Author: Jon Powell

Millions of people anticipate the day they will retire—when they can finally engage in the activities they’ve always wanted to do, such as reading, golfing, hiking, traveling, or simply completing a jigsaw puzzle.

Wouldn’t it be amazing to enter that stage of life even earlier than anticipated? While early retirement may not be feasible for everyone, with careful planning and effort, it can be done.

Read the following case study to understand how our team implemented strategies to get our clients to their goal of financial freedom earlier than expected.

Analyzing the Financial Picture

Meet Mr. & Mrs. Jones,⁽¹⁾ your typical hardworking American couple. They were diligent savers and wise spenders, however, they had never received outside advice on their investments nor created any specific strategies to map out their path to retirement.

Their expectations were to retire in 10 years, at the ages of 67 and 65. Through working with this couple and offering guidance, we revealed that they were in stronger financial shape than they realized.

Because they hadn’t received an opinion on their portfolio, they lacked the awareness to know they were actually ahead of the game!

We strategized a plan to fuel them further and faster down the path to financial freedom, allowing them to retire much sooner than previous projections estimated.

This plan included recommendations to modify their portfolio which ultimately led to improvements in their financial situation.

Adjusting Asset Allocation

Asset allocation is fundamental to successful investing. We can think of it as being an essential part of Investing 101. But is asset allocation different for those on the path to early retirement?

Absolutely.

Asset allocation, often better known as diversification, is an investment strategy in which you spread your portfolio across several different asset classes.

In doing so, you reduce the volatility associated with any one particular asset class, which generally improves a portfolio’s long-term performance.

With Mr. and Mrs. Jones, we discovered that their 401(k)s and IRAs were invested very conservatively for their age; they also had one account entirely in cash.

We made the  recommendation to choose a more suitable allocation which ultimately improved their risk-adjusted expected return profile. This adjustment put them in better alignment with their retirement objectives and other financial goals.

Improve Tax-Efficiency

Every investment has costs. Of all your expenses, taxes can sting the most, and take the biggest bite out of your returns.

The good news is that tax-efficient investing can minimize your tax burden and maximize your bottom line—whether you want to save for retirement or generate cash for savings.

Tax-efficient investing involves choosing the right investments and the right accounts to hold those investments. There are two main types of investment accounts: taxable accounts and tax-advantaged accounts.

There are advantages and disadvantages to each, but both are important pieces of creating an effective investment strategy.

In the case of Mr. and Mrs. Jones, we provided recommendations on the share of their savings going into pre-tax vs. Roth accounts. This improved the tax efficiency of their retirement assets so the projected future draw from their RMDs was less while maintaining today’s tax rates.

Know the “Why” Behind Your Goal

Financial stability can enhance your happiness, but only if your monetary objectives align with your values and what matters most to you. Before committing to the ambitious goal of retiring early, it’s essential to reflect on the reason why you want to retire early in the first place.

Suppose a person values working as an employee in a company. In that case, early retirement may not be a suitable goal for them because they thrive on the experience of being a part of a team.

On the other hand, suppose autonomy and adventure are part of their value system. In this case, early retirement may be an excellent goal that allows them to fully live out those values.

This is why we spend a great deal of time discussing values and priorities with clients like Mr. and Mrs. Jones. While numbers and projections are an important part of the discussion, good financial planning goes beyond analytics and spreadsheets.

Understanding the “why” and purpose behind your actions is a critical piece of the puzzle. Your values are the driving force behind identifying goals that genuinely feel fulfilling to accomplish.

Is Early Retirement in Your Future?

The factors and recommendations mentioned above revealed to Mr. and Mrs. Jones that they would be able to retire with increased financial stability in six years (at ages 63 and 61), much earlier than expected.

Because each individual situation is unique, it takes a careful and customized approach to each client’s portfolio and goals to find the ideal path to early retirement. Like Mr. and Mrs. Jones, you may discover that you are closer to financial freedom than you think.

Disclosure: It is unknown whether the listed clients approve or disapprove of the advisor or the advisory services. The criteria used to determine those included in this blog was whether the person was typical of the clients the firm serves.

Neither portfolio size nor performance were used to determine which persons were chosen.

Whatever your situation, our team at Ferguson Johnson Wealth Management can create a retirement strategy that fits your financial needs and helps you retire how you want and when you want.

Whether you have needs similar to the couple in this case study or you’re facing an entirely different situation, we are here to get you closer to your goals.

To schedule a complimentary consultation and learn more about how we help clients retire early, reach out to us at 301-670-0994 or by email.

