The Truth About Retiring Early in 2025!

You're never too young to retire. How to retire in 10 years starting with zero dollars. And lots of people are retiring early, quitting their jobs, doing whatever they want with their free time. Early retirement, it's everywhere on TikTok, YouTube, and financial blogs. The dream of leaving work behind in your 40s or 50s has never been more popular.

And the common belief is simple. If you save aggressively, you live frugally, you can walk away from the job decades before everyone else. Who in the heck wouldn't want to do that? But here's the harsh reality. Retiring early comes with hidden costs. Tax traps, health care cliffs, lifestyle trade-offs, the things that most people never think about until it's too late.

We've been planning for almost 25 years, helping families design retirements that actually last. Today, we're going to pull back the curtain on early retirement dreams. We're going to show you the realities that you have to plan for if you want to make it work.

Here's the plan for today. We're going to walk through the story of Colt and Kimber Browning. They're in their early 50s, high earners dreaming about pulling the plug on work in the next 5 to seven years. By the end of this episode, you'll see what early retirement really takes. The good, the bad, and the hidden surprises most people never see coming.

Colt's 52, Kimber's 48, household income of about 400,000 a year. Great income. Doing pretty well.

Yeah, doing pretty well. They've got 1.8 million banked. That's across mostly 401k. They've got a couple other accounts, Roth IRA and a taxable brokerage account. Two kids, one in college, one in high school. $150,000 left on the mortgage. So behind us we have a mock financial planning website for them which all of our clients get.

So Colt is dreaming of retiring by 55. So that's three years away for him. He's tired of the grind, which I don't know many people who aren't, but he's ready to be done. Kimber is more cautious. She's more worried about, well, if we retire early, are we going to spend through what we've banked, be it health care cost, or are we going to outlive our money, that kind of thing. So they want to know, can we really afford to stop working?

Fact is, there's a few harsh realities that we have to talk about first, because while a lot of people today are getting really almost complacent with this notion of early retirement, they're just not planning for it. We've got four that we're going to break down today and we're going to unpack all four. So stick with us throughout the show so you get all four of them. Let's start with the first one being health care before age 65.

Yeah, it's one that so many people just don't think about. And before 65, healthcare can cost a lot. So if you get out there into the private insurance market, let's say that you being Colt, you stop working and all of a sudden now you've got to go get care for your family. Healthcare that is could be for you, your wife, and your kids depending on their ages. But let's say they're still on the family budget. You could be spending 20 or $30,000 a year for that level of family care if you're not working.

Yeah. So, ACA is not cheap necessarily. A lot of people think it is, but it's generally cheap for people who don't make anything. That's where the credits come from. So, in this case, I think Colt ends up with a great question, but we have to turn that question into an answer that probably is not really what you want to hear.

Yeah. 20 or $30,000. Gosh, Phil, that's the equivalent of most people's mortgage payment. That's a pretty... I would argue that most people probably don't think about that when they say I'm gonna call it quits at 55 or 60 or any time before Medicare.

Well, and so great. That's a great observation. Yes. It looks almost like another mortgage. Yeah. So all of a sudden 20, 30,000, 30,000, Spell, might be more than a lot of people's mortgage today.

Probably. Well, I don't know about today. The current interest rate environment, if you're getting a house today, it might very well be 2500 or 3,000 a month, but here's what's interesting. The mortgage doesn't go up every year.

That's right. The health care cost will.

Absolutely. They go up every year and that ain't going to change. And so that has to be... So that's the first reality that we have to consider, and that's a pain point that a lot of people never think about, and it's the one that can derail an early retirement.

The second trap in our order tonight, and it's the tax trap.

Yeah. When you get into early retirement, you're going to pay taxes, especially if the majority of your money is in qualified plans.

Yep.

Meaning all of those dollars got in there pre-tax. So maybe it's a big nest egg. Yeah. But you got to think about how you're going to distribute, because all of a sudden getting to that money starts to cost, and depending on how large the withdrawals are, you could be spending 20, 30 cents on every dollar to bring it out of that environment.

That's a good point. And the other thing to think about too is if I'm retiring early, in Colt's case 55, he's not 59 and a half yet. So getting money out of the 401k environment, there is a way to get around the penalties, but if you don't do something very specific in terms of withdrawing the funds, you might be faced with not only ordinary income tax, but a 10% penalty for early withdrawal on top of that.

We think about when we're trying to get someone ready for this point...

Yeah.

...or for this time in their life, one, it should be celebratory. If you can somehow retire sooner...

Oh yeah.

...than your peers. If you get out of the workplace early, then maybe a kudos is in order.

Mhm.

