Your Biggest Retirement Questions Answered

Check out Jeremy’s latest podcast on Retirement FAQs by listening on “Apple Podcasts” or “Google Podcasts” or read below to get Your Biggest Retirement Questions Answered.

#71 – If you find yourself facing a plethora of questions every time you sit down with your retirement plan, you’re not alone.

Recently, a Retirement Revealed listener (shout-out to Hans!) emailed us a list of questions that we get asked by most of our clients.

That’s why we decided to take our responses to Hans on this podcast!

In this episode, Jeremy Keil debunks common misconceptions held by retirees. He also answers the most frequently asked questions relating to retirement, investment, and tax planning.

Jeremy discusses:

  • A little-known rule around 401(k) withdrawals that can help you retire early
  • How to tweak the popular ‘4% rule’ to achieve a better retirement outcome
  • The long-term benefits of waiting on Social Security
  • What happens when someone dies before filing for Social Security
  • And more

Your Biggest Retirement Questions Answered

1. When Can You Start Withdrawing From Your 401(k) Accounts?

For traditional IRAs, you have to wait until age 59½ to start withdrawing your money without a 10% penalty. But is the same true for 401(k)s?

Not always!

There is a situation where you can withdraw from your 401(k) account as early as age 55.

If you leave your employment after your 55th birthday, you can begin your 401(k) withdrawals without any penalty right away. However, there are 3 key points to keep in mind if you want to take advantage of this rule:

  • The “after 55” aspect is very important. If you’re 54 or younger when you leave your job, you’ll need to wait until 59½  to enjoy penalty-free 401(k) withdrawals.
  • If you own an older 401(k) from another company you left years ago, the minimum age for penalty-free withdrawals will remain 59½ for that account. The ‘55 rule’ applies only to that company’s 401(k) which you left after 55.
  • The early withdrawals are only free from penalties, not taxes! As they are withdrawals from a traditional taxable account, you still owe taxes on all of your 401(k) withdrawals.

Now that you know you can begin your 401(k) withdrawals early, you can consider retiring early!

2. Is the ‘4% Rule’ Relevant Today?

There is no clear-cut yes/no answer to this question. The best way to put it is: the 4% rule is a good guideline for beginners, but it shouldn’t be applied blindly to make specific retirement decisions. After all, it doesn’t factor in Social Security, pension, and other sources of income outside of your investments.

Introduced in the 1990s, the 4% rule basically states that you can withdraw 4% from your investments every year without running out of money.

Some people believe that 4% is too high today. They argue that this is because interest rates were much higher years ago when the rule was first introduced. Current interest rates might be too low to justify 4% annual withdrawals.

On the other hand, some people (including William Bengen, the creator of this rule!) believe 4% to be too low today. If you expect inflation to be low, perhaps you can withdraw more than 4%.

In our view, 4% is a good guideline and it’s more prudent to adjust your withdrawal rate over the years instead of having a fixed rate throughout your retirement. (We discuss how to adjust it briefly in our previous blog: 7 Pro-Tips for More Dynamic Retirement Planning)

3. Is Waiting on Social Security Worth It if It Draws Down Your Investments Early On?

By waiting on your Social Security, you’ll likely need to withdraw more from your investments early on.

We know this doesn’t sound appealing. But don’t forget this – waiting on Social Security allows it to grow by nearly 8% every year! With more Social Security to help you later in life, you can afford to withdraw more from investments now.

Plus, the initial withdrawals might be a matter of 3-4 years. However, the growth of your Social Security can benefit you for the rest of your life (potentially 10, 20, or even 30+ years!).

Learn how you can make smarter Social Security decisions in our blog: 5 Steps for Making Smart Social Security Decisions.

4. What Happens if Someone Dies Before Filing for Social Security?

We hear this question all the time. This concern is totally understandable!

If someone dies before filing for Social Security, the surviving spouse will receive the benefit. If you had waited on Social Security for a few years, the surviving spouse will also receive an 8% boost per year for that period.

If the Social Security of the deceased spouse was the higher among the two, the surviving spouse will receive that higher Social Security amount as well.

So, you can rest assured that you’ll not lose your Social Security even if you die before filing it.

Hans also mentioned in his email that he’ll need to live to age 79 to break-even and justify the decision of delaying Social Security.

The break-even age might vary for everyone. But the probability of an individual making it alive until that age is not relevant. What matters is: How likely is one of the two spouses to live until that age? When you look up the mortality rates and calculate that probability, you’ll find that it’s likely higher than you think!

Important Reminders!

It’s extremely important to do your own due diligence. Oftentimes, the company (or your new advisor) might not provide you with all of the necessary information.

Even if your company does provide you some info, it might not be up-to-date with the latest rules and regulations. For instance, one company that we came across in 2018 was providing 20-year old tax information to its employees which was no longer relevant!

Pro-tip: monitor your summary plan descriptions regularly. It’s a document that contains important information about the plan, how it operates, and its benefits. You can also discuss these documents with your advisor.

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Don’t forget to check out the resources below to learn more about retirement planning!

If you have any questions, feel free to contact us! We would love to feature more client questions in future podcasts!

Resources:

Connect With Jeremy Keil:

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No Tax Advice

Keil Financial Partners does not provide any tax advice. No information or results from the links should be interpreted as tax advice. Please seek guidance from a qualified tax professional for any and all tax-related matters.

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