Were you planning to retire early but got laid off early

>> Matt Nelson: Were you planning to retire in just a few years but got laid off early? What are the considerations you need be thinking about? We'll cover that in today's video. In today's video, I want to tackle a mailbag question about being laid off just a little earlier than planned. There's considerations around whether you should be paying off debt earlier, uh, what you should be thinking about right before you retire, such as health insurance and so on, as well as how to handle your equity compensation.


Matt Nelson: Question comes from Harry in Minneapolis about when to retire

I'm Matt Nelson, and I've been helping people retire for over 25 years with my group at Perspective 6. I'm joined today with Jacob LaRue, who's a lead advisor on our team, and he spends a lot of his time on financial planning and tax topics. So thanks for coming back and helping us kind of tackle this question, Jacob.

>> Jacob: I'm glad to be here. This is a good one.

>> Matt Nelson: Yeah. So let's just get right into it. So I'm going to just read this question to set up some context. And so it's a question from Harry in Minneapolis. Um, I plan to work for another five to six years, but was just told that I'll be terminated at the end of the year, which is about two weeks after my 60th birthday. I'll be getting significant severance package equal to one year's salary, and I'll have 90 days to exercise all of my stock options, which will amount to more than 125,000. My question is, should I use all this cash to pay off my house and then just retire with the money in my 401k, or should I hold on to the cash for now and try to find another job or consulting gig? So, I mean, this is a great question. There's a lot to unpack, and it's not too uncommon. Um, a lot of times clients will come to us and they have in their mind, you know, hey, I've got two more years, three more years, whatever marker they have in their mind. And they think that is the, you know, that's the thing. They gotta meet. Right? And this could be happening to Harry. We don't have all of his details yet, but he had this idea of another five years. And, you know, plans change. Um, Jacob, as we were preparing for this, we kind of looked at it a little bit like a case study.

>> Jacob: Right.

>> Matt Nelson: You know, thinking about, hey, look, if Harry showed up at our office, how would we even begin to unpack all those questions and what he should do? What was the first thing that came to your mind?

>> Jacob: Yeah, I think when we get these types of questions, the first thing that always comes to our mind is the why. You know, Harry had mentioned that he was thinking of retiring five to six years from now. We'd like to know why. Why was he thinking that was his time? Was it because he enjoyed his work or was it because he just didn't feel like he was financially secure enough to retire today? Um, we like to dig deep into those types of questions and really get to the reason behind the uh, the original thought, if that makes sense.

>> Matt Nelson: Yeah, that's, I, I totally agree with you there. It's, it's um, it sounds a little meta and like, oh, why we spend so much time on this. Let's just jump right into the taxes and that sort of thing. But I mean all of these items have to have to line up and, and point to what, what is, what is your purpose? What are you doing? Why, why are you, just like you said, why are you looking at a five year number? What are you going to be doing after you retire? How much money is that going to take? Uh, so I think you're spot on is, you know, we'd want to put some of this on initially on hold and just get a sense of what's the timeline going to look like right before, right after retirement, five years into retirement. And before we can really answer all these questions he has, it'd be helpful to just really have a more of a detailed plan set up, detailed financial plan. But since we don't have that luxury because we're just trying to answer this on a 15 minute kind of, kind uh, of response, let's just get into some specifics of what, what someone like Harry would need to consider.


There are some items you want to consider before you retire

Um, there's some early retirement specifics. We have a checklist actually that we can, we can share. Let me just share my screen now. And these are some items you want to consider before you retire. And Jake, why don't you just walk us through, you know, how you talk to a client about this?

>> Jacob: Yeah. I think, you know, a lot of people when they retire probably think of some of these things, but maybe not all of them, but from a, uh, very high level when you retire you're not going to have income more often than not from your, your job anymore. You're going to lose your, your paycheck. So that's the first thing on everybody's mind is where's my cash flow going to come from? So we really like to dig deep and just, you know, lay out your different inflows that you might have in retirement, whether you have a pension or when's your Social Security going to turn on? Um, what are your monthly expenses? Maybe this is the perfect time to, you know, review your last three months of expenses and say, okay, I'm m spending 5,000amonth. I need to know if that's going to be able to be pulled from my investments or not. Just a really laid a foundation for that cash flow plan is where we like to start.

>> Matt Nelson: Let me just interject there too, with, uh, you know, having the timeline in place then helps understand. Are some of those expenses you have today only going to last another two years? And then maybe four years out you have a whole different set of expenses. So a lot of times we'll see these, these expenses and these income sources kind of layer in and out and they're coming back and forth. And um, that's why taking an overly simplistic, I guess, approach to I have this bucket of assets and I spend this much today and oh, well, that should work. I think that misses a lot of the nuance that's important as we go into this.

>> Jacob: Exactly. Yeah, there's these little levers you can pull, um, is what we like to tell clients. And sometimes those levers can extend your retirement plan multiple years, meaning you have money lasts multiple years longer, which is what everybody wants really in retirement. So a lot of little things to adjust here and there.


If you're only 60, you need to consider health insurance

Um, you know, the other big one, if you're, if you're only 60, Harry, and you're, you're about to maybe be retired, you need to consider health insurance. I mean, you'll probably get some COBRA insurance from the job that you're leaving. Um, but after that we need to develop a plan. Is, um, the health exchange going to be an option for you? Medicare doesn't happen until age 65. You know, so you got to look for private insurance or your, your personal health insurance, which is an added cost that some people don't think about. Um, and on top of that, that plays into your, your income too, because we've talked about this before. But your income can, can make or break how much you're paying in health insurance premiums, uh, month to month if you're an early retiree.


