This Early Retirement Strategy Could Be a Huge Mistake - 577

Summary

Podcast Summary: Your Money, Your Wealth

Episode: This Early Retirement Strategy Could Be a Huge Mistake

Date: April 14, 2026
Hosts: Joe Anderson, CFP® & Alan "Big Al" Clopine, CPA

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Overview

This episode tackles the risks, pitfalls, and decision-making around early retirement—focusing particularly on the use of the IRS 72(t) provision (Substantially Equal Periodic Payments, or SEPP) as a bridge to access retirement accounts penalty-free before age 59½. Joe and Big Al answer listener questions from ambitious (but burnt out) savers weighing whether early retirement and the 72(t) strategy is truly viable—or a "huge mistake." The show is characteristically infused with humor, pop culture references, and the duo's trademark banter.

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Key Discussion Points & Insights

1. Red & Kitty: Burnt Out Millennials Considering 72(t) SEPP at 45

[01:06 – 12:32]

• Background:

  • Both age 40, aiming to retire at 45.
  • Assets: ~$2M (401(k): $1.4M, Roth IRA: $200k, Brokerage: $200k, HSA: $90k, Cash: $100k).
  • Pension for Reed: $53k/yr at 60; Social Security for both at 67 (approx. $46k & $50k).
  • Two young children; GI Bill covers college.
  • Desire to spend $75k/yr (in today’s dollars) from 45–60, more later.

• Big Al's Math Spitball:

  • Projected $3M by retirement at 45 with assumed 6% growth.
  • Adjusting for 3% inflation: $87k annual spend target at 45.
  • Standard safe withdrawal rates (2.5%–3%) at that age produce $67k–$90k/yr—tight, but possible.

• 72(t) Analysis:

  • "Would you do a 72(t) at age 45?" "[07:05] – Not a chance in hell." – Joe Anderson
  • SEPP locks into fixed, unalterable withdrawals for 15 years (until 59½).
    • Pro: Access to IRA/401(k) before 59½ without 10% penalty.
    • Cons: Inflexible, can’t adjust for market downturns or unexpected expenses, potential tax issues if returning to work.
  • Key Insight: The flexibility sacrificed is not worth the early access, especially with young children and future uncertainties.

• Advice:

  • Trial Run: Take a "sabbatical" or part-time work before full retirement for both emotional and financial reasons.
  • "If you’re burnt out at 40, you’re probably in a high-stress job. Try a six-month break to recharge instead." [11:01–11:17]
  • Revisit decision at 45; life and expenses (especially with kids) may shift.
  • Importance of maintaining a sense of purpose post-retirement.

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2. Jiminy Billy Bob: Downshifting Careers, 72(t) or Not?

[13:28 – 21:46]

• Background:

  • 44 years old, spouse same age, one 11-year-old child.
  • Assets: ~$2.1M (Traditional: $1M, Roth: $375k, HSA: $36k, Brokerage: $700k).
  • Expenses: $115k/year; plans to downshift careers and gradually spend principal.

• Big Al's Projection:

  • Retiring at 50: ~$3.3M (assuming 6% and some continued saving).
  • 3% withdrawal = $100k/yr—below their inflated spending need ($137k/yr).
  • They’d need to earn ~$50k/yr part-time to close the gap, ideally more.

• Withdrawal Order Discussion:

  • Prefer to spend from brokerage (taxable) first for liquidity and flexibility.
  • Using SEPP could make sense only later (age 55+), not at 50, given alternatives and need for continued tax diversification.

• Asset Allocation:

  • Should consider shifting some growth assets to bonds/cash to "de-risk," but not overly conservative.
  • Goal: Maintain enough buffer in taxable for several years' expenses.

• Quotes & Memorable Advice:

  • "You need to tone your allocation for safety, but this doesn’t mean 70% in bonds… it’s about strategically covering what you’ll need to pull out over the next five years." [19:00–20:09]
  • "This is a better scenario than the last, but you still need some income. Make $100k and draw $50k, not vice versa." – Big Al [20:09–20:57]

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3. Steve & Sharon: High Net Worth, Navigating Layoff & Company Stock

[22:49 – 43:39]

• Background:

  • Steve (56), Sharon (48); $7.9M net worth ($1.6M home, $6.3M investments), high income.
  • Multiple stock plans: 401(k), ESOP, ESPP, RSUs, PSUs, HSA, CRUT, various IRAs.
  • Layoff imminent. Wants to maintain $150k/yr spend (family of 4; kids 15/13).

• Key Strategies During Layoff:

  • 401(k): Keep funds in current 401(k) for penalty-free access via the "Rule of 55". Roll to IRA only after 59½ or if new job provides better option. [30:28–31:36]
  • Stock Options & Equity Plans:
    • Review vesting and exercise windows—layoffs can accelerate vesting or require rapid decision-making.
    • Understand tax implications of exercising options ("sometimes you get fully vested at layoff, but it can cause a huge tax event"[34:36]).
  • ESOP vs. ESPP:
    • ESOP: Usually in retirement account; may have to cash out if company is private.
    • ESPP: Buy shares at discount, taxable at capital gains; usually smaller dollars, review holding requirements.
  • RSUs/PSUs:
    • Taxed as ordinary income at vesting. May want to sell for liquidity or to cover tax bill.
    • Consider 83(b) election for private or early-stage companies: Pay tax when granted, potentially at a lower price. [39:46–39:51]
  • HSA & Other Assets: No immediate action needed for layoff.
  • Health Insurance: Explore COBRA (18+ months), spouse’s plan (if possible).
  • Roth Conversions: Possible in low-income (post-layoff) years, but watch for severance pushing taxable income up. [29:16–29:22]
  • Unemployment: Should file if eligible.