Now, if I go back a little bit, it was almost a trophy event. The longer you could work.

Yeah. It's different today.

People want to retire earlier today. And I don't know that I really understand the logic behind it except for we've been conditioned to believe that we need to have plenty of time for all these experiences that we need in life. And so the sooner you retire the better. So if that's where we land, then we have to be able to deal with that. And I'm okay with it. I think if you can retire at 55, go for it. I think it's great. But man, it cost a lot to live in retirement. I think people underestimate it.

So what we would generally do, Spell, is we'd be talking to people years before this about Roth conversions or putting everything into Roth so that we have tax-free distribution.

Yeah.

We'd be thinking about ways to get the money out before 59 and a half, which is the age where you finally get rid of that 10% penalty. Now, right there, there is one possibility, Spell, and it's called 72T. So, it's part of the Internal Revenue Code. You could get someone out of that qualified money with no penalty.

Yep.

Right. Still the ordinary income tax is going to apply, but we could get them out of that environment without the penalty.

Right.

But it doesn't remove the risk of running out of money because the cost of living is not going away. Just because we get rid of the 10% penalty, we can tax plan.

Yep.

And we can make this thing less biting.

Yep.

But I don't know if it's going to solve the long-term problem of potentially running out.

And the IRS rule or code 72T is extremely rigid. So once you do that, there is no reversing it. You have to take that dollar amount out each year across whatever is longer, five-year period or you turning 59 and a half.

Yeah. You don't get to set that one into motion based on what you'd like to have or the way you want it to happen.

Mhm.

You do what the Internal Revenue Code says. And it is, to your point, you have a period, a minimum period that must be agreed to. And if you try to turn it off before that, you got some real problems. You're going to be paying all those penalties after all.

Yeah. So yes, 72T is a good option for some people, but it's not an easy one because it does come with what you said. It is quite regimented and there's not a lot of flex in there. That's not the right way to think about planning, is, oh, good, I have 72t. No, it could be for some people, but to your point, it has to be set up almost like an annuity where you have these substantially equal payments every year.

Yeah.

For those five years or till you hit basically 60 years old. Not the worst thing in the world, but I think there are better plays that could be talked about.

And so if we just went through a couple of points of what we would do, right? And for most of our listeners, this is going to hold true. You really want to think about... this is why goal planning is so important, Spell. I don't think people get to age 52 or 53 or 54 and say, "I think I'll retire next year."

Right.

Right. With no planning.

Yeah.

Now, some people do, and I think those people are going to step on a landmine, but I think if the average person, at least the ones that we work with, they tend to like planning. They want to focus on their future. We'd make sure that we have multiple buckets of money so that there is tax-free.

Yep.

There's no 59 and a half penalties. So, you have multiple buckets we can pull from to get us to that point.

That's right.

We would forecast what it's going to cost for the health care piece. We might think about part-time work so we could keep our benefits. Any number of things would go into that equation because that's a real cost. And then are we going to have enough for the kids to go to college? Have we done the right savings for them? It is that going to be taken care of. What is all... and those are just a few items.

Oh yeah, there's plenty more.

There's plenty more. But if we at least get those buttoned up a number of years ahead of this, then our client or a listener has a much better chance. So I would say that the ultimate plan is don't just arrive at 52 or three or four or five and say, "Oh, I think I'll retire now because I've got a few million banked."

Right.

I think we're going to end up showing people why 2 million might sound like a lot.

Yeah.

But the reality says that if we pulled five or six% off of that money a year, that's only 100 to 120,000 a year. And some people might be listening and they could be saying, "Oh, wow. I could live on that very easily." It seems that way, but over time with the cost of inflation...

Yep.

...it's not so easy to live on that. I'm talking about paying your taxes, right? And then hopefully live on what's left. And a 100 goes pretty fast.

It does go quickly. Phil, I think you made a good point and I might add the ultimate plan is to have a plan. You can't go about retirement willy-nilly and just snap your fingers and think, I'm tired of working. Today's the day. I'm calling it quits. There's a lot that goes into the calculations and sort of reverse engineering what your desired lifestyle and what you are trying to achieve requires in terms of dollars and cents.

Yeah. You said that so well. I think that having a plan, it's so important and so many people don't.

Yeah.

But if we could encourage one thing, it is to plan early.

Yes.

Your lifestyle has to be the first part of the planning. Not only at present, but where do you want it to be? What are the things that really motivate you and what do you think your lifestyle looks like down the road?

Right.

That's really how you start to build a plan. So sort of reverse engineering, as you say sometimes.

