Market Update and What to Know about Rule 72t and Early Retirement

On this episode of A Wiser Retirement Podcast, Casey Smith, Brad Lyons, CFP®, and guest Jordan Sute, CPA, give an update on what’s going on in the market. They also discuss early retirement and rule 72t. They also cover different ways you can avoid tax penalties if you are hoping to retire early.

Listen on Apple Podcasts or watch on YouTube:

January 2023 Market Update

Even though the market predictions for 2023 were nothing short of disastrous, January has proved that not all is lost. Historically, 70% of the time, the yearly performance of the stock market follows the January performance. We sure hope that this year especially, this trend will prove itself to be true, allowing for a healthy market recovery. Thus far, we can see that many industries are up, as opposed to expectations from just a couple of months ago.  

What is the FIRE Movement?

As we shift topics, we’re also going to talk about the dream of many, early retirement. With the world changing and technology evolving, jobs and people’s mindsets are also changing. The FIRE movement has a lot to do with that. FIRE stands for Financial Independence Retire Early. The idea behind the movement is to save as much as you can in your early career (50%- 70%), and then retire in your mid-thirties or forties. Of course, this is also only possible if you have a high salary early on. Saving 50% to 70% of your salary is not an easy task and is probably not the lifestyle many would choose for themselves. However, people who are able to accomplish this, have a high chance of achieving their goals because it takes a lot of discipline. Discipline is one of the best ways to be intentional about your finances. Even if you are not trying to retire early, there are two major components to the path to financial freedom and success in retirement: eliminate all debt as soon as possible and save as much as you can.

How to Avoid Early Retirement Taxes

You’ve done everything right and now you are ready to retire in your early 50s. How can you start using the money in your IRA without paying penalty taxes? There are a few options, 72(t) in itself is a whole multitude of exceptions. We first need to understand the reason why the money is needed. Some examples include,  buying a house, medical expenses, or paying for higher education. These exceptions are covered under 72t and will avoid the 10% tax penalty. However, if the purpose of using the money is to just live off of it and travel before age 59.5, then we get into a very nuance section of the rule, which is called SEPP (Substantial Equal Periodic Payments). It’s a very specific calculation based on different life expectancy and amortization payments. It lines out how much exactly you can take out of your retirement account while avoiding the 10% payment. This can be pretty complex, so it is very important to counsel with a CPA or someone who understands this matter before making a decision on personal payments.

Additionally, it’s important to remember that whatever amount has been calculated for SEPP cannot be changed. So, it is encouraged to avoid going through this channel, if at all possible. Although 72t is an avenue, it probably works better if you have additional funds to fall back on.  

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TIMESTAMPS:

0:00 Intro

1:00 As Goes January Goes the Year (Or so We Hope)

10:59 FIRE Movement

19:47 How to Avoid Early Retirement Taxes

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Learn more about Casey Smith, Brad Lyons, CFP®, and Missie Beach CFP®, CDFA®

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