• Sustainability of Retirement:

  • Even after backing out home value, $6.4M supports $150k/yr at <3% withdrawal.
  • "If you want to spend $150k a year, you’re looking pretty good. You could even not go back to work if you don’t want to." [42:05–42:14]

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Notable Quotes & Moments

• Joe, on SEPP at 45: "Not a chance in hell." [07:05]
• Big Al’s wisdom on burnout and early retirement:
  "You helped thousands retire. We’ve seen people blow themselves up too. The goal is not to run out of money." [09:26–09:32]
• Roth conversion reminder for laid-off high-earners:
  "If you’re in a lower bracket for a year or two, do some conversion from your 401(k) or IRA if you have a lot of non-retirement assets." (Steve & Sharon) [41:58–42:05]
• Perspective on surprises with early retirement:
  "When you have little children… Things keep changing. You might want a bigger home. They may want to play club sports or dance. There are a lot of things you can hardly anticipate at this point." [12:04–12:32]
• Humor highlight:
  "Would you do it [SEPP at 45]?"
  "Not a chance in hell."
  "No way." [07:05–07:07]

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Timestamps for Important Segments

| Time | Segment / Topic | Speaker(s) | |--------------|---------------------------------------------------------|---------------------------------------------| | 01:06–12:32 | Red & Kitty's early retirement & SEPP analysis | Joe & Big Al | | 13:28–21:46 | Jiminy Billy Bob: Downshifting, SEPP, withdrawal order | Joe & Big Al | | 22:49–43:39 | Steve & Sharon: Layoff, stock plans, spending strategy | Joe & Big Al (with Andi Last fact-checking) | | 30:28–31:36 | 401(k) Rule of 55 deep-dive | Big Al & Joe | | 34:36–34:39 | Stock option layoff tax bomb scenario | Joe & Big Al | | 39:46–39:51 | 83(b) election for RSUs/PSUs | Big Al |

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Final Takeaways

• Early retirement using SEPP/72(t) is often more dangerous than it seems—especially in your 40s. Loss of flexibility, tax inefficiency, and the risk of running out of money outweigh the benefit of early access.
• Trial periods and phased transitions cushion both financial and emotional shocks. Consider sabbatical, part-time, or passion work before "pulling the plug."
• Downshifting requires more caution than most realize: Keep taxable assets for flexibility, review asset allocation for risk, and balance spending with at least some earned income until pensions and Social Security kick in.
• Complex company compensation (options, RSUs, ESPPs) needs careful unwinding in a layoff: Understand tax implications and deadlines for every element.
• High net worth isn’t immunity from planning mistakes: Even $6M+ families need to mind tax optimization and order of withdrawals.
• Inflation, kids, and unpredictable expenses call for extra padding—avoid plans that can only succeed if everything goes right.

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For more, download the episode’s Recession Protection Guide and Retirement Readiness Guide via the episode description on the Your Money, Your Wealth website.

Transcript

[A]

Joe and Big Al spitball on whether a popular early retirement strategy could actually blow up your financial plan. Today on youn Money, you, wealth podcast number 577, Red and Kitty from Wisconsin are burned out at 40 and wonder if retiring at 45 using the 72t tax election to take substantially equal periodic payments or Sepp is a smart bridge strategy. Jiminy Billy Bob in North Carolina is also considering a 72T. How should he structure his withdrawal order? And does he need to shift into bonds before downshifting his career? Plus, Steve and Sharon in Minnesota have 8 million bucks. Steve is getting laid off at age 56. What should they do with their 401k stock options, incentives and benefits before and after the layoff? If you're watching us on YouTube right now, please do us a favor and subscribe to the channel. And leave a comment below with your thoughts on today's episode. It really helps us out when you do. I'm executive producer Andi Last, and here are the hosts of youf Money, you, Wealth, Joe Anderson, CF P. And Big Al Clopine, cpa.

[B]

We got Reed and Kitty.

[C]

Damn.

[A]

Red and Kitty. This is from 70s. That 70s show.

[C]

Okay.

[B]

Red and Kitty. Red is the dad.

[A]

Yes. The parents of Eric and Lori and the adopted parents of Steven. Remember that?

[B]

Never watched it. I know. What?

[A]

Then how did you know they were the parents, Red?

[B]

I don't know. Would you think that. Well, that would be the dad.

[C]

Well, that's the. Yeah, you would think so. You are correct.

[B]

You know, the only. No. Is that what, McMasterson or something like that? He's in jail for doing something.

[A]

Yeah. That he shouldn't have. Yes.

[C]

Yeah. Well, all I know is Red Fox and that was a dad. So that's where. That's where I went.

[B]

Got it. We could call you Red.

[C]

You could. Some people have. Yeah.

[B]

All right, let's go. Hi, Andy. Joe. Big Al. I hope you're having a great week. My spouse and I are older millennial achievers. Not to brag, just report yourself to older millennial achievers. Both age 40.

[C]

40. Okay.

[B]

And we're getting burnt out.

[C]

Okay.

[B]

Just wait till you hit 50. We would like to retire five years. And if you guys tell us it's too risky because of our age. But you did a good job and we approve. Then we'll be out like deuces.

[C]

And she explains it to me in case I didn't know what it meant.

[B]

That means peace out.

[C]

Yeah.

[B]

Out like deuces.

[A]

I never heard that one before. But then I'm Never a millennial.

[B]

Yeah, I am. I'm not a millennial.

[A]

Gen Xer. We just don't understand the lingo, Joe.

[C]

And you're not a card player?

[B]

No, not really. Yeah, I play cards, but I'm very terrible at them.

[C]

Yeah. Last time you went to Vegas was what, oh, 20 years ago? 15 years ago.

[B]

I don't know. When was that?

[C]

Oh, I remember your. You had a special birthday there. Yeah, 35, I think.

[B]

Yeah, that was a long time ago. That was probably the last time.

[C]

Yeah.

[B]

Maybe Hammer's wedding.

[C]

Oh, yeah, we did do that. Yeah. Did you gamble that time?

[B]

I don't know. I don't remember. I just.

[C]

That's probably not a good thing that you don't remember.

[B]

I don't think so. No, I don't think so. Okay. But anyway. All right, all right. So if it's too risky because of our age, but you did a good job and we approve, then we'll be out like deuces. Al. That means peace out.

[C]

Okay.

[B]

All right.

[C]

Get in there.

