Why 55 Needs To Be The New Normal Goal For Retirement

Businessman holding black alarm clock with clockwise countdown from work to retirement.

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It’s 2016, 5am in the morning. I’m about to get in freezing cold water to start my first ever Sprint Triathlon. I had never done one before nor do I want to do one again. It’s not my type of training. But this time was different. This was the “Stan-the-Man” sprint triathlon in honor of Stan Ware, a client of mine for over 10 years, battling cancer. Stan, a business owner, ate clean and healthy, lifted weights religiously, did everything he could to keep in the best of shape. It was truly impressive. But cancer doesn’t care about any of that. During this race he was there to watch the hundreds of people there to support him from a wheelchair. A few weeks later, he passed away. Age 56.

Had he built a successful business? Yes. Did he have enough saved up for retirement to retire early? Yes. Year after year we would meet and run the numbers again and again and yes, he was work-optional at that point but didn’t retire. Now, his widow, all the money needed for peace and security and travel and bucket list fulfillment, but no one to enjoy it with.

I have close to a dozen of these stories I could tell you. Cancer, heart attack, Covid, brain aneurysm. The closest to hit home is my father-in-law. Worked at UPS for 40 years. He was 60 years old and was diagnosed with stage 4 pancreatic cancer the same month he turned 60, and the same month he retired. We spent his birthday party and retirement party in the hospital with him while he was on emergency chemotherapy.

I used to think my life’s mission was to help people save for retirement, manage money, and make sure they don’t run out of money. But now it’s changed to making sure I show everyone I possibly can… the earliest they can become “Work-Optional.”

What is “work-optional”

Let me tell you another story about Jon. Jon was a neighbor of mine. In 10 years of living next to him I never mentioned what I did. We were just friends. One day he called me and said, “Man, this is a small world. One of my close friends who I work with just retired at 55. When I told him I needed his financial advisor’s name and number, he gave me yours.” Crazy small world, right? The next week I went and met with Jon, and he went on and on about how much he hated work and didn’t like his new younger boss. We ran through his numbers, painted a picture, and boom… He could have retired that day if he wanted to. I said, “Jon, from this point on you are ‘work-optional.’” That means, you can keep working if you want, but you don’t have to. A few weeks later I saw his wife, and she gave me a great big hug and said, “My husband is a new man after meeting with you.” I said, “It wasn’t anything I did, I’m just a math guy, it’s just math. Nothing I did, that’s all you and Jon.” When I saw Jon, I asked him what changed and he said, “I’m still working, but the monkey is off my back, I’m not worried one bit about what my boss says anymore, if he wants to fire me, he can, I know I’ll be good.” Now I didn’t convince Jon to retire that day and in fact, he is still working. But at least I can sleep at night knowing that he knows he can retire a lot sooner than he ever planned on.

It’s just a coincidence that Jon worked at Boeing and people have used a study Boeing came out with that showed people who retired sooner actually lived longer. Now, that has been debunked. This really isn’t my job to run through a bunch of statistical averages and convince you when you should or shouldn’t retire. My purpose is to have you go sit down with someone ASAP and know when you can be “work-optional.”

Why do people hold on so long…

I can’t tell you the exact reason, but if I had my guess, it’s because we are just used to “Norms”.

Well, Medicare starts at 65 so I don’t want to have that expense so I’m waiting till 65.

My Social Security statement says Full Retirement age is 67 so that’s when I will retire.

I can’t touch my IRA or 401k without penalty till I’m 59 ½ so that’s when I will retire.

I have heard of the 4% rule and when I do the math it just doesn’t make sense.

I read somewhere you need X amount of dollars to retire comfortably.

I still have kids at home.

I have heard it all, and I’m not saying these aren’t valid things to consider. I’m just saying that you owe it to yourself to see if any of these apply to your situation. Because in my opinion, I think the number 1 reason why people work so long is… they have never seen if they could retire ahead of schedule or not. You see, in my world, I really can’t use the word “Guarantee” much. But in this case, I will… I can Guarantee there isn’t a one-size-fits-all plan/strategy that fits for everyone. 18 years and hundreds of retirement/distribution plans later, I can say that I have not seen anyone in the exact same position as anyone else.

Well, where do I start?

Knowledge. Start with knowledge and education first. Here are a few things to consider.

