401k Early Withdrawal Concerns: Rule of 55, Health Insurance, and Social Security

50,000 views and over 100 comments in the first four days of our last video. Not only has it led to this response video where we’re going to dive a little bit deeper into some of the comments that you left, but I’m going to come up with three more in-depth videos about the content that I’m going to discuss today. What is it? The Trump tax cuts expiring, some comments there, social security cuts and what it means for you and your retirement and the stock market forecast moving forward.

We had comments around all three of these. I’m going to dive into them at a high level today, along with a couple other of your comments. Those three topics, I’m going to do a deeper dive in separate videos to help you understand more about how they could possibly impact your retirement.

One of the things that I found of interest when looking at these questions and comments is the role that government plays in these three big topics. Will social security be cut? Trump tax cuts expiring and the stock market forecast. All three of these are completely dependent on what Congress will either do from an action standpoint or an inaction standpoint. These will directly impact your retirement.

I encourage you to watch the video if you have not already. The title of it was, I’m 57 with 700K: Can I Retire With My 401K and Social Security? The very first question comes from Jeff, and he says, “Do the plan documents need to explicitly say that the administrator allows the rule of 55?” Before I get into the three main topics here, this was a good question, and I wanted to provide the answer to you, Jeff, because I think this can help other people.

The age 55 rule means when you retire, if you leave your 401K behind at your employer and do not roll it over to an IRA, you can access the money inside your account at age 55 without the 10% penalty. Normally, you’d have to wait to 59.5 before you can access those funds without a penalty. There is an age 55 rule. It does not have to be written into the plan administrator’s paperwork. You simply leave your 401K behind when you retire. You can access those funds without a 10% penalty. It is an IRS law.

Want to give a shout out to JD Golf, who always participates in the comment section and watches the videos. We really do appreciate it. How you doing, JD? Your question is, “What is included in the $50,000 expenses? Would it make sense if it was not essential spending to reduce some of that in the early years to avoid sequence of returns risk?” The 50,000 does include everything. To your specific question, JD, whether expenses should be cut, the non-essential, our opinion would simply be, let’s make it performance-based. Meaning if the accounts are doing real well, and we’re making some money, maybe we increase that spending.

If the accounts aren’t performing well, we go into a recession, market comes down, we probably should reduce some of those non-essential items. The most important thing is to stay connected to your plan so you are always aware and have visibility into how your projected spending over the course of your expected retirement, how your security is being impacted. If that number is changing, or if your future security is being jeopardized, that’s what should dictate a reduction in spending, not anything else.

Our next question comes from Jimmy Olsen Blues. Again, very impactful. I think this could help many of you in a similar situation. Jimmy says he has 750,000 mostly in an IRA with 100K in an annuity. They cut his pay 50%. He quit work. Now, he’s struggling to pay for health insurance. A couple of things here. The problem is all of the money is inside tax-qualified accounts. This is one of our big no-nos here on this channel. We want to diversify our contributions, our savings, our investment accounts from a tax characteristic perspective. Meaning please don’t put all of your money into 100% tax-infested retirement accounts.

Get your match, take advantage of those deferral opportunities but start to diversify your savings across different buckets of tax profiles. Now, the only thing I want to point out here is because you only need $2,000 a month to live on in rural Tennessee, is one, you should qualify for a subsidy. I don’t know if Tennessee is a state-run exchange or if it’s part of the federal exchange, but you should qualify for a subsidy, and health insurance should cost basically close to next to nothing.

The challenge is getting the money out of those tax-infested accounts prior to 59.5. Look up 72(t) payments. We’ve done videos here on this channel about 72(t) payments. It’s 72(t), and that is taking a series of substantially equal periodic payments, which allows you to take money out of your account prior to 59.5, your IRA, without incurring that 10% penalty. There is some drawbacks though. You have to take them for at least five years or until age 59.5. Now that interest rates are higher, the 72(t) strategy is more favorable than it has been for the past 15 years.

Something to talk to a CPA about, your financial advisor about or do some research yourself. That could help you in that situation. Even with that $2,000 a month taxable distribution, if you do a partial 72(t) on an IRA, it hopefully puts you into a situation based on the laws in Tennessee, which exchange you’re a part of, to where health insurance is no more maybe than $100, $200, $300 a month. Hope that helps.

Along that same vein, we have Laurie that says, “What about healthcare in this example? Does he get insurance from his employer, or could he pay upwards of $2,000 a month for health insurance?” This is why in the retirement success plan here at Oak Harvest Financial Group, health insurance is step four, health insurance planning. Nick V sums it up pretty good. “Wrong, wrong, wrong. Affordable Care Act will pay a huge subsidy based on $50,000 of income for two. They would pay less than $200 a month combined.”