[B]

Okay. We work hard and have had success in our careers and want to enjoy more time with our two daughters. We live in a low cost living area of Wisconsin. We like to drink Earthrider, Superior Pale Ale and Old Fashions.

[C]

Okay.

[B]

Earthrider. Never heard of that.

[C]

Me neither.

[B]

We found you as a recommendation on Pandora podcast, and I've been listening for about five months. And we'll probably keep listening as long as you keep doing your thing.

[C]

Bang. Okay, we'll try.

[B]

We love your banter and real time analysis. We are especially listening in withdrawal strategy conversations using substantial equal periodic payments to help bridge the gap for folks like us that want to retire earlier. It seems like you're not a fan, but I'm hoping with the fixed income in our savings, you may give the strategy some extra consideration. Anyways, here are the numbers. We got a total of $2,000,000. So 401s is 1,400,000. Roth IRAS is $200,000. Brokerage account is $200,000. HSAS, $90,000. Cash, $100,000. We have $75,000 left on the mortgage and it will be paid off in two years, worth about 400. We have two young children that are still many, many years away from college, but that we will cover because I served four extra years so I could transfer my GI bill to them. All right, cool. Good for you. Thanks for your service. For fixed income, Reed's red pension will be about $53,000 at age 60. And Kitty has no pension for Social Security kitties will be $46,000 at 67. Reds will be 50 at 67. We'd like to spend $75,000 annually between the ages of 45 and 60. And then after that probably let loose and spend a little bit more. We're excited to hear your spitball. We wish you and your families well. Hello, Wisconsin. Love Red Kitty and the entire 70s show. Andy, I included all the important info for the spitball. Your video about the important stuff was very helpful.

[C]

Well, there you go.

[A]

Thanks, Red.

[B]

Very good job all the way around.

[C]

Well, Joe, I'll do a little math for you and then you can see what you think.

[B]

Okay. He wants to retire at 45, five years.

[C]

So he doesn't really say what he's saving. But I've just. Here's what I did. I just took. Call it 2 million today. Five years, 6% added about 40,000. Just as a number gets to about 2.9 million. Call it 3 million. Yeah, you want to spend 75,000 in today's dollars, which at a 3% inflation rate for five years becomes about 87,000. Now if you take your 3 million, 3% distribution would get it there, but that would be a little risky, I would think. At age 45. Now I know he's got a pension coming at age, but that's a long time.

[B]

15 years.

[C]

I might rather look at maybe if I was going to do this, maybe a 2.5% distribution which would be like $67,000 and then we're short $20,000. I guess the point is this could work, but it's awful. Ty. I would want to have some kind of part time income that's more than $20,000. Because that would be kind of right on the fringe.

[B]

I think at 45 he got $3 million. Hypothetically. Allegedly.

[C]

Yeah. Hypothetically, based upon the assumptions I just mentioned,

[B]

would you do a 72T at age 45? So an SCPP, he's not going to get anywhere near what he needs out of a separate equal periodic payment.

[C]

No, he'll probably get around 2%, which would be about 40,000. Or two and a half would be about 50,000. So give or take.

[B]

So what an SEPP is is that you could take money out of your retirement account prior to the age 59 and a half and avoid the 10% penalty as long as you take a separate equal periodic payment. So you got to take the same amount of money out of the account for five years or until you turn 59 and a half, whichever is longer. So in his Case he's going to start at 45. He's got to pull the same amount of money out of the account every single year until he turns 59 and a half. That's a 15 year stretch where you got to pull the money out.

[C]

Yeah. Whether you want to, if you like

[B]

it or not, market blows up, the market goes high, whatever. You got to continue to pull that money out, pay the tax and do whatever you want with it. I don't know if I really care for that. That's a long time of doing that and I don't know. Retiring at 45. I get that. He's burnt out.

[C]

I get that too.

[B]

So I'm 40 years old, I'm burnt out. I've saved some money. We make good incomes. We got high stress jobs now we got little kids. We want to spend time there. And you know what? I'm going to work five more years, see if I can save as much as I can. We live in a low cost area in Wisconsin. We like the 70s show and drink. I don't know, the. The Earth rider. Superior, pal.

[C]

Right. A couple old fashions.

[B]

A couple of little sidecar old fashions. Right.

[C]

Y Y.

[B]

He's living the dream. He's thinking about it.

[C]

So would you do it?

[B]

Not a chance in hell.

[C]

No way.

[B]

I would know. I'd be freaked out. I wouldn't be comfortable. I would. 3 million is a ton of money.

[C]

Right.

[B]

But he's making a lot of money and he's saving a lot of money and he's got two kids that he probably wants to take care of. He's got a GI bill that he's. I don't know, I just think with two small kids, I think it's too tight, but I guess maybe I'm conservative. What are these people writing in saying we're too conservative.

[C]

We've had some.

[A]

Yeah, yeah, that's right. We had an Apple, Apple podcasts review. Hold on, I'll find it for you. Continue.

[B]

Like 3%. 4%'s way too conservative.

[C]

Yeah.

[B]

I don't know. You retire. We've helped thousands of people retire. We see people blow themselves up too.

[C]

We have.

[B]

The goal is not to run out of money. In most cases. People, yeah. You know, they get divorces over money. They have mental health issues over money. Well, I want to be a little bit conservative versus like yeah, 45. Blow it out. Go for it.

[C]

I agree. The first thing I would think of is maybe it worked to at least 50. If I really wanted to do this now, if I just Couldn't do it, Joe. Let's just say I'm burned out, I got to do something else. Okay. Then I wouldn't do the 72T election because you get locked in, do part time work, try to make 100,000 doing something between the two of you and see how you like it. It may be awesome. Right. And if it is, and this is the lifestyle for you, and you can make it work, maybe do that for a couple years, then maybe the 72T would work because now you know that this is something you want to do.

[B]

They've got to do a trial run.

[C]

Trial run. That's what I'm saying. Yeah, do a trial run. And I would say not in all cases, Joe, but most cases, people that do this end up going back to work. And the problem with that is then you're in a higher tax bracket and you're still pulling out this money, and so you just got to pay higher tax on it.

[B]

If I'm burnt out at age 40, I'm guessing I have a fairly high stress job.

