Early Retirement Plan Distributions

Episode 109 October 19, 2023 00:13:41
Early Retirement Plan Distributions
Annuity Straight Talk
Early Retirement Plan Distributions

Oct 19 2023 | 00:13:41


Show Notes

In episode 109 of the Annuity Straight Talk podcast, host Bryan Anderson discusses early retirement plan withdrawals, focusing on the concept of the 72T. This IRS code allows for penalty-free withdrawals from qualified retirement accounts before the age of 59 and a half, but with certain conditions. The three methods to calculate these withdrawals are the Amortization method, the Minimum Distribution method, and the Annuitization method. Each method offers different withdrawal amounts based on the individual's needs and preferences.

Bryan emphasizes the importance of expert advice when considering early withdrawals, given the complexity of the rules and the potential for penalties if not followed correctly. He also mentions that current higher interest rates make this a more viable option for those considering early retirement. 

If you have questions schedule a call with him on AnnuityStraightTalk.com

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Episode Transcript

[00:00:05] Speaker A: This is Annuity Straight talk. Since 2008, your host, Brian Anderson has helped clients nationwide navigate the complex market for annuities. With Brian's assistance, hundreds of clients have achieved a profitable and secure retirement. You, I would know because Brian has answered many of my questions concerning annuities and retirement planning so that you can benefit as well. Let's get started here's, Brian. [00:00:47] Speaker B: Hello and welcome to the Annuity Straight Talk podcast, past episode number 109. My name is Brian Anderson. Coming to you again. 109 episodes, rolling right along. Lots of information to cover. We're going to do a lot more case studies probably in the future, but I got a bunch of information coming out. Everything's teed up. I'm going to be traveling a bit, coming in the next few weeks, going to Kansas and Arizona. Be on the road for a while. Everything's coming with me. Calendar's staying open. You guys get a hold of me. Top right corner of any page on annuitystraighttalk.com. Schedule a call. Best way to get me, best way to guarantee a time slot. I'm here. I can do it. This one is kind of a niche. Episode 109 early Retirement Plan withdrawals. I run into it. It's not going to be applicable to everybody and not even most of the people I talk to. But more and more I get calls from people in their early 50s. They're really setting things up for retirement. I've done some case studies where those guys are planning for things that are 7810 years out, which is fine. We've got really good rates. I used to not support that so much for long term commitments, but you can lock in some really nice deals. Some of those guys are breaking even in their money. By age 67, 68, you're in the insurance company's pocket for the last 20 years of life. Amazing stuff. So you can get really good deals, but everybody's got to look at it, look at their situation, and evaluate whether it is because there's some really good ways to get things done. Right now. I'm going to go ahead and share my screen. There is a cool table in here. All right. Early retirement plan with Distributions. Now there's a lot of restrictions on retirement accounts. Can't take it out till 59 and a half. You got to start taking it out in your RMD. Age is going up in 2033 to age 75. It's getting better. There's usually a way to work around it or at least minimize any negative effects of those requirements. If you want to retire before 59 and a half, a lot of people do. And you got to know this. And it's not that you do it or use it, but at least know it's an option so you don't feel constrained by those regulations. Withdrawals prior to 59 and a half from qualified retirement Accounts IRAs, 401, KS, TSPs, four hundred and fifty seven S, all that stuff. Sep, qualified money, additional 10% tax penalty. Quite obviously, that is prudent to avoid if at all possible. So this is going to be a guide for anyone who wants to consider doing this to fund an early retirement. It really is just for retirement. I guess we'll talk about that just for retirement, not for unnecessary expenses. There are some exemptions to the 10% tax penalty for emergency medical care, things like that. But because of the requirements of the 72 T, that's the IRS code that gives you the opportunity to do this. Anyway, we'll talk about that as we go along. So a lot of information along line. You want to Google 72 T, it's fine. You'll find plenty of typical websites. Investopedia bankrate the information that's helpful. I like to kind of put it in a story version, kind of tell you about it. It's certainly worthy of a podcast episode, but you'll get helpful information from a lot of place. You got to have expert advice, someone who knows the system, knows the rules and the products that will work. At least one of the