Where should you spend from when you're not yet Medicare age

>> Matt Nelson: Yeah, you know, makes me think you mentioned the, the, um, the marketplace and the health insurance options. And that could kind of speak to his question about where should I spend from. Um, just do a brief breakdown of why it's important when you're not yet Medicare age to be trying to keep your tax level low.

>> Jacob: Yeah, exactly. So let's, let's say you had um, this cash from stock options. Um, that money is going to be pretty tax favorable if you hold onto it at capital gains rates. Whereas if you have a 401k, well if you take $100,000 from your 401k and that's all pre tax, that money is going to directly flow to your tax return and that's going to impact your health insurance premiums uh, on a monthly basis. So really picking and choosing what to spend from, what bucket to spend from if you will, um, those first few years of retirement is really important because um, like I said, a little tweak here and there can be the difference between a hundred dollars in premiums more or $100 in premiums less on a month to month basis.

>> Matt Nelson: Yep, absolutely. That can really, it can be counterintuitive where you from like when, when clients come to its first, at first they, they have a sense of like well I'll just spend from my uh, my 401k because that's my retirement money. But, but where they spend from could be a uh, huge savings in their, in their health insurance side.


Harry asked about his equity comp and should he sell mortgage to pay off options

All right, good. We, we also were identifying, he asked about his equity comp and this one's, um, we're gonna have to make some assumptions here. That's the problem is because equity comp is obviously pretty broad and so we would need to know are they non qualified stock options? Um, are they incentive stock options? Are these just RSUs? You know, we'll make some assumptions here. He does have 90 days uh, to execute. So they're, they're probably stock option related. Um, you know the, the thing that came to my mind is if he's getting uh, if he's leaving the job at the end of the year, then now we get some choice because he has that 90 days to either look at um, exercising his stock options in the current year or pushing it to the next year. And that's, that's really helpful. I mean if he was getting terminated, you know, mid year, well you don't get that choice. So it's kind of ideal that maybe we could push some of his income into the following year. But now the question becomes if they were incentive stock options, um, do you really want to sell those? He's asking about should we sell that to pay my mortgage off? It's possible that he would want to hold the mortgage and take advantage of uh, the tax advantages of an incentive stock option, maybe exercise that, hold it for the two year hold and Get a little better tax deal. Any other kind of thoughts on that?

>> Jacob: No. Yeah, I think that's right on the money there. I mean, if we can optimize the ISOs by, um, exercising them now, starting that tax clock, if you will, early, and then, um, two years from now we'll have some cash flow that comes into play that can be really flexible for his spending. So I like that strategy.

>> Matt Nelson: Yeah. And it's sort of, it does dovetail with the mortgage question itself. Um, you had pointed out when we were talking about this, like, what if his mortgage is like a 3%? We've seen, we've got quite a few clients with that.

>> Jacob: Yeah, everybody was refinancing, you know, what, five years ago now, six years ago now. So it's pretty common for these retirees, um, the last few years to have a pretty good interest rate on their mortgage. And you know, in our minds, mortgage or any debt doesn't feel great. People don't want to retire with debt. But if the interest rate is cheap enough and you have a sizable portfolio that can generate, you know, um, good, good yield off bonds or even just good performance between a stock portfolio portfolio and bond portfolio mix, um, you're likely going to get over 3% on like a 10 or 20 year period. It's not a guarantee, but it's very likely. And right now, you know, interest rates are high, so your, your money markets or even treasury bonds or T bills are yielding more than 3%. So it's kind of like a cost, cost benefit there.

>> Matt Nelson: Yes. Yeah. So I guess the basic answer to him is, you know, maybe don't rush to pay that mortgage off necessarily. Now there could be other reasons, but just from the initial facts, he's kind of laying out, um, possible he's going to be better off just holding that mortgage to take advantage of, you know, again, not quite knowing exactly what kind of stock options he has, maybe taking advantage of some things there, um, and then worry about paying off the mortgage later, maybe slowly. Um, we have plenty of time. But we didn't fully address one part of his question which was, or should I go back to work kind of in the gig economy or part time? You know, I think this comes back to the why that you brought up in the first place. Um, if, if you really like working and you actually need something to keep busy, feel free to do it. Um, if we have, um, if you have enough saved up but you're bored at home, that's not going to be a great life either. So back to having a plan you know, having a purpose, having a plan set up, that's really going to be the first and best use of your time trying to figure this out. And it looks like you do have some time up until the end of the year. So I'd encourage you to, uh, to put some time and effort into that.

>> Jacob: Yeah, this is a very common question, like we said, and we get this one from clients and sometimes, um, you'd be surprised like, what they can make on their own just from like a consulting gig. So if that's something that Harry's thinking about exploring, I say do it. And, um, just earn a little bit here and there. It actually helps your retirement plan out too, because now you're not pulling so much from the portfolio early on. So explore it.

>> Matt Nelson: Absolutely.


Medtech Wealth Advisor shares checklist to help you achieve financial freedom

Well, great. I mean, that's, you know, it's all the time we had today. Just wanted to kind of hit one of the, one of the mailbag questions we thought was interesting to unpack. If you want to learn more about the team behind the Medtech Wealth Advisor, you can visit our website@spective6group.com we're going to link to the comments, uh, the checklist we were going over today. So if you find that helpful, feel free to download and use it as you'd like. And until next time, remember, financial freedom takes more than money. So find your purpose, make a plan to live your life well. Take care of each other out there.