Talk to someone who can help you here. You can do the research on the internet. The Kaiser Foundation has a healthcare subsidy calculator. There’s a few others out there. Just to tie this together, the big decision that we have to make oftentimes when we retire prior to 59.5 is do we defer our retirement accounts and deal with that tax problem later because of the tax infestation in those accounts, or do we want to go ahead and save money now and not spend, not do Roth conversions so we qualify for a higher subsidy. It’s a balance just like everything that we do in life.

When we have a decision, you weigh the pros and the cons based on your personal circumstances, and you make the decision with the best information that you have available. For me, my opinion is most of the time, it makes more sense to get the subsidy depending on various factors. If you can save $20,000, $25,000 a year right now for two, three, four, five years, that’s a pretty big impact to your bottom line. It should increase the longevity of your funds for retirement. Hopefully, you still have the ability to tackle the IRA problem, the tax infestation inside that account later.

Okay. Getting into our three main topics that I talked about at the beginning of this video, and we are going to start with the expiration of the Trump tax cuts. First things first here in the video, I must’ve said the Trump tax cuts expire in 2026. A couple of people pointed that out. They do expire December 31st, 2025. When I talk about it in that context, what I’m referring to is year 2026 is the first tax filing year that you will have to where the 2017 rates come back into play.

Technically, yes, they do expire in 2025, but in your 2025 return, you’re still going to take advantage of those tax cuts. Your 2026 return will be the first one that you file where you go back to the previous rates, and many of you will be paying higher taxes. Two responses there from Brown Whale and S. Wright that I’m going to dive into in just a second, but I want to show you why considering making tax moves is so important in 2024 and 2025 if you have a large retirement account balance because I want to show you the difference between what the tax rates and brackets are today and next year 2025 versus what they’ll be in 2026 under current law.

Okay. Feel free to pause the video. If you want to study these two charts, go back and forth. You can find them on the Internet. You’ll just have to Google what are current tax brackets and rates versus what are 2017 tax brackets and rates because that’s what we’re looking at. Okay. 24% bracket right now, this is married filing jointly. Again, if you’re single, please just look this up, but I don’t want this to be a 30-minute video where I dive deep. I am going to do another video specifically about this with some real-world examples, married and single. Stay tuned for that.

We can have taxable income of $383,000 right now, and the top tax bracket is 24%. Now, this is taxable income. Your gross income can be higher than that. You can have over $400,000 of income. You take your standard deduction, or if you itemized to get down to 383,000, plus if you have any, what are called above-the-line deductions, you could also take those before you get to the standard deduction.

Long story short, 383,000 is taxable income. You’re still in the 24% bracket. Because of that, we have this ability to take more money out of your retirement account, put it into a Roth IRA than any point in the history of your life. If we compare that to what the tax brackets are estimated to be in 2026, once the Trump tax cuts expire, we see that at 25%, so 1% higher. The big thing here is that the tax brackets have been compressed. It’s no longer $383,000 of taxable income. It’s $197,500.

Additionally, if we want to take more out of that retirement account for whatever reason, if we wanted to get back up to that $383,000 number, we’re getting into the 28% bracket and even into the 33% bracket for the taxation on some of those conversions or withdrawals. Not only are these brackets coming down, and the rates going up, but your standard deduction is going to be reduced as well.

For some of you, this may be a good thing. If you have a lot of real estate and your property taxes, they’ll be able to be itemized. No longer will there be the salt cap, the state and local tax cap as far as the itemization on your income taxes. Some of those 2% of AGI deductions will come back in, and maybe that’ll help you itemize a bit more. For many people, the standard deduction is going to be cut substantially, and if you don’t have a lot of deductions, you’re also going to be hit on that side.

Not only are the brackets being compressed, rates are going up, but the deduction system, the standard deduction, itemized deduction rules are going to change, and that will impact everyone a little bit differently. Okay, so back to Brown Whale and S. Wright. Brown Whale says, “Only if Congress doesn’t extend the Trump-era tax rates but ask your tax advisor.” “Yes, 2025, I am assuming it will expire, Roth conversions until then.”

Now, even if former President Trump does win the White House, there’s no guarantee, and I would say it’s probably even unlikely that the Trump tax cuts do get extended in a few reasons here. One, the Republicans would have to maintain and probably increase their control in the House of Representatives. They’ll have to win the Senate. I believe it’s extremely unlikely they’ll get 60 seats in the Senate, so a supermajority is probably off the table. Then also, they’re going to have to make sure that the Congressional Budget Office scores this thing revenue neutral.

Remember, the whole reason that these tax cuts expire in the first place is because that’s what they had to do to get the Congressional Budget Office to score this thing as revenue-neutral to the federal government. What does this mean for you? Ultimately, it is unlikely. I believe that within the first year of or if President Trump gets reelected, that these tax cuts will be extended. Could it happen? Possibly. Yes, it could happen, but a lot of dominoes have to fall. I think the more prudent planning decision is to expect tax rates to go back to their 2017 levels and possibly much higher in the future.