[C]

I would agree.

[B]

Right.

[C]

And if they saved 2 million by 40, that's. That's phenomenal.

[B]

Yeah, you're in the top 1%.

[C]

I certainly didn't have 2 million at 40, did you?

[B]

Of course I did. That was just a couple of years ago.

[C]

Oh, you've got the big wallet. Okay,

[B]

well, you gotta be thinking about, all right, well, what's going to get you up in the morning? What are you going to do? What's your sense of purpose and all of that? I think maybe, yeah, you take six months off and just relax and kind of figure things out and recharge. But at 45, you're doing that a long time.

[C]

It's a long time. And it gets tricky, Joe, when you try to go back to work and maybe a few years.

[B]

Yeah, take five years off and then try to go back.

[C]

Try to go back and just say, oh, I'm really good at this. And it's like, well, you were good five years ago, but no, AI moved on. Yeah. AI took your job. You're out. Anyway, I'm not saying you can't do it. I'm saying it's really tight and make sure this is what you really want to do. And I think probably the most important thing that I would tell my kids in this situation, they're nowhere near that age, but if they were, I would say trial run. Just try this out for a while, see how it feels when you have little children. Things keep changing. You might want to get A bigger home. They might want, want to play certain sports. Club sports. And you're gonna play all around? Yep.

[B]

Yeah, they're in Wisconsin.

[C]

Yeah, that's, that's, that ain't cheap. No, it's, it's not cheap. I don't know if it said boys or girls, but if it's girls, they might want to do dance lessons and that. There's a lot of things you can hardly anticipate at this point. So maybe at age 45, then you rethink this. Is this still what I want to do? And if it, if it does, if it is, then maybe a trial run might be the thing for you to at least give a shot, Try it out, see if it's for you or not.

[A]

Let's make sure that you aren't making a financial decision today that could lock you into a strategy you regret later. Whether it's retiring early, tapping your retirement accounts too soon, or reacting to what you think the market might do next, making the wrong move at the wrong time can have long term consequences for your entire financial plan. That's especially true when markets get volatile, emotions take over, and that's when investors are likely to make impulse decisions that can take years, even decades to recover from. Download our Recession Protection Guide. It'll show you how to recognize the signs of a downturn, how to position your portfolio to weather it, and how to stay disciplined so you don't derail your long term retirement strategy. Click or tap the link in the episode description to download the Receipt Session Protection Guide. Yours free, courtesy of youf Money, you, Wealth and Pure Financial Advisors. And when you fill out that form in the drop down that says how did you hear about us? Choose podcast.

[B]

All right, we got Jiminy Billy Bob. Jiminy Jiminy.

[A]

Yeah, Jiminy, like Jiminy Cricket.

[B]

Jiminy Billy Bob from North Carolina. I have a few details that I'd like to hear from you, so if you can spitball for me next steps or some relocation of my brokerage account.

[C]

A reallocation.

[B]

Oh, reallocation, Yep. Brokerage account's not going to relocate.

[C]

Probably not.

[B]

It could.

[C]

It could.

[B]

To a different broker, a couple different asset classes.

[C]

It could.

[B]

All right. Jiminy the Bibby Bob. My wife and I are both 44 years old and we have an 11 year old daughter. In the next five to seven years, we're looking both to downshift in our careers and find something that would pay us much less. And we'd like your thoughts on a withdrawal order of our allocation. We currently spend about $115,000 a year and all of our tax deferred and tax free retirement are allocated 50% s and P25 international 15 small cap, 10% mid cap. We have about $1 million in traditional retirement and roughly $375,000 in a Roth. We have $36,000 in an HSA and $75,000 in a 529. Our taxable brokerage, however, is worth $700,000 in a split between 85% s and P500 funds and 15% small cap over the next five to seven years. If we want to take part time jobs, start withdrawing from the taxable brokerage, would you start heavily working bonds into the allocation to de risk? Should I consider a 72t? Is this the 72t shill?

[C]

It is, I think.

[B]

Got it. Looking for any guidance? By the way, my wife and I both love a good espresso martini in the winter and a nice cold IPA in the summer. Thanks so much.

[C]

Sounds good. Well, Joe, to put a little math to this and then you see what you think. So right now they have about 2.1 million, which again, great.

[B]

At 44.

[C]

44, that's phenomenal.

[B]

All these guys are killing it and then they all want to do a 72T tax away.

[C]

Well, it's like, I worked enough, I'm done. And I, and I get it. You remember I was going to retire at 47 and here I still am. But now I work because I want to work. And that's a little different thing. It is, but sometimes when you don't have to work, work is actually more fun. Anyway, just.

[B]

You're not really working.

[C]

Hardly. I'm doing this show. I guess I'm aware of that. Yep. Anyway, so let's say, okay, you got 2.1 million at 44. Great job, let's go. I just said, wouldn't it be cool in your situation to retire 50? So I went six years just to see what that looked like. Six percent conservative, but I went 6%. I don't know what you're adding. I just said $40,000 because you got a lot saved already. So you're probably doing a great job saving. So then you end up with $3,300,000. So $3,300,000 at $50,000, 3% distribution would be probably as high as I'd want to go for a 50 year old. And that's 100k. They want to spend 115, 3% inflation for 137. So you're short by 37k and that's kind of stretching it.

[B]

Yeah.

[C]

So I think if you want to do this and still make it work, you'd probably have to have some kind of income to make at least $50,000 just to cover this gap. Yeah.

[B]

And I think that's what they want to do. It's looking to downshift in our careers and find something with much less pay. So yeah, the math might work. What is your distribution order? Well, it depends on how much the downshift is. Yeah, you know, you want to keep some liquidity in your taxable account. You've done a good job there. You got $700,000, you got $1 million in deferred accounts. You're going to continue to defer those. Let's say he stops saving into those accounts altogether.

[C]

Yep.

[B]

He's 44 and maybe he starts taking withdrawals at 60. Right. Because now he's eligible to take penalty free withdrawals without using the 72T.

[C]

Yes. Yeah.

[B]

So that million could be what, 3.5, 4 million bucks by that?