Yeah. And I think if you don't do that, then you run afoul and you get to 52, 53 and you think, okay, good. I'm going to retire now. Well, you might, but you also might go back to work because you're probably gonna run out of money or you're gonna realize that you're running too close to the edge.

Exactly.

And all of a sudden any mishaps will then throw you right over the cliff.

This is the third harsh reality of the evening. And that's a sequence of returns risk. So, another one that's overlooked.

Oh, certainly overlooked.

We'll get right back to today's show. But first, I'd like to ask you a quick favor. If you're enjoying this episode, hit that like button and make sure that you're subscribed to our channel so you don't miss what's coming next. And hey, if something in today's episode has you wondering about your own financial plan, why not get a second opinion? Visit omnistarfinancial.com to schedule a consultation with one of our team members. It's quick, it's easy, and it could make a huge difference in your financial future. Now, let's get back to the show.

And listeners might not know what I mean by sequence of returns. When you hear that or when we talk about that, usually what we're solving for is, okay, we've stopped earned income. We're no longer working.

We're now living off of maybe it's Social Security, maybe it's some other form of income, be it a pension or, we have clients who have portfolios of real estate, maybe they have some income from that. And then their investment portfolio. So the traditional investment portfolio, what we like to look for is if we have a market decline, which nobody knows when that's going to happen, and it's severe. We also don't know how severe a market decline may be. You've seen several market declines in your career, some of them more severe than others. In the last 15 years, it doesn't seem like we can have one.

Yeah. Yeah. If you think about that, you're right. I've seen some major declines.

Yeah.

But in the last 15 years, it seems like we've had so much intervention from our Federal Reserve or from the government, if you will. Markets go down, but small amounts and they quickly recover. And that's because everyone's been trained to buy the dip, buy the dip, buy the dip, regardless of the fundamentals, just buy the dip, right? And as long as that keeps working, Spell, we don't have to worry as much about sequence of returns.

Yeah.

That risk we can basically put on the sidelines. I just don't know how sustainable that is. The sequence of returns, that risk will become important again. In fact, I think it's probably more important today than it's ever been because I don't, this is another show, but I really believe that if you just look at the preponderance of evidence, I believe we're inside of a bubble at this point. It may never explode.

Right. Right.

But I believe we're way past the point of being due for something major. And so people that are not planning, this is the kind of thing that catches them off guard.

It does. And so what we're looking at is if we stop the earned income and we're now relying on a portfolio of assets to provide you with your desired lifestyle, what happens if that portfolio takes a hit the year that you begin pulling money out? What does that do to the trajectory of your portfolio for the remainder of your life? And if you don't have someone or something that can show you that, you might not ever know that you're going to run out of money until it's too late.

Yeah. Usually it is too late when you finally figure it out. And that's because you don't know how many years the market might go down. If we go back to 2000 during the dot bubble, Spell, we watched the market literally stay in peril for three years. And so it wrecked a lot of lives without question. One, no one was planning for it. Two, people were taking extreme amounts of risk, right? Far greater risk than they would normally take. But everyone was feeling good. They had FOMO. Everyone was buying into the market. And so why not? And then all of a sudden when it crumbled, people weren't ready, right?

And so I know that we have the technology to show people what that looks like. One or two years at the beginning of retirement is all it takes. Three years of a down market and you're making withdrawals, you could be cooked.

Yeah.

Unless your pot of money is way beyond what you need to create the income that you'll be living on. So, I think it's so important to be able to see that sequence of returns risk without a doubt is a, that's a landmine. That's a blind spot and people miss it all the time.

So you say it's important to see it. And today we actually are going to show on screen what this might look like. Now, for a one-year downturn, Colt and Kimber, if they didn't retire at 55, mind you, if we told them, okay, you're going to retire at 65, which is the normal retirement age. There's nothing wrong with retiring at 65, by the way. But if you retired at 65 and we had a 10% downturn in the first year, and it says first and second year. This is just the first year for now and then I'm going to flip into another toggle and show two years worth of a 10% decline.

That's awesome.

What will this look like for you? So, and the other thing to keep in mind as we're going through this, you're seeing some big numbers on the screen. We don't like to live in future value numbers. We like to turn numbers into how they would spend in today's dollars.

So inflation's real.

Inflation is real.

It might look great to show people this giant box of money.

Right.

But it's not going to spend like that unless all of a sudden we have zero inflation, Spell, and that's never happened in the history of this country.

Correct. That's right. That's right.

So that's right. I think it makes sense then that you show it in, so you're showing it in present value.

Present value. That's right. So across the course of the Brownings' lives, we model that they both live to be age 90. It looks like ceteris paribus, or all other things equal, everything kosher, that they'll accumulate a little over $8 million in their portfolio.