⁽¹⁾ Names changed for confidentiality purposes.

Retirement Planning Checklist

If you’re planning on retiring in 2024, the countdown is on! The new year brings new planning needs, especially if you’re retiring in the next year or so. 

There are many moving parts to preparing for retirement. Here, we share a 12-step retirement planning checklist to help you prepare for retirement over the next year. 

1. Review or Create Your Retirement Plan

If you haven’t done so already, now is the perfect time to review or create a retirement plan. This should include everything from exactly when you will retire to how you will spend your time. Take the time to think about what you want retirement to look like for you.

Will you be retiring with a spouse? Do you want to work part-time, volunteer, or travel the world? The answer to these questions will inform the rest of the tasks on this list, so it’s important to be both intentional and realistic about your plans.

2. Decide When to Claim Your Social Security Benefits

Deciding when to take Social Security benefits is one of the biggest questions you will have to answer in the year leading up to retirement. Depending on your age when you retire, you could be looking at reduced benefits (age 62), full benefits (age 67), or maximum benefits (age 70).

If you decide to retire, but delay benefits until a later date, you will have to plan for an alternate income stream during that time. 

Keep in mind that once you turn age 62, your benefit amount will be increased annually based on the cost-of-living adjustment. This adjustment occurs even if you don’t claim your benefits until a later age.

If both you and your spouse worked and contributed to the Social Security system, then you have two benefit amounts to consider. There are strategies that married couples can use to make the most of their benefits by taking one benefit early and delaying another until age 70. 

3. Create a Realistic Retirement Budget

Once you’ve assessed your Social Security benefits and decided when to claim, it’s important to take a look at all other sources of retirement income and create a realistic budget. With your newfound free time, it can be easy to overspend without realizing it.

But since your income is fixed, a realistic budget that you can hold yourself accountable to is one of the best things you can do in the months leading up to the big day. Overspending, even for a short period, can shave years off the longevity of your assets. 

The budget doesn’t need to be perfect, but it should be something you can honestly stick to. Try tracking your expenses for a couple of months to get an idea of what you spend currently. Once you have all your costs outlined, consider if there are areas where you can cut back or items that will increase in retirement.

4. Consider Saving More

If you are earning more income in the year leading up to retirement and you don’t necessarily need it for daily expenses, consider contributing more to a tax-advantaged retirement account like a traditional or Roth IRA, or a 401(k) or 403(b). These accounts have increased contribution limits for taxpayers over the age of 50 and contributing more can be an effective way to boost your nest egg while reducing your taxable income just before retirement.

5. Determine Your Withdrawal Strategy

Many retirees mistakenly assume that how and when they withdraw from their retirement accounts doesn’t matter as long as they have a sizable amount saved. They also falsely believe that they will always be in a lower tax bracket in retirement.

This can result in inefficient withdrawals that increase your tax liability unnecessarily and greatly reduce the longevity of your portfolio. The timing of withdrawals makes all the difference and it’s a key component in safeguarding your retirement nest egg. 

For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA.

If you blindly take your money and run, you could trigger an avalanche of higher Social Security taxes, investment surtax, capital gains taxes, and even higher Medicare premiums, which will eat away at the funds that were supposed to carry you through retirement.

Creating a tax-efficient withdrawal plan before retirement can help you strategically withdraw from your various retirement accounts and minimize your tax liability. 

6. Review Your Life Insurance Needs

Many employers offer group and supplemental life insurance policies as part of a benefit package for employees. These are great during your working years, but they often expire at retirement, and retirees who only have group insurance may be left unprotected.

Whether you have a mortgage and want to make sure your family is covered, or you want to provide an inheritance, be sure to review your life insurance needs, as well as any existing policies you have in place. If it makes sense, consider extending your employer’s coverage or look for a private insurance policy. 

7. Take Advantage of Employer Healthcare Benefits

Another important step to take before retiring is to utilize any healthcare benefits offered by your employer. Maintaining good physical and mental health is a key component to a happy and fulfilling retirement. Make sure you are up to date on your physicals, check-ups, and prescriptions before retiring, especially if you have already met your deductible for the year. 

If you have an FSA, consider spending down the account, and if you have an HSA, consider paying for expenses out of pocket to keep the funds growing tax-deferred.

8. Review Your Medicare Options

Once you turn 65, you will be able to enroll in Medicare. Depending on your age at retirement, be sure to mark your calendar for this important milestone.