[C]

At 60? Well, let's see. Yeah, because it's going to be 4 to 55.

[B]

That's 2 million, 2 and a half, 3, 2 and a half, 3 million.

[C]

Yeah, something like that.

[B]

Yeah. So let's say that's $3 million all in deferred accounts. And all of that is going to be taxed at ordinary income rates. And if he draws down all that taxable account from age 50 to 59, he's going to have very little tax diversification.

[C]

True.

[B]

So you want to keep to be diversified. So in this case it's like because he has a lot of money in a non retirement account, I think I would be okay with the 72T tax election, but I wouldn't do it at age 50. I would probably wait till 55. I would downshift in the career. I would start making a little bit of cash. Depending on what my wife and I want to do. You spend $115,000. So you both get part time jobs or maybe you get full time jobs that are not pain that you know, you can, you can squeak by, but both of you maybe $30,000 a piece. So that's $60,000. You pull $40,000 from the accounts. I feel okay drawing down a little bit from the taxable account at that point, see how you're liking things. Do you want to, you know, hit the gas again or, or, or not? I like this scenario a lot better than the previous one because there's a little bit more diversity where the money's Held.

[C]

Agreed. Yep. Yeah. Plus it's at 50 instead of 45 instead of 45.

[B]

That five year difference is huge.

[C]

It's a. Yeah.

[B]

Who knows what's going to happen with the markets over that time period too.

[C]

Right.

[B]

And they're fairly aggressive investors because they're young.

[C]

Right.

[B]

And so does he need a downshift and start going into bonds? Well, that's going to be the key of the downshift. Again, how much money do you think you're going to make in your part time job is going to depend upon how much money that you have in bonds and how much that you're going to pull and what your 72t tax election is going to be. So I would start thinking and planning of like, well, what am I really passionate about and what can I make a couple of dollars doing and then figuring out what that income would be for you and your wife and then that would probably help start formulating some of the strategy. But to answer like high level questions. Yeah. You need to tone your. I would change your allocation for sure just to give me a little bit of buffer and safety because I don't know what the market's going to do. But it's not like, hey, I want 70% in bonds. It's going to be strategic on how much money that you're actually pulling out each year. And maybe you have a buffer for five years.

[C]

Yeah, right. And I tend to agree with you, Joe, but I probably flip these two numbers. So I guess what I mean by that is instead of drawing 100,000 from your portfolio and making 50, I would make 100 and draw 50. And at that age you'd have to draw it from your taxable account, which is 685,000. Right. Now I don't think I would feel comfortable if I went much higher than that. Now if you did that for 10 years at 50,000 a year, that's 500,000. Even with no growth, you got enough. So I would be more comfortable with that scenario. So if it were me, and I agree with you, Joe, I think this is a better scenario than what we just looked at. Mainly just because they're five years older.

[B]

They're five years older. It's roughly the same amount of assets.

[C]

Yeah, exactly. Yeah.

[B]

But they have a little bit different diversification from a tax perspective where this, where Billy Bob or Jimmy Bob.

[C]

Well, the other thing too that is different is they have an 11 year old daughter, not three and five young kids then. Yeah. And they want to work five to seven, not just five so, yeah, there's things about this scenario that I like better. But again, it's not like you can stop at age 50 under this scenario, at least that I ran. I mean, I don't have all your variables. I just made some assumptions. So you'll want to look at this more closely as you get closer. But on the assumptions I ran, it's, it's, you can't not work. You got to, you got to create some kind of income to get you to Social Security, I would say.

[B]

Yeah. All right. Very good. Congratulations.

[A]

When you're proactively planning for the best possible retirement, like Jiminy Billy Bob, you might think the biggest risk to retirement is a market crash or picking the wrong investment. Think again. Small, everyday financial pitfalls can quietly drain your wealth. From the tax traps hidden inside your 401k to investment mistakes that feel safe but are actually dangerous. You could be adding years to your working life and costing hundreds of thousands of dollars without even realizing it. This week on youn Money, you, Wealth tv, Joe and Big Al break down six ways Americans accidentally sabotage their retirement. And more importantly, they show you exactly how to fix it. Plus, grab the retirement Readiness guide for retirement income planning, Social Security taxes, healthcare investments, and legacy planning so you can see where you stand and what to fix before it's too late. Click or tap the links in the episode description to watch YMYW TV and to download the retirement Readiness Guide for free.

[B]

We got Steven Sharon writing in from St. Paul, Minnesota. Dear Joe, Big Al, I'm going to get laid off from work in January and have questions about how to financially exit the company and programs like my 401 employee stock option plan, employee stock purchase plan and performance shares, restricted shares, health savings account, and getting my family health insurance. There's a long list there.

[C]

Big Al, this could take all show.

[B]

This could take a while. And he's got a lot of benefits.

[C]

Yes, he does.

[B]

All right, what are the key things to do before getting laid off during and shortly after one that takes place? We currently have $7,900,000 in assets, of which $425,000 or $452,000 is in cash in a premium savings account at 3.5% interest rate, 7.5% invested, of which $2,800,000 is in my 401, $308,000 employee stock ownership, $112,000 in straight company stock in RSUs and PSUs, $27,000 in employee stock purchase plan. We got $55,000 in a health savings account, $1.1 million in brokerage accounts, $20,000 in a Roth IRA. We'll call that $30,000 in a Roth IRA. $1,500,000 in my wife's rollover IRA. $73,000 in my wife's simple IRA. $44,000 in my wife's SEP IRA. $80,000 in five hundred and twenty nine plans for the kids. We have a $1,600,000 in our house, which is all paid off. Our Investment mix is 70% stocks, 20% bonds, 5% alternatives, 5% cash. We also draw $18,000 per year from the $1.1 million NIMKRUT.

[C]

That's sophisticated.

[B]

Oh, wow.

[C]

He's got a Nimcrut net investment makeup.

[B]

Yeah. Makeup not income Trust makeup.

[C]

Yeah.

[B]

Oh, Nim. Crap. Remember the Nimcrut days?

[C]

Yes, I did. And we should continue. Charitable remainder unit trust NimCrit.

