The Unintended Consequences of Early Retirement

Anonymous, 60, recently lost her job and is worried about retirement. She owns a paid-off triplex, living in one unit and renting the others for $30,000 a year. She used her 401(k) funds to buy the triplex and now has $50,000 in retirement savings and $150,000 in cash. She expects only $2,400 a month from Social Security at age 67. After losing her son two years ago, she’s seeking advice on managing her underfunded retirement.
Noelle, 40, and her husband, 49, want to cancel his whole life insurance policy. They are debt-free, own their home, and plan to retire soon, relying on Noelle’s $80,000 income. They have $504,000 in retirement savings. Should Noelle keep her $100,000 term life policy until she retires?
Sleepless in San Antonio, age 35, plans to retire at 45 but is concerned about how this will affect Social Security benefits, which is calculated based on the top 35 earning years. Should they work longer in order to boost their Social Security benefits?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
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Anonymous asks (at 02:13 minutes): I was recently laid off from a job I held for three and a half years. I’m 60 and not feeling confident about my ability to become re-employed.
I have $50,000 in 401k retirement funds, $150,000 in cash, and a paid-off triplex. I live in the smallest unit and rent out the other units short-term which generates $30,000 net per year.
It’s a long story, but I used my 401k funds as a down payment when I purchased my triplex. At the time, I was a single mom struggling to support kids during an economic recession.
It enabled me to generate income from a 401k that I otherwise couldn’t touch and it was vital to my survival then. Overall, it’s proved to be a positive move.
However, I’m 60 now and don’t have enough saved for retirement. I use the Rollover as Business Startups (ROBS) account and haven’t yet figured out an exit strategy.
I can probably get by on some part-time work and the $30,000 income from my triplex, but I feel uneasy. Do you have any thoughts on ROBS and my underfunded retirement account?
I lost my 24-year-old son to cancer nearly two years ago. And everything has changed. I don’t expect much Social Security, maybe $2,400 a month when I turn 67.
I have no real pile of money, but I have a house that makes a decent amount and I live here happily. What are your suggestions for me?
Noelle asks (at 43:15 minutes): How do you know when you no longer need life insurance?
I’m 40 and my husband is 49. We don’t have any children. We own our home and we don’t have debt. We plan to retire at 50, which would be next year for him and in 10 years for me.
We have $33,000 in cash savings and $504,000 in investments between our 401k, Roth IRA, brokerage account, and Health Savings Account (HSA).
We plan to live off my $80,000 annual income until I retire. When I retire at 50, he’ll be 59 and a half and we can start taking minimum distributions from his retirement accounts.
We want to cancel his whole life insurance policy and invest the money instead. I’m not a fan of whole life and it’s expensive. We pay $52 monthly for a $100,000 policy.
But we’re not sure about my life insurance policy. I have a $100,000 term life insurance policy for myself. We pay $16 a month for it.
I’m leaning toward keeping it until I retire. If something happens to me in the next ten years, he might need that income so he doesn’t have to return to work.
How do we think through this?
Sleepless in San Antonio asks (at 1:01:14 minutes): How do you think about the impact of early retirement on Social Security benefits?
I looked up my Social Security benefit recently. The government estimates I’d receive $3,800 monthly in Social Security if I retired at full retirement age.
The calculation is based on the average of the top 35 earning years of work. But if I’m 35 and plan to FIRE at 45, I’d have less than 35 working years.
In this case, should I lower the amount of Social Security benefits in my calculations of what I could expect for early retirement? How would I make this calculation?
Does it make sense for someone to delay their early retirement plans to achieve more Social Security earnings in their later working years?
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[@budgetlifemillionairesby405]

You can't live in a 401k! She has a place to live that pays her to live there! Probably the only real estate she owns, I see it as a stable investment.

[@ariefraiser140]

No you can't live in a 401k. But if you do it you can retire with a $1 million 401k. She shouldn't have emptied her 401k for that triplex. There are multiple better ways she could have approached this.

