Dunn: Too much retirement savings? No such thing
Dear Pete: I’m 44 years old, and I fear I’ve made a massive mistake. I think I have too much money in retirement plans and not enough money in non-retirement investments. What if I get to be in my late 50s and I want to retire, but I don’t have any non-retirement funds to tide me over until I reach age 59 1/2? — Brent, Brooklyn
This reminds me a little bit of the job interview question in which the interrogator asks the candidate their biggest weakness. “I’m just too dependable,” the interviewee says. Fearing you’ve saved too much for retirement is a fear many wish they had. Alas, it’s your fear, and I must calm that fear.
Your problem may be different than you think it is, or you fully understand the problem and just didn’t explain it well. Before we get to that, there are other issues to deal with. A good place to start is clearing-up the terms “retirement” and “non-retirement.”
Typically, when a person uses these terms they mean “tax-qualified” and “not tax-qualified.” Retirement accounts such as a 401(k), 403(b), traditional IRA, Roth IRA and a few others, are all considered tax-qualified accounts. They enjoy various tax benefits but, in exchange for those benefits, they generally can’t be accessed without penalty until you hit age 59-1/2. That’s what makes them “retirement” accounts.
There are a couple technical strategies which could solve your perceived problem right away. The IRS allows you to use qualified (retirement) accounts prior to age 59-1/2 without penalty under rule 72(t). There’s some nuance to make this work, so you’d want to talk to a tax adviser. Basically, you need to take “substantially equal periodic payments” from a retirement account. Once you start taking those distributions, you must continue making withdrawals for the longer of five years or until you reach 59 1/2.
Another reasonable solution is a Roth ladder conversion strategy. It’s a complicated process, but it can work wonders for people who want to retire prior to 59-1/2. Essentially, you would convert traditional IRA money into Roth IRAs, paying the taxes now as you convert, and then withdrawal the converted money tax- and penalty-free after you’ve held the converted Roth for at least five years.
If this appeals to you, then I’d start your conversions sooner rather than later. But take note: You will have to pay taxes on the converted money. This could be a big issue if you are in a high tax bracket. Please talk to a tax adviser before adopting this strategy.
I know you didn’t ask, but the biggest issue with early retirement, whether it be prior to age 59 1/2 or prior to age 65, is health care expenses. You may have enough money to support your current lifestyle in early retirement, but it’s the added expense of paying 100% of your health care premiums which could ruin everything. People who’ve had their health insurance premiums subsidized by their employer throughout their career sometimes struggle to grasp the gravity of funding health care premiums on their own.
But in answer to your question: It’s impossible to have too much money in retirement plans. Not having enough money in non-retirement accounts is a separate issue. Your retirement could last for five decades or more — yes, 50 years or more. During this time, your potential long-term care and health care costs could skyrocket into the six-figure range on an annual basis. Unless you claim to be one of those people who say things like “I want my check to the funeral home to bounce,” then you’ll always want to have too much money available for you in retirement. This is especially true if you retire in your 50s.
Consider redirecting more of your current income to non-qualified investments. A nice compromise is to contribute to Roth accounts. You can always access your Roth contributions tax- and penalty-free. If you’re not able to contribute to a Roth, then make sure your non-qualified investments are either tax-sensitive or employ a tax-loss harvesting strategy. This will keep your annual tax bill down as you try to grow this account to support you in your 50s.
Ultimately, you are seeking flexibility, and I like that. More people should see value in financial flexibility. Who knows how you’ll feel about work, money or life in general 10-15 years from now. Age 44 is a great age to start thinking seriously about all these different scenarios. Too often people wait until the last minute to put together an exit strategy. Your planning, with the right tax advice, will give you the flexibility you desire.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com