On to Social Security, and this one garnered a lot of feedback and discourse amongst some of you, so I want to address it because it is very, very important. It’s a question that we receive all the time when we do– Ed Rossi, one of our financial advisors, recently did a Social Security workshop and a webinar. You can check that out if you’d like. When we do Social Security events, they’re one of the most attended events of anything that we do. Social Security is still a very, very important topic. People have lots of questions. How is it going to impact if they do reduce Social Security benefits?

J Kulas says, “Good info. Very close to my own personal scenario. The biggest concern I have about retirement success is the looming Republican goal of reducing, delaying or eliminating Social Security benefits. Okay, so no one’s discussing eliminating Social Security benefits, and I don’t think this is a Republican thing. It’s an American thing, right? Because we simply don’t have the money to continue to pay for Social Security.

The fact of the matter is, something must be done. It’s like I tell clients all the time, you don’t have to take the tax recommendations from a planning perspective that we’re making, because the government has a plan for you. You can take the government plan, or you can take your plan. Completely up to you. I don’t care one way or the other. Same thing here. Either we have our own plan that we developed to address the shortfall of Social Security, or we take the government plan, which right now, according to the most recent reports, in about 2033, there’s going to be enough money to pay 77% of benefits for everyone.

That is the current plan. The only question is, do we come together with a bipartisan solution to addressing the Social Security shortfall? The same thing applies to Medicare. I don’t really see this, even though, again, I’m not a very political person. I just look at this from a numerical standpoint, a mathematical impact on the likelihood of success for the clients that have entrusted so much to us. Now, one of the tools that we have is this, what are you afraid of tool.

I pulled up the same plan in the video that we’re talking about here, 98% probability of success, but Social Security, we get this all the time. I don’t care if we’re working with clients that have $500,000 or 10 million. People want Social Security because they’ve paid into it. It is your money. It is nothing more than a return of your money. Honestly, it’s been pretty poorly invested over time, and we should not be in a shortfall, but we’re in the shortfall because we have so many people leaving the workforce and so many people not paying into the system anymore.

The growing number of people in retirement, the extended life expectancies, it’s going insolvent to an extent. Same plan, 98% probability of success. If we increase that to a Social Security cut by 10%, it drops to 93%. If we increase that to 20%, 79%. Now, we’re starting to get into a little scary territory here. 25% Social Security reduction. Probability of success now only 71%.

I’m going to do a much deeper dive on this specific topic. I’m going to go through the most recent report from the Treasury about Social Security. We’re going to do some planning examples. We’re really going to dive into this topic. For right now, I just want to point out a couple of things. Nothing that anyone in Congress is talking about on either side of the aisle is going to impact the majority of you that are over the age of 57, 58, 59, 60, 62, somewhere in that range.

I shouldn’t say all, but the majority of the proposed changes will impact younger people. We can have a shortfall come 2033. Remember, this is all fuzzy math. If we increase the Social Security age for people that are 20, 30 or 40 from 67 to, let’s say, 70, because we are living longer lives, or various other items that we will get into in the video I’m talking about, all of that math changes. We’re no longer insolvent by 2033, right?

The actuarial calculations will change. Something has to be done. We cannot just kick the can down the road. I wish this wasn’t such a divisive political football, but it is. Both sides are probably going to use it to scare you and to get votes. The truth of the matter is, most of you watching this will not be impacted. Now, the caveat there, and again, this is just conjecture on my part, but there could be some type of bipartisan solution that involves a means testing of either wealth or income.

What does that mean? If you have $100,000 of income, you will only receive 90% of your benefits. For most people that are in this video wealth range, 57 with 700,000, you’re probably not going to have $100,000 of retirement income. Again, this would not impact you. Many of you, in that $1.5 to $2 to $3 million range, very likely, especially because of required minimum distributions with Social Security, you will be above that $100,000 threshold.

Now, I threw that out there. That’s not anything anyone else has said. It could be 150,000, it could be 200,000, it could be 250,000, it could be any number. That is what means testing of income would look like, some reduction of your Social Security benefits based on being rich. It could be wealth-based, but that would be a bit more complex because we don’t report wealth to the government. We do report income every single year.

Okay, that’s going to get a lot of people fired up, I’m sure. Comment down below, let me know what you think, what your opinion is, if you have any potential solutions. We’re going to jump to the third part of this video right now, where we dive into the stock market forecast. I’m going to tie this all together because I want you to understand how big a role government actually plays on the impact of your retirement in the stock market forecast. Many of you are going to be shocked.