[B]

NimCrut. All right. What was that? Was created seven years ago from a highly appreciated company stock. And we use those funds to pay for a $2 million whole life insurance plan for our kids at $9,000 annually. We don't count this in our net worth or Investments. I'm 56. How long do you think he's going to keep that insurance?

[C]

That's a great question.

[B]

It's 56.

[C]

Yeah.

[B]

You think he's going to. He's going to die with it?

[C]

50. 50.

[B]

I was going to say the same thing. And he got it seven years ago. So he bought the $2 million whole life plan, put money in a nimcrut in his 40s to fund it.

[C]

Yeah, right.

[B]

I wonder who his broker is.

[C]

I have some ideas.

[B]

Yes. I'm 56 years old. We got a W2 job making $300,000 a year. I drive a 2021 Grand Wagoneer, and I drink rye whiskey, Old fashions. My wife is 48, self employed, $100,000 a year. She drives a 2021 Porsche.

[A]

I think it's a Taycan. A Taycan? I think it's Taycan.

[B]

Yeah, it's a flow a little different. It needs to be a little smoother. A Tiquan. A Tijuana. No, that's a little place down south.

[C]

That's where I just was building a home.

[B]

She's got a Porsche. Do you like to say Porsche or Porsche?

[C]

Porsche.

[B]

Oh, God.

[A]

I believe it is actually Porsche. I know it is pronounced Taycan.

[C]

So, yes, Taycan. Okay.

[B]

That's an suv, I'm guessing.

[A]

No, it's. It's sporty looking.

[C]

Oh, it's little. Okay.

[B]

Oh, it's a four door.

[A]

Yeah, that's a four door.

[C]

Well, it can be either.

[B]

Yeah.

[C]

Okay, you say Porsche or Porsche.

[B]

Yeah, it depends on my company.

[C]

Okay.

[A]

Depends on the company, really.

[C]

Got it.

[B]

You know Porsches. I say Porsche.

[C]

Got it. Okay. You know, now I'm clear.

[B]

If, if I see a guy wearing a Porsche hat, I would be like, Porsche, Porsche.

[C]

Like they're really into it. Maybe more than. Yeah.

[B]

So that I kind of like blend in.

[C]

Got it. Otherwise you say Porsche otherwise like everyone else.

[B]

Yes, exactly.

[C]

Got it.

[B]

All right, we have two kids ages 15 and 13, and burn around $150,000 a year in expenses. Man, that's a lot of expenses for a couple kids. I plan to retire before 60 or maybe now in my wife before 55. At the same expense level. Spitball would be greatly appreciated. What to do when getting laid off. Steven Sharon from. Oh, Steve and Sharon. I know Steve and Sharon. They ran, they did a little good morning talk show.

[C]

Oh. In Minnesota. Oh, okay.

[B]

Yeah.

[C]

There you go.

[A]

Oh, so this is people that have actually called on your knowledge of. Of local. Local information.

[B]

Yeah. Killed it.

[C]

Yep.

[B]

Stephen Sharon, look it up. I think I'm right.

[C]

You could have just made that up.

[B]

No, it was like, I forget the name. It's like, it was like a Good morning Minnesota. But maybe it was in the afternoon, I don't know.

[C]

All right, we'll do a little fact

[A]

check on this Stephen Sharon Edelman, a married television host duo best known for their popular Minnesota talk shows, Twin Cities today from 76 to 80 and Good Company from 82 to 84 on KSTP TV.

[C]

Well, okay, I stand corrected.

[B]

Yep. I don't know. I never, I don't think I watched it.

[C]

But you know about it.

[A]

Do they look familiar to you, Joe?

[B]

Yeah. Huh.

[A]

There you go. That's Stephen Sharon.

[B]

Steven Sharon Edelman.

[C]

Edelman. Okay.

[B]

Twin Cities today. Very wonderful. Yeah. Handsome couple.

[C]

Yeah. Yep.

[B]

All right, so what does Steve here, what does he do? What are the key things to do before getting laid out? Well, when you got 10 million bucks.

[C]

Yeah. You got a lot of choices yourself.

[B]

A little bullet rye, old fashioned.

[A]

Well, okay, so let me ask right up front. Because of the fact that he's getting laid off, that's going to make this a lower income year. Should he do Roth conversions?

[C]

I believe he should, possibly. It depends if he gets severance, though, because severance can be even more salary, so.

[B]

Yeah.

[C]

Well, Joe, here, let me start with all these fancy plans. I'll just, I'll just be brief.

[B]

So let's one we can kind of stretch this out because I think it's important for people to understand what they are work and what the impact is.

[C]

Yeah.

[B]

When someone leaves employment, maybe unexpectedly.

[C]

Yeah, I like that. So I'm just going to go in the order where he brought stuff up. Okay, so we start with a 401k plan. Your employer 401k plan, you've been contributing to it and your company is probably doing a match and depends upon your plan. Sometimes some, some plans the match is instantaneous, meaning that it's vested as soon as you get it. Other times you got to work a certain amount of years for each grant to be able to get it vested. So, you know, it depends upon the plan. Typically when you leave, whatever you have vested gets frozen. You can typically keep it in the plan if you want to, or you can roll it to an ira, no taxation. But now you control that. So that's number one personal choice. Depending upon what you do, most people tend to roll them to an IRA so they have control, but you don'

[B]

he is, how old is he?

[C]

He is 56.

[B]

All right, so you might want to keep it in the 401k because there's something that's called the Rule of 55.

[C]

Oh yeah, gosh. I, I, I messed, yeah, you're right, you're right, you're right.

[B]

So what, what happens with the rule of 55 if I get laid off at 56, I, I separate service at 55 or older is that that avoids a 10% penalty. There's not the 59 and a half rule that everyone thinks about. Retirement accounts with 401ks, your employer sponsored plan, you can take the money out at 55 and avoid the 10% penalty. So if you wanted to draw on it as income as you're bridging the gap or just living off of that, keep it in the 401. Don't roll that yet until you get another job or you want to roll

[C]

it into that 401 or he turns 59 and a half.

