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Jan. 25, 2020, 1:37 p.m. EST

Whether retiring at 40 or 70, the challenges are surprisingly similar

Both FIRE and traditional retirement involve uncertainty and finding purpose

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By Chris Mamula


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A few years ago, I left my career as a physical therapist at age 41. I decided to pursue a completely different financially independent, retired early (FIRE) lifestyle . Around the same time, my parents asked me to go over their finances with them. They were preparing for traditional retirement in their 60s.

After years of working with a financial advisor, they realized that they were paying far more than necessary for financial advice that was questionable at best. They asked me to help manage their finances as they transitioned into retirement.

I initiated our transition into early retirement. Simultaneously I was intimately involved in navigating my parents’ transition into traditional retirement. The experience provided unique insights.

I’ll explore a few common themes I came across despite our vastly different situations. Lessons I learned will assist your retirement planning, wherever you are in your journey to financial independence and whatever type of retirement you desire.

Dealing with uncertainty

The biggest challenge to retirement planning is dealing with uncertainty . Financial markets, interest rates and inflation are all difficult to predict and completely out of our control. Health-care costs are a massive unknown. We all have unique personal situations that will affect our tolerance for risk and need for security. And none of us know how long we’ll live.

This is all true for both traditional and early retirement. However, to me it feels more manageable with traditional retirement.

Uncertainty in early vs. traditional retirement

Anyone reliant on an investment portfolio to produce income deals with uncertainty in financial markets. This is manageable for those who’ve achieved a stable traditional retirement. Social security provides an income floor . You can annuitize a portion of assets if more of a floor is needed. You could also consider a reverse mortgage .

Also read: This financial planner believes you probably don’t need an annuity for your retirement

These options either don’t exist or are not practical for early retirees. Some continued work, or at least maintaining the ability to return to work , are essential levers for early retirees to be able to pull to manage financial risks.

My parents are both on Medicare. Despite some people’s misperceptions, Medicare is not free . Still it gives them a stable system with predictable and affordable costs. In contrast, we have constant uncertainty hanging over our heads. We reevaluate our health insurance options on a year-to-year basis as the health insurance market continuously evolves.

A clear advantage to retiring sooner is reclaiming younger, and presumably healthier, years of life to do the things you desire. But there is a trade-off. From a planning perspective, retiring earlier creates more uncertainty.

Dealing with uncertainty is something all retirees must come to peace with. FIRE in our early 40s and traditional retirement in my parents’ mid-60s to early 70s represent opposite ends of the spectrum. It’s been interesting to see how we all are dealing with this in real time.

Early retirement amplifies the magnitude of uncertainty, requires greater flexibility and can create anxiety. I wouldn’t trade places with my parents. I do envy the level of security and certainty their traditional retirement provides.

Read: Don’t keep delaying retirement for ‘one more year’ out of fear of these unexpected expenses

Importance of tax diversification

A consistent message from my co-writer Darrow Kirkpatrick’s earliest writing on the blog “ Can I Retire Yet? ” is not to fret about taxes in retirement . I generally agree. I’ve shared a simple but extremely effective tax-planning framework that my wife and I have used while saving toward early retirement.

Our philosophy was to max out all tax-deferred retirement savings available to us during our peak earning years before considering Roth or taxable accounts.

We can perform Roth IRA conversions in years when earnings are lower in early retirement. In traditional retirement years, we can withdraw the money directly from the tax deferred accounts. In either case, we anticipate taking the money from the tax deferred accounts at lower tax rates than we would have paid during peak earning years.

Read: Here’s why you may want to reconsider doing that backdoor Roth IRA conversion

Tax planning for early retirement

Our initial thinking was that we would have little to no earned income in early retirement. We could convert traditional IRAs to Roth up to the standard deduction each year without paying any federal income tax.

For example, we could theoretically convert nearly $25,000 in 2020 tax-free. We could then convert tens of thousands of dollars more each year at the lowest marginal tax rates if desired.

Then we ran into two wrinkles. First, like many people, we were fearful to spend down retirement savings we worked so hard to build. My wife and I have each elected to continue doing some paid work into the foreseeable future.

Our earned income currently exceeds the standard deduction and 10% tax bracket. This makes performing Roth conversions less beneficial than anticipated.

Second, we have determined that health-care-sharing ministries are not a viable option for our family. We’ll most likely use Affordable Care Act subsidies to reduce our insurance premiums once we can no longer qualify for employer-sponsored coverage.

Read: This hidden Obamacare feature could save your family hundreds of dollars on health insurance

Generating more taxable income by performing Roth conversions could decrease ACA subsides, effectively increasing insurance premiums. This may diminish the benefit of doing Roth IRA conversions.

It would be particularly harmful if income generated by performing Roth conversions caused us to exceed the ACA subsidy cliff . In this scenario, the increased premiums would substantially outweigh any benefit of doing a Roth conversion.

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