I’ve been thinking about doing this for some time, but it was inspired for me to talk about right now from Joseph. Joseph says, “If you’re only getting a 5.31% return from your investments after using a financial advisor, that’s your first problem.” Now, I’ve been thinking about doing a video about this for some time. I want to thank you, Joseph, for bringing this up as inspiration to add into this video. I’m also going to do a deep dive on stock market expected returns over the next 10 years. Just high level right now, when we use a 5.31%, that was based projection or rate of return. That’s for planning purposes. We’d rather be too conservative than too aggressive.

We don’t want to put a plan together that is successful at 9% average rate of return. We want to make sure that your plan is successful at lower rates of return in case the stock markets don’t perform like they have over the past 15, which is basically pie in the sky that is extremely unlikely to happen over the next 15 years. We want to make sure that you’re okay from not a worst-case scenario standpoint, but from a bad timing, from a bad scenario standpoint.

If things are better, great, you’re just going to be all the much better most likely. You don’t want to ever do retirement planning, assuming large rates of return. That’s a big mistake, and that could cost you significantly in retirement. Here we have a consensus of stock market projections, S&P 500, by a lot of the large institutions out there. We have BlackRock, JP Morgan, Morningstar, various research affiliates, Charles Schwab and Vanguard. Disregard this part of the chart for the first bit. Here is your consolidated bar graph of U.S. equity returns over the next 10 years.

This is what those institutions that we just went through, what they project the S&P 500 large-cap companies in the U.S. to perform over the next 10 years. 5.2% from BlackRock, 7%, 4.6%, 4%, 6.2% and 4.2%. Again, BlackRock, JP Morgan, Morningstar, various research affiliates, Charles Schwab and Vanguard. Vanguard put out their forecast not too long ago. I want to say it’s been a couple of months, maybe a few months.

It made headlines because they popped out at 4.2% equity market returns over the next 10 years. We see these things come out all the time. Many of these institutions are projecting much lower equity returns over the next 10 years than many people that we come into conversation with talk about or expect. This is very, very important. If you’ve just been paying attention to investing closely for the past 15 years, you may think that what we’ve seen over the past 15 years is normal. It’s not.

It’s not even close to normal. We were in a zero-interest rate environment, and companies could borrow money at zero cost, invest in various projects, haphazardly and still be extremely profitable, increase their marginal return on invested capital. That really accelerated growth in the equity markets. We are not in that environment anymore. It is unlikely we’re going back into that environment.

As a matter of fact, the opposite is true. We have a crushing amount of debt. Higher interest rates mean higher expense or interest expense. That is projected to slow the economy down significantly. That’s one of the primary components of all of these consensus reports is that it’s the national debt, it’s the percentage of debt to GDP and also the crushing annual interest expense to service that debt.

Right now, we’re at more than $2 billion a day of interest expense. That is expected to increase substantially over the next 10 years. It puts a burden on the economy. Major takeaway here, if you’re doing retirement account projections, and you’re doing your own investment managing and your own planning, please do not use 7, 8, 9, 10, and God forbid, 11 or 12% average annual returns for your projections.

Bring it down because this is nominal. This is not even taking into account the inflation, the projected inflation rate. Many of these institutions, an inflation-adjusted rate of return or what we in the finance industry call the real rate of return is 1% to 3%. That’s what you’re looking at possibly earning over the next 10 years on a real basis or inflation-adjusted basis.

Are they going to be accurate? I can’t tell you. I don’t get into the 10-year forecasting game, but I can tell you this, I get into the retirement planning game, and it is far better to assume a much lower rate of return than a much higher rate of return. Okay. Many of you may have caught this common thread, but all three of those big things that I did a mini-deep dive into are completely out of your control, right?

The Trump tax cuts, will Congress extend them? Will they not? Completely out of your control. That’s up to government. Social Security cuts, completely out of your control, government dependent. The equity market forecast, the projected stock market returns, again, completely out of your control, but primarily due to the crushing debt that we have as a country and the higher interest rate environment creating a massive budget item to the federal budget is in regards to interest expense.

This growing requirement to spend more and more money on mandatory budgetary items, as well as discretionary budgetary items, slows the government’s ability to spend money to help spur economic growth. That in return is a large part of why many of these institutions are projecting lower stock market returns over the next 10 years. You need to take care of you. You need to do the right things to improve your probability of success so you can be prepared for whatever may happen.

Now, the government debt, the low stock market returns, you combine that with higher rates of return, a potential social security cut. Now, we’re starting to see how your probability of success today may be rosy at 98 or 99 could significantly be impacted if some of these dominoes don’t flow in the right direction. Please talk to someone that can help you. If you do this yourself, just simply be aware of all these things and stay connected to your plan. Get informed, take action. Don’t be afraid but also don’t be too aggressive.

➡️ Do you need a Retirement Success Plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at (877) 404-0177 or fill out this form for a free consultation: https://click2retire.com/401k-contact