Very respectable. Extremely respectable. That's wonderful.

Most people would say, "Hey, the Brownings are perfectly on track."

Absolutely.

All is good. But let's show what happens if we get a 10% downturn in the first year of retirement when they start living off their portfolio. And this is again rudimentary. We don't have the system built with all the bells and whistles, all the ins and outs. This is just to show how severe something might be. 10% downturn in the first year of retirement, Phil, at their age 90 cost them a million half dollars, almost $1.6 6 million off portfolio.

One year, one 10% decline, one year and then back to a normalized market.

That's right.

And still cost them well over a million dollars.

Well over a million and a half.

Million dollars in today's dollars.

In today's dollars. That's right. So that's a major change. And so now what I'm going to do is change that to run for two years. So if we had a 10% downturn year of retirement, 10% downturn, one year postretirement.

Yeah. I think what you're saying, Spell, is so important because nobody knows how many years in a row the market will go down. It might not, but if it goes down 10%, goes down another 10% in the subsequent year.

Yeah.

And as we said, back in 2000, we saw it go down almost three years before the market finally found its bottom.

That's right.

And what a train wreck that was. Some people didn't live to tell about it because they took their own life. It was that severe. They just weren't prepared. It's bad.

And so just to go through this quickly, and again this is just to show how severe a market downturn can be, particularly in the early years in retirement.

Yeah, it's not so bad if you're 30 years into retirement and your life expectancy is another 10. This is the difference between accumulation phases of life and distribution phases because we wouldn't be having this conversation, Spell, if you've got 30 years to save. If you're 30 years old and you got another 25 or 30 years to save, you don't really care. You don't care if the market's up or down 10% in a year. All you care about is that over time it averaged 10 or 11 or nine or whatever percent you were going for. If it did that, then you're going to hit your goal.

That's right.

But when you start distributing and you have to navigate market volatility, right? You're hitting that portfolio from two angles. One is distribution, one is the market performance. And if it's down and you're taking distributions, right, man, it gets tough.

Yeah.

The challenge is on at that point. So really different when it comes to distribution.

Yep. Absolutely. And so you can see on screen that this downturn for two years cost them almost $3 million in today's dollars.

It's getting real now.

Oh yeah. It gets very real now. That doesn't necessarily crush their situation because they've done a nice job saving. Also keep in mind we're not telling them to retire at 55. This is them retiring at 65 when they're, for the next 10 years, actually the next 13 years, earning $400 plus thousand dollar. They're going to bank a lot of money. Some of the things behind the scenes that you don't see is that they're maxing out a 401k. They're funding a brokerage account. They're doing things to prepare for retirement. But if you mitigated or you took away those 13 years, I'm going to turn this off and show you. If we said, which we wouldn't in this case, our firm would never say this, but if we said, go ahead, green light, retire at 55. What does that look like?

Hey, that's what they want to do. So, let's at least, let's show them.

Let's show them. So, let's retire at 55. No more income. Portfolio takes a massive turn.

I can see it out of the corner of my eye on the monitor and it looks like it's turned into the opposite of what it was. We had a nice almost gradual, almost a steep uptrend in the value of their portfolio.

That's right.

And then all of a sudden it's 180 degrees from that.

Yeah. And they're running out of money before they run out of life, likely. If not, there's not much left, which means the risk of them running out means that the risk of a downturn in the market becomes something they have to be worried about more and more.

That's right.

Is that as something like that plays out, if you sat at our table and you asked, "Can I retire at 55?" and you'd given us this information, the answer would be no. And this is what we would show you, what most, the average person, when they consider retiring early and they think, "Wow, I've banked a couple million bucks. Life's good." Right? They're not thinking about all of the things that come into focus when you reach retirement.

There's, and we haven't named half of them.

Oh. So there's so many.

Yeah. We haven't named, we've gone through very, very surface today.

Yeah. Yeah. Phil, before we close, the asset spread or Monte Carlo probability of success is an environment that we love to live in because it allows us to test probabilities, right? And from those probabilities, it makes it more comprehensible to someone who's on the receiving end to understand what we're saying.

So, well, everybody can understand the odds, right, of something happening.

That's exactly right.

And it's pretty easy when we put it in that context.

That's right. When we say, "Well, it might work or it might not work," that's pretty nebulous.

Pretty vague.

But in terms of the Monte Carlo, you can show a lot.

Yeah. And we can set those probabilities so that anyone can understand that. And a point that you brought up, our fourth one, which was lifestyle and purpose. I hate to mention it, but when people retire, Spell, early, the things that we see most, and after doing this for more than three decades, people don't realize how bored they're going to get in retirement. They have no idea how many new hobbies they're going to pick up and quit.