[B]

Yeah, until he turns 59 and a

[C]

half because then it's an IRA, you can roll it and then you can still have access to the money. So you're right, Joe, that's actually best to keep it in there so you have access to it without penalty. And yeah, as you said, the rule is you have to be 55 when you retire or get laid off. So 55 years old or older and then at that point you can draw on it as long as it stays in that plan. Right. Until you're 59 and a half and then you can roll it.

[B]

All right, so employee stock, like I'm confused here. He says employee stock ownership account and then he's also got. Well, he said the employee stock purchase plan.

[C]

Yeah, those are generally two. Those are two different things. I'm going to start with the first thing he said, which is employee stock option plan. So that's, that's ownership.

[B]

Well, you think that's options or.

[C]

Well, the first. I'm looking at the first sentence. He said stock option, so I'm going to start there.

[B]

Okay.

[C]

Yep. Anyway, stock option plan is what your employer typically gives you. An option to purchase a share of the company at a certain price. And why they do that is maybe at vest in three or four years from now, meaning you have to stay at the company for it to vest. But the idea is if the stock price is low and it goes up, you can buy it at that lower price and then all that extra appreciation you get, which is all ordinary income upon exercise. I won't go into non qual incentives. That's going a little bit too deep.

[B]

Yeah. But I guess here's the point. It's a really cool program for employees to act like an owner of that company of a publicly traded company. So you get options and let's say you have an option to buy the stock at $20 a share.

[C]

Right.

[B]

And the stock price is worth a hundred dollars a share. Yeah.

[C]

When invests.

[B]

So the street has to pay $100 for the share, but I have an option to buy it at 20.

[C]

Correct.

[B]

So the spread in this, this is a pretty dramatic.

[C]

Yeah, example. That's a good one.

[B]

But the spread would be $80 per share.

[C]

Correct.

[B]

So all of that spread is profit for me or income where I would have to pay tax on.

[C]

Yeah. And that actually goes right on your W2, Joe. As you know. So it's ordinary income and there are incentive stock options which are treated a little bit differently, but it's the same concept. You get to buy the stock at a lower price. Typically when you are, you retire or are let go, you have to cash in whatever is vested and then you pull it out. You can, in some cases, Joe, you can keep the stock. But in many cases, if it's not a public company, they will require you to sell the stock back to the company. So just be aware of that.

[B]

But if I have non qualified stock options, in some cases, if I get laid off, depending on the package. So you have vested and non vested stock options. So vested is all right. Well, here I have the option to buy the stock at whatever my option price is. Then I have unvested that are probably at a different price, that I can still purchase the shares. But I can't buy those shares until they vest.

[C]

Right.

[B]

In some cases, if I get laid off, if I'm an executive, some of the packages that we've seen, is that all right? Well, we'll fully vest your options. So even though they're unvested and you needed to wait a couple of years if I was getting laid off, and maybe they put a package together for me. So if this is the case, well, then you get fully vested and maybe you have to exercise. And that could create a fairly large tax event in that given year.

[C]

It could be. Because that's considered salary, Joe, as you just said. So. So if that happens, like let's say you get let go in December, so you got a full year salary, maybe you've got a severance, which is extra salary for X number of months or even a year, whatever. And then you got stock options that need to be exercised. It can be pretty pricey. So let's go to employee stock option or ownership plan, which. He kind of mentions that earlier, so I'm not sure which. It's probably.

[B]

He's got 27,000 in an ESOP.

[C]

Well, that's. Yeah, that's. That's what it looks like. Yeah.

[B]

So he could purchase.

[C]

No, no, that's not an esop. That's an employee side purchase plan. That's a different thing.

[B]

Or espp.

[C]

Espp. Yeah, we'll get there. We'll get there. But employee stock ownership plan, that's typically in a retirement account.

[B]

Right.

[C]

And the company allows you to buy its stock in your retirement account. And it depends upon the plan, Joe. Sometimes you can keep it. In a lot of times the company wants you to sell it again, if it's a pri. If it's a private company, they'll probably want you to cash out the shares and they'll pay you the value, what they're worth based upon what they believe the value is. If it's a public company, you might be able to keep it.

[B]

Yeah, but an employee stock purchase plan is you're buying the stock at a discount. And in most cases it wouldn't be.

[C]

In most cases, you're right, it would

[B]

be just another plan. I can buy it at a 15% discount. I have to hold those shares for a certain period of time. There's vesting schedules. I can. Because you're getting it at a At a discount.

[C]

Right.

[B]

So just kind of look at the plan doc there. Sometimes you'll automatically vest again if you get laid off. You have 27,000 in the employee stock purchase plan. So it's not going to make or break your bank here, given that you have millions. But for those of you that have an employee stock purchase plan, you can buy it at a discount. You have to wait for a certain number of years from a vesting perspective, and then when you sell it, it'd be cap gains.

[C]

Well, and just to be clear, there's an ESOP and an ESPP and they're different things.

[B]

Right.

[C]

So just to be clear, an ESOP plan is usually in your retirement account. An employee stock purchase plan is usually outside of a retirement account where you can buy the stock at a discount. And they all have different kind of vesting schedules.

[B]

Okay.

[C]

Okay, let's go. Now I would say these days, Joe, there's less stock option plans and more restricted stock units is what we see, RSUs. So a restricted stock unit is you are vested a certain amount of shares in the company, but you've got to meet a certain vesting period. It might be two years, three years, four years, five years, it might be a five year vest and you get 20% a year. So it can be different things. Right. And so when it vests, whatever it's worth on that date is actually taxable income. It gets added to your salary. And so. But then you can either sell, a lot of people sell because they don't have the money to pay the taxes on the rsu, or if you've got other money, you can pay the taxes on that yourself, keep the stock. And then if it goes up, and that's all ordinary income, that part, if it goes up from there and you sell it at a gain, then it would be capital gain, either short term or long term, depending upon whether you've held it for a year.

[B]

Yeah, some companies will. Will make you automatically withhold a little bit more. So each plan is a little bit different. I don't know what company works for, I'm guessing, I don't know. It's a publicly traded firm because of the amount of dollars that it has, it's probably 3M. Yeah.

