessly overlap various sectors of the market. They may also use funds with extremely high expense ratios that are charged in addition to their portfolio management fees. Their thought process is that they can convince you that they can "beat" the market" by utilizing a complex strategy that would be way to difficult for you to implement on your own. The problem is that it is extremely likely that they will not "beat the market" over the long run, no matter what type of investment strategy they use. But they will be happy to charge you that 1% of your portfolio balance year after year, regardless of the performance of your investments.

When it comes to investing, its important to keep things simple by focusing on what you can control. The first is the amount of risk you are taking (and therefore how much return to expect). Your investments should be set at a level of risk that aligns with how and when you intend to use that money. If they aren't, they may not grow enough to fund your goals for the money, or they may lose too much value just before you need to use the money. 

Once you determine the appropriate amount of risk for each bucket of money used to fund a goal, you should invest at that risk level by using the appropriate mix of low cost, index-based investments. These types of investments won't "beat the market". But they are designed to replicate market returns. And if you have a sound financial and investment strategy in place, that should be all you need.

As part of my planning process I educate clients on how to manage simple, index-based portfolios. And even though I don't manage portfolios on an ongoing basis, I do provide specific investment advice which included recommendations on asset allocations and locations. I also provide model portfolios that are aligned with my asset allocation recommendations. 

Mistake 8: Not Knowing Exactly What Your Current and Future Cash Flow Looks Like

Many families whom I partner with for financial planning have a fairly poor grasp of where all of their hard-earned dollars are actually going. This can lead to one of two negative outcomes. One is that they end up spending frivolously on things that don't really add to their happiness and fullfillment in life. The other is that they actually end up saving too much money in a bank account earning next to nothing. This is why it's important to create a detailed financial plan using cash flow analysis. By visualizing exactly how much of your cash inflows are being allocated towards your cash outflows (including monthly living expenses, taxes, investments, savings, debt, insurance, goals, and hobbies), you can be confident that every dollar has a specific purpose and is not being wasted.

If you are close to retirement, this exercise is even more important. The key is to not just assume your regular monthly spending, your travel spending, and other goals will remain the same throughout retire. You really need to think through and map out how those things will change over time. If you ever use one of those simple retirement calculators online from any of the big brokerage firms, they ask you what your expenses are and call it a day. That is way too simplified to be able to provide you with any results you should rely on.  

When I create financial plans for clients, we dedicate an entire meeting to talking through and understanding how their personal cash flow needs will change throughout the course of their retirement. 

Mistake 9: Buying The Wrong Types Of Insurance With The Wrong Amounts of Coverage:

When it comes to life insurance, and property and casualty insurance (i.e. home and auto), there are plenty of insurance agents out there who will sell you products you don't need, or will sell you too much coverage.  When it comes to life insurance for example, they may try to sell you whole life policies when all you need is term life. When you buy term life, they may talk you into buying more than you need. That could result in a needless increase in premiums that could literally cost you thousands of dollars.  On the flip side, if you don't buy enough coverage, your family's financial needs may not be taken care of the way you hoped. The only way to know for sure that you have the right amount of life insurance coverage is to project your family's future cash flow needs and make sure your death benefit will be enough to cover them. You can do this on your own, or get some advice from a professional who has no financial incentive to steer you in any one direction when it comes to determing the proper amount of coverage. 

The same goes for home and auto coverage. It's important to understand how much coverage you actually need, and only purchase that amount. Then shop around for new quotes for that coverage every year or two.  For some people, umbrella coverage may be neccesary. But to avoid purchasing too much coverage, you need to understand which particular assets in your state are already proteted against creditors. 

As a fee-only planner, I help clients determine exactly what type of life, disability, property and casualty, and umbrella coverage to have. I can even help you obtain quotes. Throughout this process, you will have the peace of mind in knowing that I don't get paid to refer you to anyone else, but I do partner with a network of independent insurance brokers who will do a great job in helping you obtain quotes. 

Mistake 10: Hiring the "typical" financial advisor who sells products or charges you fees based on how much you invest with them

I am an advice-only planner. This means that for a single, flat-dollar fee,  I partner with people to create personalized financial plans, and I help them implement my advice. Unlike the vast majority of financial advisors, I don't charge people based on how much they have to invest. I don't require that you let me manage your portfolio for you for a percentage fee that is riddled with conflicts of interest (the AUM, or Assets Under Management model). My only compensation comes from the financial plans I create and I have no financial motivation other than to give you the best advice possible. This enables me to partner with anyone, regardless of the amount of investments they have, or if they are a DIY investor. 

For the above reasons, I wholeheartedly belive this type of flat-fee pricing model makes the most sense for anyone seeking help with planning for an early retirement.  If you hire a flat-fee advisor like me, you will  benefit from transparent pricing, and conflict-free advice.  If you hire an AUM advisor, that may not always be the case. 

Schedule A Complimentary Video Chat To Learn What It Takes To Create A Personalized Plan For Early Retirement

Are you hoping to make work optional before age 65? Do you think you may benefit from personalized advice but aren't exactly sure what the heck a financial plan should entail in the first place? If you schedule a video chat with me, I'll pull back the curtains and give you a step by step live tour of my planning experience. You'll learn how a proper financial plan helps you to avoid the mistakes above so that you can retire early with confidence and not be left wondering if you should have done things differently. 

If we decide we aren't a good fit for each other, I'll provide referrals for other flat-fee advisors who I think will be a better fit. I believe my planning experience is as personalized and thorough as you will find in the industry. Worst case, you walk away from our meeting knowing what a real financial plan should look like. That way if you interview other advisors in the future, you will know if they really believe in the benefits of financial planning and want to spend the time doing it, or if they want to use watered down planning as a means of selling you their other products and services.