If there is a gap between when you’re retiring and your medicare eligibility, you will have to find alternative coverage through the Health Insurance Marketplace, COBRA, private insurers, employer retiree insurance, or your spouse’s employer coverage.

These options can vary dramatically in cost and level of coverage, so be sure to plan ahead.

9. Evaluate Your Long-Term Care Needs

It’s estimated that 70% of today’s 65-year-olds will need long-term care services at some point in the future. Without proper planning, these costs can quickly spiral out of control. The year before retirement is the perfect time to assess your needs and consider long-term care insurance to supplement what you can afford to spend out of pocket. 

Consider family health history as well as your own lifestyle, health needs, and projected life expectancy when thinking about long-term care. As difficult as it can be to think about, planning ahead is the best way to safeguard your savings as you head into retirement.

10. Evaluate Your Housing Needs

If you haven’t already, take stock of your current housing and if it will still make sense in retirement. Are you an empty-nester in a five-bedroom house? Have you always wanted to relocate? Do you have a mortgage? Would you easily be able to age-in-place or would significant accessibility modifications be required?

These are all questions to ask yourself in the year leading up to retirement. Since housing is one of the largest ongoing expenses you’ll have during your golden years, it’s important to thoroughly consider your options.

11. Review Your Estate Plan

Now that you’re gearing up to retire, take the time to review your estate plan and make sure everything is in order. You should have basic estate planning documents like a will, durable power of attorney, and healthcare power of attorney to ensure that your wishes are clearly communicated and a trusted individual can act on your behalf if something were to happen.

If your estate is more complex and you will have significant assets to leave behind, consider utilizing trusts in your estate plan.

12. Partner With a Professional

Lastly, partnering with a fee-only financial advisor is a good way to navigate your retirement journey this year. The year before retirement is likely going to be the most crucial one of all. At Ferguson Johnson Wealth Management, we specialize in helping pre-retirees and recent retirees navigate retirement with ease. If retirement is right on the horizon for you, reach out to us at 301-670-0994 or by email.  

We’d love to help. 

One of the most important things to consider when planning for retirement is what kind of lifestyle you want to live. Retirees are rarely interested in giving up all their worldly possessions and moving to a remote island in the Pacific.

Most people love the lives they’ve built for themselves and want to keep their lifestyles relatively the same in retirement. Without an income from a job, retaining the same lifestyle is no longer as easy, but it’s not impossible.

With proper planning and wise investment decisions, you can minimize the uncertainty around retirement. Here are four factors to keep in mind.

Identify Your Income Sources and Manage Fragmentation

Before assessing what type of lifestyle you can lead in retirement, you must first identify where your retirement funds will be coming from. Common sources include:

• Qualified retirement accounts such as 401(k)s, 403(b)s, and 457(b)s
• Traditional or Roth IRAs
• Health savings accounts (HSAs)
• Social Security benefits
• Investment portfolios
• Life insurance policies
• Annuities

If you’re like many American workers, you’ve probably worked for several different companies throughout your career and you may have multiple retirement accounts that are not consolidated. This is called fragmentation, and it can eat into your income stream by causing larger tax liabilities. 

For instance, all qualified retirement accounts (except Roth IRAs) have required minimum distributions (RMDs) once you reach age 72. This means you are obligated to withdraw and pay taxes on a certain amount each year.

If you have three accounts with RMDs, but you can easily survive off of just one distribution, you can end up paying taxes on two income streams that would have been better left undistributed.

Fragmentation can be alleviated by merging your accounts through consolidation. This will allow you to take one RMD instead of three, thereby saving you money on taxes and keeping your funds invested longer. It’s important to note that there are very particular rules surrounding consolidation and the process should be reviewed with a professional whenever possible.

Where Is Your Money Going?

Our clients often come to us with concerns about how soon they will be able to retire, whether they can maintain their desired lifestyle in retirement, and how to make sure they won’t run out of money. A crucial part of answering those questions comes from budgeting and tracking expenses.

Without understanding your retirement needs, there is simply no way to assess where you stand. It’s important to record every expense you can realistically estimate, including basic living expenses, mortgage and debt payments, life insurance, health insurance, and long-term care. 

It’s often said that retirees should plan to spend about 80% of their pre-retirement income on their post-retirement lifestyle, but, in practice, that number is very subjective. The amount of income required largely depends on the type of lifestyle you want to lead, which is even more of a reason to plan ahead. 

Assess Your Level of Risk

Once you have a complete picture of your finances, you will be able to determine whether you’re on track for retirement. At this point, you can evaluate the level of risk in your portfolio and make any necessary adjustments. 