sources that I looked at when I was trying to see who all was out there with typical stuff, one of them said, oh, it's a financial last resort. But if you find someone who specializes in asset distribution and you can look at it from all angles and do the appropriate amount of planning, it can be done effectively. And I would not consider it to be a financial last resort. I think that is in reference to like emergency spending or something like that. I'm going to say that it's probably only for those who are very well capitalized for retirement. You're also looking at a longer payout period because you're starting at a younger age. If you start at 55 instead of 65, that's ten more years lower payouts on annuities, all that stuff. So I brought this up because I've actually got a meeting the day I'm recording this, I got a meeting with a 53 year old couple. They want to retire within a year. They knew some of the things, they didn't know the other things, right? I think they knew about 72 T. This is probably what I'm going to recommend they do just because it's easy. They got about 60% that are assets. When I say very well capitalized, I don't mean you have to have a whole bunch of money. It just means your spending rate has to be low as a percentage of your total assets has to be low. You could have 200 grand and do it effectively. You could have 2 million and do it effectively. 60% of assets in a qualified retirement plan. The 72 T is probably the best way to get it done. This is the same as a lot of other cases. I feel it's best to work first with the IRAs and leave the non qualified or the after tax investments alone for long term growth. Even Roth IRAs kind of leave those alone if you can. You want long term growth in those planning adjustments over time. If you leave the IRAs alone and you use non qualified money, you will get tax deferred long term growth. But you're going to bleed through most or a lot of your non qualified money, a lot of your after tax stuff. And if you got long term growth in IRAs, then you've already got an income plan set up and then you're forced to take even more out of it. So it's going to put you in a worse tax position when RMDs are required. Now, that is a long ways away, but anything you lock in and do now, you have to keep that perspective in it. You don't want to get 20 years down the road and be like, oops, why did we do that? You're not even going to remember. So it's a long ways away for these guys. But whatever you structure, you got to have any of the issues in mind so that you can pivot and turn and make sure you take care of those things. Roth conversions can come into play in this case. It's something I think you should delay until early 60s in this case. And that's because you want to deal with one thing at a time in retirement, they have to first figure out how to generate income. If you do Roth conversion and income at the same time, it's going to be costly from a tax perspective, I'm not sure it's worthwhile. The rules of the 72 T are stringent. You have to stick to a plan. Messing with other distributions at the same time could make things unbelievably complex. Here's how it works. The IRS offers three different ways to calculate the amount of penalty free withdrawal you can take. Age of both payees, whether it's single or joint life, is necessary. Plus you have to plug in an assumed interest rate. That rate can be no more than 120% of the federal midterm rate at the time it's set up. Right now, the federal midterm rate is 5%, right around 5% or so. So the maximum assumed interest rate would be six. So you take those inputs and there are three options. Below, I'm going to explain those amortization method. Calculates payments based on amortizing. The funds over the life expectancy of single or joint payees. So if you calculate it with a discount rate of 6% over the life of these guys over a 30 year period, probably then you're going to get a huge payout. That's one of the methods you can use to create it. The minimum distribution method is kind of like calculating withdrawals for RMDs. They give you a table of factors based on your age, single or joint life. And because you're young when doing this, then obviously the rates are going to be a lot lower than like an RMD rate for somebody who's 73, right? So this is going to result in the minimum possible withdrawals. And this one's kind of confusing. The annuitization method, it's a different set of factors. Another table the IRS gives you to calculate the payments that fall somewhere between the highest and lowest withdrawals for a singular joint life. You got to have these three methods available. It depends on how much you want to take out and how much you have in your plans. Right? If you're trying to maximize income, you use the amortization method. If you just want a little supplementary income, you probably use the minimum distribution method. And if you want to try to get somewhere in the middle, you can change your discount rate. You can change