My multimillionaire friend recently let it slip that his household's net worth surpassed $5 million last month. In our relatively reasonable cost of living part of the country, that should be enough to sustain a fairly comfortable lifestyle more or less indefinitely.
When I asked him whether he was thinking of retiring, he let me know that he couldn't quite make it work out yet, even with that substantial net worth. When I pressed him for why that was his perspective, he made it clear that he didn't really need more money to retire, but rather that he needed a similar net worth in a more accessible format.
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Asset location matters
The key issue my friend is facing is that nearly all of his household's money is tied up in ways that makes it difficult or expensive to tap for normal living expenses. When the county reappraised his home last fall, for instance, its value went up by nearly $150,000.
While that added to his net worth, he can't tap that money without selling or taking out a home equity loan. Plus, the higher home value leads directly to higher property taxes, making the home value increase a very expensive asset to drive an increased net worth.
Beyond that home situation, his family's major assets include retirement accounts like 401(k)s and Roth IRAs and other restricted accounts like 529 college savings plans and a Health Savings Account. Indeed, when pressed for a breakout, he shared that only around 10% of his net worth sits in easily reachable locations like a checking, savings, or ordinary brokerage account.
Although his financial concerns can certainly be considered a "first-world problem," they are legitimate hurdles for someone who may be looking to retire well before a standard retirement age. (He's in his 40s.) That accessible amount, while still a decent nest egg, wouldn't last his family all that long as very early retirees.
After all, they'd be on the hook for health insurance on top of all their other costs of living, and tapping retirement plans early generally adds a 10% penalty on top of ordinary income taxes . While the Affordable Care Act might cap their premiums, those caps are income-dependent. Higher income levels -- such as the income generated by tapping retirement money early -- will act to reduce those subsidies, thus raising the cost of walking away from work before a standard retirement age.
How to tap retirement money early
There are ways for my friend -- and others in a similar situation -- to get access to retirement money early. They include things like a Roth IRA conversion ladder or a Substantially Equal Periodic Payments withdrawal plan. While they can help, they do bring their own limitations.
A Roth IRA conversion ladder, for instance, typically requires at least a five-year head start before it can really kick in. This is because there's a five-year wait before a Roth IRA conversion can be withdrawn without triggering a penalty if the person is under age 59 and a half.
Likewise, a Substantially Equal Periodic Payments plan requires a commitment for the longer of five years or until the retiree reaches age 59 and a half. While that can be useful if you're committed to staying retired, it can get expensive if you later decide to go back to work but can't cancel the payment plan.
As a result, if you want to retire very early, it's important to build a nest egg that you can access early. That can come from pre-planning on either of those two ways of tapping retirement money early or from saving aggressively in ordinary retirement accounts. Otherwise, you might find yourself in a situation like my friend, where the money's there, but just not in a way he can comfortably reach it quite yet.
Get started now
Whether you're looking forward to retiring at a traditional age or would like to call it quits a decade or more ahead of your peers, there's incredible power in planning ahead. The sooner you know what you want out of your retirement, the earlier you can start getting your money in the right places so that you can get at it when you want it.
So get stared now, and give yourself the most time you possibly can to give yourself your best shot of reaching the type of retirement you want when you want to get there. If you're able to hit your target, you'll certainly be glad you put the effort in early.
