Creating our early retirement checklist


So you’ve done all your saving and investing, took care of your Roth IRA problem, and now you’re ready to pull the trigger and tell your employer bye-bye.  However, as an early retiree, you are a forward thinking individual and wish to tie up any loose ends before your early workplace exit.  I happen to be in this situation as I write this post.  I am going to share with you what’s in our early retirement checklist.

Santa loves a good plan

Before we dive into this checklist, I must share the lyrics that come to my mind when I think of lists; From Santa Claus is coming to town:

He’s making a list
And checking it twice
Gonna find out Who’s naughty and nice
Santa Claus is coming to town

No worries here, as you achieve financial independence, you will only get onto Santa’s nice list.  I digress.

Now on to the serious business of planning for my workplace exit.  Here are a list of things we considered while planning my exit.

Determine an exit date

At first, this task sounds incredibly simple.  You are confident you are already prepared to take the early retirement plunge, and can’t wait to leave.  Should you put in your notice tomorrow?  That’s an important question to ask.  At my employer, I qualify for an annual bonus that equates to 15% of last year’s salary.  This annual bonus is paid out at the end of March.  In order to qualify for this bonus, I must be employed here when it is paid out.  Naturally, I am going to at least wait until we receive this windfall of cash before I exit.  Alternatively, you may have a date you need to wait until you qualify for your quarterly or annual 401(k) matching.  Since my matching is only done after year-end, I am going to forgo this annual match this year. It’s not worth waiting around another 9 months for.

Assess your workplace accounts and rescue remaining balances

If you are retiring early, there is a high probability you already take advantage of any and all tax advantaged accounts at your employer.  These accounts may include dependent care accounts, health flex spending accounts (FSA), & commuter expense reimbursement accounts.

We do not participate in a dependent care account as our kids are in school and my spouse watches them when they aren’t attending.  Likewise, we have no reason to participate in a commuter expense account as I ride my bicycle to work and occasionally drive and parking is free here.  However, I do participate in a flex spending account, also known as a FSA.

A real screen shot of my FSA balance

Logging into my FSA account, we can see that my existing balance is $1,921.  Needless to say, I have no desire to exit work here and leave this money sitting on the table.  The reason for the balance being so high is that I planned to have some dental work done this year that I have yet to get around to.  Last week, I went to the dentist to start this process, and was told that the dental procedure that I need done, a dental implant, will take four months to complete.  This was a surprise to me.  As such, my options are to leave and sign up for Cobra coverage until the procedure is done, or just work another four months.  We are probably going to work for another four months until the work is complete.

FSA spend tip:  Options to drain an existing balance in an FSA account include purchasing contact lenses, having some medical work done that you have been putting off, or even buying sun block (SPF 30 or higher is reimburse-able).  You can also purchase contact lens solution in order to help drain your balance.  Consider your spouse or kids as well.  Do they need anything dental or vision related?   

At my work, we do not have the option of a health savings account (HSA).  However, if you are contributing to a health savings account, you need not drain this account.  The funds that you contribute are yours for the keeping, and you may use these at any later date you choose.  You should, however, look into “maintenance fees” charged to maintain these accounts after you retire.

Consider reducing or dropping your 401(k) contributions to zero


This, by far, has to be the most bizarre advice given on an early retirement blog (except maybe this advice).  However, before you leave, let me explain.  One of the main reasons to contribute to a 401(k) is the company match.  The second reason to contribute is the tax savings you receive at higher tax brackets, that can then be withdrawn later starting at 0%.

This, by far, has to be the most bizarre advice given on an early retirement blog

However, if it’s still early in the year, such as is the situation I am in (it’s March as I write this), you won’t have a full year of work income to shelter.  Therefore, we decided to drop the 401(k) contribution from 6% down to 0% until my early retirement date.  My employer does provide a 50% match on the first 6% of employee contributions.  However, a few years ago they magically switched us to a “once a year” match, which requires that I be employed on the very last day of the calendar year (December 31st) to receive this match.  Since I don’t plan on being employed on that date, the match is no longer a concern for me this year as I won’t receive it anyway.

I anticipate that we will remain within the 15% federal tax bracket this year, without the extra 401k contributions.  If any unforeseen circumstances come up where I will be working until the end of the year, I have the option to increase my 401k contributions, up to 75%, to make up for lost time and lost deductions.  The only thing I would lose out on is the match for the paychecks that I did not contribute for.

Determine your healthcare strategy

Sit back and relax on this one, there are still plenty of viable options.  While it is true that many of the best options for high deductible, affordable health insurance have disappeared since 2014 with the phase out of grandfathered plans under the affordable care act (dubbed Obama-care), you still shouldn’t work forever out of fear of the unknown, or the improbable.

Let’s first list 4 options you have for health insurance for your early retirement.

  1. Sign up for an Obamacare plan on your state or the Federal Health exchange
  2. If you are Christian, you can sign up for a Christian Health Sharing ministry at very affordable rates.
  3. Sign up for COBRA coverage from my employer.  This option will only last 18 months.
  4. Go naked, as in don’t carry any health insurance or a health sharing plan.  It’s important to differentiate healthcare from health insurance.  You can still receive health care without having insurance.