[@Fjjfuffnr244]

@@ariefraiser140 disagree. The income from a fully paid off rental netting her 30k is a massive asset. Real estate is more about cash flow than appreciation. As was noted thats the equivalent of a 750k 401k. Nothing wrong with that. If she can maintain that cash flow, she is in a better place than she thinks. It sounds like she was just down from her personal life events. Maybe redirect some of that cash and she’s good.

[@daw7773]

Agreed, she said her real estate brings her 30,000 net which is$2500/month. At 62 her Social Security should get her additional estimate $1500-2000/month.

[@Fjjfuffnr244]

@@daw7773 Precisely. Like you said, her SS + rental income adds up. Its likely enough to cover a majority of her living expenses. Then you add what she can earn if she invests say 100k of her cash. Heck she can even get a part time gig and invest that new income. She’s fine. I kinda side eye “experts” who say stocks or real estate is better than the other. They are essentially different tools. Its like someone claiming to be a mechanic saying a wrench is better than a screwdriver. Or a cook saying garlic is better than flour. It has no meaning until you learn more about them and what they want to do.

[@daw7773]

@@Fjjfuffnr244 Agreed.

[@archeanchaos-s4c]

What happens when the she gets a few bad renters who wreck her house and leave. My last renter took 6 months to evict after not paying rent for a few months before. Then they wrecked my home about $12k in damage. I talked to a lawyer and he said I could sue her, but what makes me think she would pay that when she couldn't pay rent, especially after I told him she was trying to get SS since she got hurt and couldn't work.

[@cameragirl242-om1qx]

Watching this, as am considering doing, what Betty did, buying a 2 family income, in addition to my own homestead.

[@RPSartre01]

Unexpected consequences from quitting the capitalist rat race and retiring? Happiness, good health, no stress, and freedom.

[@malaysia1911]

Glad to hear that you are getting a Thumbnail designer.

[@larrymelman]

I don't know why that is even a thing. Her priorities are out of whack.

[@hogroamer260]

That triplex, equivalent to a $750k retirement, is also her home so, not so much. She would need another house or apartment if she was to sell it. But, if she can live on that $30k, she can always take her Sicisk Security early which would be about $1600. Then her savings and retirement are additional security.

[@MrOsasco]

This same woman called Ramsey with this exactly same estory. You can check it out.

[@Fjjfuffnr244]

@@MrOsasco could be she’s wanting multiple opinions? Or both sites sharing a made up story for video content?

[@AlexCharron]

Way too many micro-editing cuts throughout. It's only after trying to watch another of your videos that I realised that I was sick after watching this one because my brain was picking up the hundreds of micro-edits. These edits makes the information come in way too fast and the odd cuts all add up to making me nauseated. With the understanding that people are more than capable of speeding up podcasts on their own devices, is there really a need to have all of these micro-edits? What a shame. Used to love your podcasts years back. I tried to start listening again but your editing style makes it so that I cannot watch or even listen to them.

[@affordanything]

Thank you for the feedback! We recently let go of our normal editor (who has been with us since we began producing video content for KZbin), and we are currently testing a variety of editors for the replacement role. The variation that you see on videos such as Michael Kitces, Meir Statman, and several recent ask Paula videos reflects paid tests that we are giving to our editorial candidates, who are applying for the position. Based on your feedback, it’s clear that the person who edited this should not be offered a full-time role. Our hiring method is to give each editor one episode, (paid as a freelancer), and see how well they perform. As a result, there is going to be variation until we fill the role. Thanks again for your feedback. You are watching the messy process of hiring in public as a small business.

[@Esther-uo7fs]

@@affordanything That's so kind that those are paid interviews. Kudos for employing that interviewing tactic!

[@waterbug1135]

OMG people, female type people are soooo dramatic.

[@stephenadamczyk-c9m]

Most people do t know, taxes are due quartly, Medicare Part A, is at no cost, part part B costs vary from about 180 to 480 per month, plus you have to pay the portion it doesn't cover, sad but true, their retiree friends don't tell them the truth, I guess they are lonley, and need more suckered to be friends.