your rate a little bit. You use the annuitization method if you want to fall somewhere between those two. So you can make the distributions. Anything that you know, jack the rate down if you don't want your distributions to be that high. So the point of this, the result of any method creates a substantially equal periodic payments. Sepp, that's what the IRS calls it. Dictates the guidelines you need to follow. Don't mess it up. Then you'll have to pay the 10% penalty after doing all that work. So there's a table down here from Bankrate.com that shows three different methods for calculator. I got a cool calculator. You plug in the amount, the age of one or two people, then your discount rate and it'll show you what your payouts are. So it's kind of cool calculator. If you click on the image in the newsletter, it'll go right to that calculator. You go to Bank Rate and check it out. Pretty solid site with a lot of good information. I did an assumed interest rate of 5.35%. I'll explain that in just a second. And so what it gives you is it'll give you the required minimum distribution, the fixed amortization method and the fixed annuitization method. And it shows you which is highest. And on the right is the 5.35 that I plugged in. They also give you a 4% and a two and a half percent. You can see changing the rate lowers the payments. So you can use that to create whatever income stream you need to pull out of it. And so there are going to be some limits to it, but there it is. And it's pretty easy to do. If you want to play with the numbers, you go to that website. 5.35% happens to be the going rate for a seven year fixed annuity from a very highly rated company. I'm not chasing rates on this stuff. I go with security first. Risk is something you want to stay away from because market volatility is a bad deal when you're stuck with a substantial withdrawal plan. So rules for 72 T dictate taking substantially equal periodic payments for five years or until age 59 and a half, whichever occurs later. These guys start at 53. They're going to have to go for six and a half years before they're out of it. Now, if you calculate the annuitization method or the highest payments, it doesn't mean you have to go buy an annuity. It just means that's going to give you the schedule and the withdrawals you need to make. You could leave all your money in the stock market, but you have to take that much out every year. But if you have risk, it's no different than other times of retirement. If you lose money, you're forced to take it out because you have to, or you're going to pay a penalty. So that's why I say you got to take some risk out of it for sure. So there it is, five years or 59 and a half, whichever is later. You got to take the payments. It's pretty simple to set up, pretty easy to do, but there's just a lot of little working parts on it. I've only set up maybe two or three of these things in the past. I think because we have higher rates right now, it's going to be a more viable option for people. You don't have to have as much money to retire now as you did three years ago, but the calculators online if you want to play the numbers. Putting it into practice takes an expert. I've been looking at this and studying this idea for probably twelve or 13 years. It's not for the majority of the people here, but applicable to plenty of the people I talk to. If you're considering making this part of an early retirement, get on my calendar. I'll help you figure it out. Top right corner. Any page on annuitystraighttalk.com schedule a call. Please subscribe or comment on YouTube or your favorite podcast platforms. Share it with your friends. If you know someone who's interested in doing this, send it to them. Let them know that there are options available and it's possible to do it. So again, lots of restrictions with IRAs, but you can usually work around it. Again. My name is Brian Anderson. This has been episode 109, early Retirement government Plan distributions. I'm back next week with episode 110. I'm going to tee it up and record a bunch of them so that they're good to go. When I'm on the road, I can just talk to you guys, make my appointments, and get you taken care of. So thank you so much for joining me. I will be back next week and I'll see you then. [00:12:44] Speaker A: You have been listening to Annuity Straight talk. The precision information is for informational and educational purposes only and does not represent tax, legal or investment advice. The views expressed by guests on this program are their own and do not necessarily reflect the views of Annoyed Straight Talk or its partners. No information presented today should be acted upon without meeting with a qualified and licensed professional. It is important that you read all insurance, contract disclosures carefully before making a purchase decision. Guarantees are based on the financial strength and claims paying ability of the insurance company.

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