Our considerations lead us to believe that Christian Health Sharing is our best asset protection strategy. Below I will list, briefly, why we did or didn’t choose other options.

  1. While it is true that Obamacare would provide us subsidized options, at an estimated $65k in taxable income, a high deductible plan would still cost us $176/month where we live, with a $6150 deductible per person.  Such a rate is only guaranteed for one year.  If our income fluctuates due to IRA conversions needed for the future, we could be paying considerably more.  The un-subsidized plan at this level is a stratospheric $953/month.  For that reason we ignored this option as it is not affordable.
  2. We found a health sharing plan with Medishare, that will cost us $190/month for their “healthy” option.  The beauty of Christian health sharing is it’s predictable and our rates won’t fluctuate with income.  We can convert IRA’s as need be and if our income jumps, our rate doesn’t.
  3. When you leave a job, your employer is required to provide you with un-subsidized benefit plans for 18 months.  This law is known as COBRA.  Our current , employer subsidized, plan cost us $275/month for a family of 4.  My employer estimates that they pay 74% of employee premiums. That implies that the un-subsidized cost for our COBRA coverage would come out to $1,057 per month.  The deductible would be somewhat low, at $1500 per person.  However, we have never met any deductible in our health plans, ever, with the exception of the birth of our two children.  I don’t expect this healthy streak to suddenly halt.  Therefore, we’ll skip this $12k per year option.
  4. While the idea of medical tourism is intriguing and completely reasonable, we aren’t quite to the point yet where we feel comfortable going without any asset protection for our family’s healthcare needs.  If you are interested in self pay options, check out this awesome website.

Dental Care

For some reason, dental insurance is very expensive on the individual markets.  For the most part, we only get cleanings each year.  For myself, I just skip cleanings altogether.  I take excellent care of my teeth, floss somewhat regularly, and haven’t had a cavity as an adult.  For dental, we will use a discount card provided by Medishare instead, and stay within their discount network for fixed and reasonable rates.

Some sample discount dental rates they advertise, for their network are:

Adult Cleaning, $47                                                                                                                                                   Child Cleaning, $36

These prices sound incredibly reasonable to me.

Vision Care

Both my spouse and I wear contact lenses.  Contact lenses aren’t free.  My employer does not subsidize our vision insurance plan.  However, we do sign up for for the employer vision plan at $15/month (family).  The coverage includes a vision check up for each person, and up to $150 reimbursement for out of network contact lens purchases, per person.  Therefore, we will actually receive more benefits, signing up for vision COBRA, than we will pay premiums for.   For the first 18 months of my early retirement, we will sign up for Vision Cobra, and then go naked, or uninsured, after that point (individual vision insurance is also very expensive).

Once our vision insurance expires, I will continue to use an online eye exam service named Opternative, which is an online eye service that has only cost me $40, per exam, for a contact lens prescription.  The rest of the family will likely use an Optometrist in the discount program that Medishare offers.   However, if we are able to come to a reasonable rate agreement with our existing Optometrist, we will stay with him.

Determine your retirement budget

Before you retire early, it’s a good idea to discuss with your spouse what your retirement budget should be.  However, let’s clear the air here.  It’s a better idea to live a frugal lifestyle, and focus on efficiency, than it is to try to spend an entire budget.  Glad we could get that out-of-the-way.

Now let’s dissect roughly what our early retirement budget will be:

Expense Per Month  (categories in red are highly variable, and are lumpier than smooth)
Mortgage                            $885
Groceries                              750
Travel                                    600
Property Tax & HOA            284
Utilities & Internet               230
Home Repair                        200
Medishare (Health)             190
Entertainment                     150
Clothes                                 150
Medical, Dental Self Pay     130
Gasoline                               100
Car & Home Insurance         88
Auto Repair                            75
Cell Phones                            65
Hair                                         60
Dining Out                              50
Presents                                  50                                                                                                                         Gym Membership                  21                                                                                                                         Vision COBRA                         15                                                                                                                           Netflix                                     11                                                                                                                           Mistakes in budgeting         896

Retirement budget      $5,000 per month 

OK, that was tiring.  I am glad that is over.  As you can see, we aren’t particularly frugal.  We left in plenty of fun money for travel, to the tune of $7,200 per year ($600 per month), and plenty of money for mistakes at $896 per month. These funds can be used to cover larger, one time items, such as our water heater failing, or one of our two cars needing a major repair.  It’s nearly impossible to predict when all these things will happen.

In order to make sense of the above amounts, I highlighted amounts in red above that are highly variable.  That is, they are likely to occur only a few times through the year, and not smoothly each month.  However, since our budget is on a monthly basis, I simply took the forecasted annual expense, and divided that total by 12 months.  If an item is in black, you can assume that it’s pretty even from month to month.  Our utilities, for example, don’t fluctuate much through the year.  Our gas bill goes down in summer when the heat no longer runs.  Alternatively, our electric bill goes up in summer, when we run the AC a fair amount more.