If you find that you are not on track for the lifestyle you want to lead, you can consider investing in riskier assets with the hope they will earn a bigger return or you can extend your retirement timeline. 

Conversely, if you find you are on track for retirement, you can consider reducing your overall level of risk and invest in more conservative assets. Either way, your risk tolerance is just one aspect of your full financial situation, and, as such, it must be analyzed as one piece of a much larger puzzle.

Review Your Plan

Lastly, be sure to review your retirement plan annually so you can make adjustments as needed. Try as we might, we simply cannot plan for everything, and partnering with a trusted advisor can help keep you on track no matter what pops up. 

At Ferguson Johnson Wealth Management, we can help you navigate the road to retirement. If you’re ready to review your retirement needs, reach out to us today! Call us at 301-670-0994 or email us. 

By Jon Powell, CFP^®

As financial advisors, our work is about much more than just picking investments and managing your money. We want to help teach you how financial freedom can improve your day-to-day life and also help you set short-term and long-term goals for the future. 

One of those long-term goals for most people is a safe, comfortable retirement. But who says you can’t enjoy some of the flexibility and freedom that retirement brings today? Here we outline some tips on how to live out your retirement dreams now instead of just waiting for the future. 

Envision Your Dream Life

Financial conversations can often be left-brain dominant. But since money impacts every area of your life, it’s critical that financial discussions also include your hopes and dreams for life. That means we need to dig into the emotional side of our thinking.

One simple way we can do this is by asking our clients specific questions about what their retirement goals look like:

• Tangible goals: What would you like to have? 
• Conceptual goals: What would you like your life to be like?
• Freedom goals: What would you like to be able to do?

Take Practical Steps to Live a Fulfilled Life

Many people don’t even know where to begin when faced with the above questions and will sometimes provide a surface-level answer, such as “I’d like to travel” or “I’d like to spend more time with my family.” These are great starts, but it may take some time to truly uncover what’s most important to you.

Even if you don’t know exactly what you want, there are ways to take practical steps toward leading a happier, more fulfilled life now. 

1. Expect Less

It’s no secret that money can buy peace of mind and less stress. But can money buy you happiness? The answer is: to an extent. Researchers have found that increased income is associated with increased levels of happiness and life satisfaction up to a point—$105,000 to be exact. Beyond that threshold, happiness levels plateau and additional increases in income result in negligible changes in happiness. 

Instead of focusing on the ultimate retirement dream (e.g., a certain amount of money in the bank, or a specific car or household item), try focusing on what you do have and live in the moment as much as possible.

Practicing meditation or mindfulness can have significant impacts on your overall sense of happiness and well-being, and letting go of expectations of what your life should look like can be a great first step in living your retirement dream now.

2. Set Sub-Goals

If your dreams are more on the tangible side, that’s great too. To help with these goals, try setting smaller sub-goals that can be achieved more quickly than the ultimate retirement dream.

For instance, if your retirement dream consists of retiring in a condo on a beach in South Florida, maybe set a sub-goal of vacationing in South Florida first. Taking that trip could inspire you even more to make your ultimate dream a reality, while also allowing you to live your dream in the moment as well. 

3. Find Purpose

Studies show that individuals who live a purpose-driven life are happier and healthier on average than those who don’t. Not only that, they also live longer! 

A purposeful life is commonly associated with fulfillment and motivation, and can be found in many ways. Volunteering for a local nonprofit or church, spending time with your children, or pursuing a newfound hobby are great ways to find purpose in your day-to-day life. 

4. Prioritize Family & Friends

This one sounds obvious, but it’s often one of the hardest things to do. Life gets in the way and before you know it, you’ve spent a whole month getting stuff done but not really spending any true quality time with the people who matter most.

Living your retirement dream now often comes in the form of just slowing down for a moment. Realizing that the laundry list of stuff to buy, deadlines to meet, and things to do is important, but so is connecting with and learning from those around you. 

The great news is that you don’t have to wait until retirement to do that. You can start setting aside time every week to check in with loved ones and find meaningful ways to connect. You might just find that in doing so, your to-do list becomes a little lighter and maybe even easier to accomplish.

Get Started Today

So, what are some action steps you can take to start pursuing your dreams now? You may be surprised to realize that some of your goals can be accomplished sooner rather than later. 

At Ferguson Johnson Wealth Management, we are here to celebrate your successes and cope with your challenges as you work toward living your retirement dream now. Reach out to us at 301-670-0994 or by email