[C]

Yeah.

[B]

What do you think?

[C]

Yeah, that could be. I mean, usually, Joe, you see this kind of thing when it's a high tech company or very successful company. So a PSU performance. Yeah, you don't see those as much, but it's the same thing as a restricted stock unit. This is a performance Stock unit. So invests upon a certain performance, maybe a revenue target or maybe a net income target or whatever it may be, invest or valuation of the company invests at that point and then it's the same as a restricted stock unit, meaning when it vests, you get whatever it's worth at that point is ordinary income gets added to your W2. If you decide to sell the stock, great. A lot of people do because they can't afford the tax. But if you keep it, then if the stock goes up from there, it's a capital gain or it goes down. Joe. It's actually a capital loss. So you could have either. Something I want to say this is getting a little bit more advanced, but when you get RSUs and PSC restricted stock units, performance stock units, you can, when they are granted, fill out what's called an 83B election. And that allows you to pay the tax on the shares at the price it was when it was granted, which in a growing company will likely be lower than it will be when it vests. So if you're very bullish on the company or if it's a startup and the stock isn't valued very much, you want to do an 83B within 30 days after you get that, that grant and then you pay the tax at that point and then any future gain is long term capital gain. That's a point that's missed often, I think.

[B]

Yeah, it's a great tax strategy, especially for private companies.

[C]

Yeah. So I think we, I think we hit all of these.

[B]

So. All right.

[A]

He wants to say, is there anything that he needs to do differently with that?

[B]

No.

[C]

Yeah, it can just stay in that account. That's fine.

[B]

So I don't know how much he's spending. Is he spending $150,000 on his kids or he just said, hey, I have two kids and we're all burning $150,000 a year.

[C]

That's what I think. With the kids, it's 150k all, all in.

[B]

But it's not like here I'm spending 150, $150,000 on the two kids.

[C]

I don't think so.

[B]

Okay.

[C]

That'd be a lot, wouldn't it?

[B]

That's what I thought I was like, man.

[C]

Especially Minnesota. Right.

[B]

What are they doing?

[A]

What high tech companies are in Minnesota, Joe?

[B]

High tech? I don't know. I haven't lived in Minnesota in a long time. But I'm guessing like the big, you know, there's the, there's Honeywell 3M, there's maybe one of those Best Buy.

[C]

Best Buy. Oh, there you go. How about that?

[B]

Target Fargo. That's private.

[C]

Yeah, yeah. So anyway, if you think you're going to be let go, maybe a couple other things that you might want to think about. File for unemployment. Because if you're let go, you qualify for unemployment benefits, whatever your state offers. So that's one thing. Sometimes there's federal benefits you want to consider health insurance. Right. Maybe you can get it through your wife's company. I think your wife is self employed, so maybe she already has a plan and can include you on the plan. Maybe you can do cobra, which used to be 18 months after you got let go, but then it was extended during COVID I'm not sure what it is right now, to be honest, but you have the ability to get company, the company you're with, continue their insurance. It's called cobra. But you have to pay for it. Right. So just be aware of that. And he's sort of mention Roth conversions. If you are in a lower tax bracket for a year or two, that would be a good time to take some of this $4,400,000 in your retirement account and convert it if you're in a lower bracket. So that would be a great thing, particularly in your case because you've got a lot of non retirement assets from my calculation. A couple million dollars.

[B]

Yep. If you want to spend. He wants to spend $150,000 a year. He's got $8 million.

[C]

He can do it.

[B]

Yeah, the math looks pretty good. Continues to work. You know, she's self employed.

[C]

Yep.

[B]

Have her make that hundred thousand dollars.

[C]

Yep.

[B]

And yeah, I think, yeah, if they want. Pretty good.

[C]

If they want to spend 150 a year, that's. They're, they're looking fine. Technically. You would even have to go back to work. Joe, just to clarify here, when he says he has 7.9 million in assets, that includes the home. So you have to back that out.

[B]

4, 5, 1 million.

[C]

He's got 6.4. Really? So I guess the way I think about someone in their 50s, maybe a 3% distribution might be tops. Maybe you want to do 2.5% distribution rate to be safe, but even a 3% distribution rate on 6.4 million, 192,000. If the spend is 150, you know, then you got the wife's income on top of that. So yeah, that's looking pretty good.

[A]

And to answer your question about Cobra, 18 months, if you lose your job in, if it's voluntary or involuntary job loss 36 months applies for things such as the death of a covered employee, divorce or legal separation, or a dependent child losing eligibility. In certain cases of disability, the 18 month period can be extended to 29 months.

[C]

Got it. Wow. That's great information.

[B]

Wow.

[C]

And you know what? The reason why I couldn't say it at the top of my head was it changed during COVID and then it was gonna change back and then it got extended and I sort of lost track. So that's really helpful. Let's see what else can we say.

[B]

That's it.

[C]

Yeah, I think we did a lot.

[B]

I'm over Steve and share.

[C]

You're over it. Yeah.

[B]

All right, that's it for us. Thanks for tuning again to another wonderful show of youf Money, you, Wealth. We'll see you next time folks.

[A]

Next week we are talking Parks and Rec, Paw Patrol and Smokey and the Bandit on YMYW as Andy and and April Chase and Ryder and Burton Sally all want to retire early. Can they do it? And does Dolly have any options to maximize her Social Security? Follow us in your favorite podcast app or subscribe to watch us on Spotify or YouTube, won't you please? Your Money, you, Wealth is presented by Pure Financial Advisors. To really learn how to make the most of your money and your wealth in retirement, you need more than a spitball. Schedule a no cost, no obligation comprehensive financial assessment with the experienced professionals on Joe and Big Al's team at Pure Financial Advisors. Click the free financial Assessment link in the episode description or call 888-994-6257 to book yours. You can meet in person at any of our locations, around the country or online right from home. No matter where you are, the Pure Team will work with you to create a detailed plan that's tailored to meet your needs and your goals in retirement. Pure Financial Advisors is a registered Investment Advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information contained in the podcast in the process of making a full and informed investment decision.