We don’t run a strict category budget.  Instead, we try to determine if we will derive benefit from each activity.  If we determine there is a better alternative available that is less expensive, we switch.  We attempt to DIY most minor repairs.  We have yet to attempt to DIY a major repair.  With early retirement, we will have more time to do the few things we have hired people to do.  For example, we haven’t always done all of our own painting.  Some of our rooms are particularly large and challenging, so we have hired painters in the past for the more complicated tasks.  With more time on our hands, those expenses will be harder to justify.

Determine Order of Withdrawal

Although this topic could turn into a lengthy post on its own, I am going to summarize our order of withdrawal plans in a few summary paragraphs.

Years 0-5 withdrawals

We will fund these years primarily with sales of taxable investment accounts.  Concurrently, we will be converting traditional IRA’s, to Roth IRA’s, as part of our Roth laddering strategy for later years.  In year one, after separation of employment, I will get a lump sum (about $20k) from my 409a employer deferred compensation plan.  Such a distribution, thankfully, is not subject to a 10% early withdrawal penalty.   We will receive other funds in year 1 that won’t repeat as well, such as a payout of PTO as well as a one week lag in my paycheck (when I quit, I will get paid a week later).  I estimate that this residual, “hangover,” compensation from my full time job will amount to about one month’s full pay.

These early years are when the Christian Health Sharing plan comes in especially handy.  There are no fluctuating subsidies with these plans, so our rate will remain the same or increase a bit, but we won’t have large swings.  Therefore, we can convert IRA’s at our will and not worry about law changes to the affordable care act.

Useful Links:                                                                                                                                                       Roth Laddering                                                                                                                                        Traditional to Roth IRA Conversion Strategy

Years 6, and later, withdrawals

We will fund these years through a combination of financial maneuvers.  Assuming we have no work income, to be conservative, we will withdraw most of our budget from prior year’s Roth IRA conversions (contributions only from years 0-5 above).  I estimate there will be a small gap in need, and we will take out some funds from IRA’s early and pay a 10% penalty on these small amounts.  Although this sounds onerous at first, our taxes will continue to be very low in these years, as our child tax credits will offset this penalty.  Due to this offset, most of our income will not be taxed during these later years.  It is entirely possible that self employment or part time work may offset all or part of these small penalty amounts.  For example, my spouse has expressed interest in part-time work in one of her passions once I retire.  For myself, I may work seasonally, if need be.  The beauty of our early retirement plan is it doesn’t rely on us working. However ,at ages 41 and 40, we still have a few good years of work yet if we want or need to.

Inflation

We assume a 2%, compounded, inflation rate per year in our forecasting and budgeting.

Departing Words

I hope that you have learned something from my real time checklist of what we reviewed for our work place exit and early retirement.  I would be remiss if I didn’t say that I wasn’t a wee bit nervous about it. However, there are many things in life I have been nervous about due to lack of experience.  In almost all cares, my fears were much larger than reality.  My recommendation is to plan your early retirement, and do not let fear of the unknown hold you back.  Your incredible knowledge, discipline and skills that allowed you to be in such a wonderful place in life will be the exact same skill set that will serve you well beyond your indentured servant years.

Your incredible knowledge, discipline and skills that allowed you to be in such a wonderful place in life, to be able to retire early, will be the exact same skill set that will serve you well beyond your indentured servant years.

What things will you do to prepare for financial independence?  What’s holding you back?

10 comments

  1. This is really interesting and I wouldn’t have thought about not contributing b/c of the once a year contribution that you have but it totally makes sense. My wife and I have been maxing out our IRAs and 401k in order to reach FIRE as quickly as possible. I think we’re a few years away unless the market goes into total disarray but I’m definitely looking forward to it.

    1. Thanks. As an FYI, when I first started working here, our company match was after the end of each quarter. In such a scenario, I would contribute until the end of the quarter, prior to my departure. I have been here over 6 years, and the fringe benefits have been slowly deteriorating, and not in my favor. 🙂

  2. The best thing I can do is continue that “save grind.” Thanks for the inspiration, I’m still over a decade out, but I draw inspiration from the military P-6 planning.(Proper Planning Prevents Piss Poor Performance).

    1. That’s the key, save pre tax, pre tax, pre tax. Save as much as you can in the higher tax brackets, and pull it out later in your retirement years in the lower tax brackets. Since you are a government employee, you likely have a 457 plan. Unlike a 401k, you need not worry about a 10% penalty for early withdrawals. That’s a great option to have, and I don’t have it.

  3. Nice job of noticing that the match by your employer doesn’t go into effect until December 31st…that’s sneaky. But given your situation and the fact that you wouldn’t receive the match at all, I think your choice of not contributing to a 401k makes sense. This is actually something that I’m going to look into myself now, so thank you!

  4. I’m throwing everything I’ve got into my business. I figure that if this works out, I’ll never have to work a day again. I’ll have enough money to do whatever I want, whenever I want. If it doesn’t work out, I’m still young. I can always head back to the corporate world.

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