Yep.

So, they're going to try all kinds of new things, which means new equipment, new stuff, and then it goes to the Play It Again Sports store somewhere. But the boredom, the loss of identity cost money, and then lifestyle creep, right? All of a sudden they have free time. I want to do something, whether it's donating or being part of a charitable organization, whether it's traveling more.

Yep.

All of a sudden you've got this void to fill. You have no purpose anymore or you have nothing to keep you busy.

True.

And so better have a lot of money because living in retirement costs more than just simply keeping a roof over your head.

Oh yeah.

And keeping the refrigerator full. There's a lot of stuff that goes into it.

And true.

So we can't forget that part. And I think that's the, that fourth harsh reality.

Yeah.

Is probably the one that escapes people more than any.

Y and it's the one that leaves people in a position of weakness because they don't really think about those things.

For sure. And that is a great point. I'm glad you brought it up because if we hadn't, that would have been a big miss. But so let's go back to Colt and Kimber for just a second. We're going to talk about their retirement probability of success. And this is that their portfolio does not run out of assets. So they retire at 65, live life the way they want to do it, continue to save the way they do. Nothing else changes. They have a 99% probability of success.

Wow.

That their portfolio does not run out of assets.

What a difference. Big difference.

Let's look at if they retired at 55, Phil. And again, these are just things that we would talk about. That 99% probability of success drops to 54% probability of success.

I don't know that I would flip a coin to determine if I would be successful in retirement. That seems like a huge gamble.

Yeah.

Right. You go from 100% essentially probability of success to half that.

And we like to say that if you get under 80% there are definitely some blind spots that are going on, and your likelihood of being successful is not in a place where we're going to feel confident telling you to pull the trigger.

That's right.

But when they're over 80% things tend to work out pretty well. So to go from 100 to 50, that should grab someone's attention. And I think that's the beauty of the technology is it allows people to say, "Wait a minute, that's major." And it shakes them to a point of being at attention, ready to listen and learn.

Yeah, for sure. So, Phil, the dream of early retirement is certainly possible.

It's absolutely possible. It can be done, but it's not as simple as quitting your job and then living off of your portfolio.

No, it's not going to happen. And I think we have to go back to that rule of thumb. How much money do I need at 55, 60, 65 as a multiple of my income? And you remember the Brownings are in a decent spot, a little bit short.

Yep.

For where they should be. But if they all of a sudden wanted to retire at 55, that multiple changes. And so instead of them needing six or seven times, now they need closer to eight times, right? Nine times and maybe 10 depending on lifestyle, depending on their goals and objectives.

Yeah.

That means that they don't need the 2 million. They really need almost double.

Yeah.

That amount.

Yeah.

Which that would call into question this idea of retiring at 55. But then when you put that technology in front of them, right, it drives home the point that hey, we've got more planning to do and you might need to work a little while longer. And that's the other thing, Spell, you don't have to maybe work till 65. Just a few years can make an incredible difference.

Oh yeah.

In the outcome.

Well, they're in their peak earning years. And I would 400 a year, right?

Exactly.

I'd argue that, 52 years old, you're probably depends on the situation, but you're probably just getting into your peak earning years.

Yeah.

And that's when you can really play, if you have to play catchup to retire or to build your nest egg or if you're where you should be, you can really afford yourself a nice retirement.

Yeah. And maybe they don't do it at 55, maybe it's 58 or something like that. But they only owe, if I remember right, in their plan, they only owe 150 or 60,000 on the home. They don't have a lot of debt. Got to get those kids through college. But really, they're in a great position, a strong position, but they're only in a strong position if they don't take their eyes off the road and say, "Oh, good. We'll go ahead and do it at 55 because they get so immersed in this idea or this notion that early retirement is just going to give them so much happiness." Right?

I can promise everyone if you fall short on being able to live that retirement life, it isn't going to make you very happy. And so, better to plan to your point, Spell, do it early. And then when you know that you've reached a point that it's really feasible, that it can be done, that's the right time, right? It's not 55 just because.

Unless you've planned for it and you're really prepared, right? Chances are it's going to be longer than that for most people. Life is expensive. Bottom line is you got health care risk, you got market risk, you got tax risk, you got design of the plan risk, all of these things, not to mention the rate of return that we talked about. So all of that matters.

Oh yeah.

And this early retirement can seem like a great dream, but without the right planning, it can quickly turn to a nightmare. And that's what we want everyone to avoid.

If you enjoyed this episode, click or tap the screen now to watch a video that Phil did on how helping your family could be destroying you. We'll see you next time and we're talking