1. Order of liquidation. This means taking out of taxable buckets first, and then IRAs and 401ks later. I used to think the exact opposite. We all see that RMD freight train coming down the tracks and there are only 3 ways to minimize the hit… 1. Spend it. 2. Convert it. Or 3. Give it to charity. I prefer number 1 because this is the whole reason you saved money in the first place… to spend it later. So naturally we think to start spending our 401ks/IRAs first. But the math tells a different story. It is better to take from non-qualified bleed forever buckets first. I say bleed forever buckets because you pay the tax every year on the 1099. Then let your tax-deferred keep growing and compounding.
2. Well, what if you don’t have any bleed forever buckets and you can retire before age 59 ½, how do I avoid the early withdrawal penalty? There are a few ways but one of my favorites is the Rule of 55. This allows you to keep money in the 401k you retired from after age 55 and take distributions directly from there to eliminate the extra 10% penalty. Still pay the tax on pre-tax money, but not the extra penalty. So, if you are 55 and retiring, leave enough in there to give you a 5-year runway of spending.
3. Gotta prepare for and mitigate sequence of return risk. What is sequence of return risk? Put it this way, you are lined up for a race. Gun goes off and you stumble out of the gate… it’s going to be hard to recover and win the race after that. But if you only stumble at the finish line… chances are if you have the lead, you’ll keep the lead. Well, if you retire and then the market decides to take a dive, it’s going to be hard to recover from that. So, what do you do? How do you mitigate that? Me personally, I like the bucket strategy. Give yourself a few years of spending window and put that into a bucket that isn’t correlated with the markets and draw from that. That way, if you retire at exactly the wrong time, you’ve got some time before you need to tap those other assets.
4. We’ve all heard it, the Go-Go Years, the Slow-Go Years, and the No-Go Years. JP Morgan did an incredible study and showed that as the retirement years go by, spending goes down. And even if it wasn’t backed by a study, over the last almost 20 years of helping people in that phase of life, I would say that is mostly true. That is why the 4% rule is just too generic for me. People at 65 take a trip around the world. That same person turns 75 and doesn’t feel like taking a trip at all. So just saying take 4% out doesn’t really translate to real life.
5. Die With Zero: Bill Perkins. I had one of my best friends who is also a financial planner tell me to read this book. At first, I was hesitant…I don’t want all my clients spending every penny. That’s an impossible goal. There are so many variables. But I was pleasantly surprised and impressed with the read. One quote I’ll never forget is “For every 10,000 you leave on the table at death; that’s one life experience you didn’t take.” As I read the book I thought, hey, this is real life, this is why people save money, it’s for this moment. Then realizing that so many people save, save, save, and then never get to enjoy it. I tell all my clients they ought to read this book. If not for the strategy, but for the mindset shift.

If you were to ask me what the hardest part about being a financial planner has been… I’d say… teaching an old dog new tricks… meaning you take someone that has been a big-time saver their whole life, has all this money and more, and try to get them to really spend what it would take to get their account remotely to zero… Not a chance.

1. The two R words. Risk and return. You see, in the accumulation phase of life, volatility is your friend. Look up dollar cost averaging. It’s a good thing when the market goes down and you are saving because you are buying new shares at a cheaper price. But now you are in the distribution phase of life. And the opposite is true; you are selling when the accounts are down and locking in those losses. The game completely changes. Volatility is not your friend. Most people probably know what kind of returns they are getting. But they have no idea what beta means, standard deviation, Sharpe ratio or any other metric that tells you how much risk you have in your portfolio. Impact of losses is real. The more you lose, the more you have to gain to get back to even. Except for this time… you don’t have years to wait.

Most people don’t have bad investments; they just have uncoordinated retirement plans.

What is the plan when the market goes down right when you retire? Or we go through one of those not so abnormal lost decades? Because the market has been on a tear the last 10 years. I hope it continues to go up and up forever. But that just isn’t realistic. So, what’s the plan? How much do you want to spend now vs later? Should you be considering Roth conversions and if they make sense or not for you? And if so, which assets do you place in those Roths? I talked to a guy who for the past 10 years has had unbelievable returns. I said, why are you looking to go anywhere else… He said, my current investments are good for one thing and one thing only… growth. But I am looking for income. And growth is good until it’s not, and when I need income and money, I am looking for something different. This guy got it. It’s not about having the best returns, it’s about mitigating risk. Most people are told you must pick one or the other, and that is just simply not true. In retirement you want your investments to look more like a championship sports team. A good offense and a great defense. Because to win championships or to have a peaceful and successful retirement… you need both.

Retirement is not an algorithm, and neither should your plan be.

There is one thing that all retirees have in common. Change. The plan on day 1 in retirement is not the plan a year later, or 5 years or 10 years later. There are a lot of moving parts. It is very complex. Take one path changes this and that. Take another, well this or that might not make much sense. Your goals change, your plans change, your dreams change, your family dynamic changes, your zip code changes, your health changes, markets change. Change will be constant. The solution isn’t finding an investment or a strategy; it’s about finding a person who helps you with these complex ever-changing paths look and feel simple. It’s the person that’s going to be in your corner, that helps you vet options, that guides or helps you see around corners. My goal is that if someone asks my client the “value of working with an advisor,” if I do my job right, I am hoping they say… priceless.

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