Divorce the IRS

F.I.R.E. and Divorce the IRS: Building an Early Retirement Strategy

• James Miller

Share episode

Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.

0:00 | 7:03

In this episode of the Divorce the IRS Podcast, Jimmy Miller breaks down the F.I.R.E. movement, which stands for Financial Independence Retire Early, and explains why the concepts in Divorce the IRS can be especially useful for people who want to retire before the traditional retirement age.

Jimmy discusses why Roth accounts can be such a powerful tool for early retirees, including how Roth IRA contribution withdrawals, Roth conversion withdrawals, and Roth growth are treated differently under IRS rules. He also explains why having access to tax-free and penalty-free sources of income can help solve one of the biggest challenges early retirees face: accessing retirement savings before age 59½.

This episode also looks at the lifestyle side of F.I.R.E. Jimmy shares why learning to be happy with less, avoiding lifestyle creep, and saving a high percentage of income can dramatically change the retirement planning equation. He also explains why a successful retirement is usually about retiring to something, not just away from something.

In this episode, Jimmy discusses:

  • What F.I.R.E. means and why it has grown in popularity
  • Why Divorce the IRS resonates with people pursuing F.I.R.E.
  • How Roth IRA contributions can be accessed tax and penalty-free
  • The order in which money comes out of a Roth IRA
  • Why Roth conversions may help early retirees create future income
  • How Roth accounts compare to Rule of 55 and 72(t) strategies
  • Why lifestyle creep can make retirement harder to achieve
  • The importance of retiring with purpose, not just escaping work
  • Why real estate is often part of the F.I.R.E. conversation

Jimmy also mentioned his short video on the different types of F.I.R.E. You can watch that here:

https://www.youtube.com/watch?v=IcKHu8ygKg0

In the next episode, Jimmy will explore how real estate fits into the idea of divorcing the IRS.

Disclaimer: This podcast is for educational purposes only and should not be considered tax, legal, or financial advice. Please consult with a qualified professional before making decisions based on your personal situation.


SPEAKER_00

Welcome to the Divorce the IRS Podcast, the retirement income planning podcast designed specifically for those who want to pay the least amount of taxes possible and build a retirement income that lasts. Inspired by the best-selling book, Divorce the IRS, you get to go behind the scenes with financial planner, author, and speaker Jimmy Miller. Learn how to set yourself up to pay the least amount of taxes in retirement when you'll need your money the most. And now, here's your host, Jimmy Miller.

SPEAKER_01

Welcome. Welcome to episode 27 of the Divorce the IRS podcast. Today we're going to talk about FIRE, which stands for Financial Independence Retire Early, something that almost everyone would like to achieve. Divorce the IRS, the book, has become a popular read for those who embrace the FIRE philosophy. The FIRE movement has been around for some time, but it has recently been increasing in popularity, especially among millennials. This is a great movement, and there is no comparison to the feeling of freedom you gain once you become truly financially independent. People who embrace the fire philosophy, who read the first edition of Divorce the IRS, used to reach out to me asking if there was anything extra they should know as it relates to fire. I received so many inquiries about this that in the second edition of the book, I included a chapter specifically for the fire movement. The concepts in Divorce the IRS work really well for someone on a fire path. One of the biggest reasons is that the book and this podcast recommend the use of Roth accounts. If someone wants to retire early, it's hard to beat a Roth IRA for that. This is because any money you have contributed to a Roth can be withdrawn at any time for any reason without tax or early withdrawal penalties, which was the tax time bomb two we discussed in episode 11. It is only the growth that is locked up within a Roth IRA until you're at least 59 and a half years old. Another thing to know about why Roth accounts are so beneficial to the early retiree is that the IRS is very specific about the order in which money comes out of a Roth IRA. First, any money that you have contributed comes out, tax and penalty free at any age and with no minimum holding period. Once you've withdrawn all of your contributions, any Roth conversion money in the account comes out next. This money also comes out tax and penalty free after it's been in the Roth account for at least five years. That five years starts from January 1st of the year that the conversion was made. Now last, any growth or interest in the account comes out tax and penalty free once you're 59.5 years old or older and have had a Roth account open for at least five years. These rules allow for income to start from a Roth IRA at any time. If someone is using the 4% rule to take income from their Roth IRA, which is a popular retirement income strategy, it is unlikely they will have taken out all of their contributions and or Roth conversions before they're 59.5 years old. And if they have withdrawn their own contributions, they can always choose to stop withdrawals from their Roth accounts until they reach 59.5 years old. Now one of the bigger challenges that some early retirees face, besides how to fund their health insurance costs, is how to access qualified retirement savings before the age of 59.5 without the 10% early withdrawal penalty. We have discussed a few ways to approach that problem in recent episodes about the rule of 55 and using 72T strategies. Make sure you go back and listen to those episodes if you are serious about FIRE. Having money in a Roth account is just another great way to solve the early retirement income problem without the rules and restrictions that come with the rule of 55 or 72T strategies. After 25 years of helping people retire successfully, I find that one of the secrets to an early retirement is learning to be happy with less money. FIRE exemplifies this issue. By saving such a large percentage of income from an early age, the philosophy teaches people to be happy with less. Instead of allowing lifestyle creep, FIRE recommends that you save those raises to accelerate your journey towards financial independence. Lifestyle creep is one of the biggest problems when it comes to retirement income planning. It isn't rocket science that if you only need $50,000 to $75,000 a year to enjoy your retirement, it doesn't take nearly as much money to reach this goal as the person or couple that allowed lifestyle creep into their lives and has become used to and desires an income in the $150,000 to $200,000 range, which is what most people who I sit down with these days yearn for. Another secret I have learned over the years about having a successful retirement is that a person really needs to be retiring to something and not just away from something. The most successful retirement transitions that I see are almost always when people know what they want to do in retirement. They have a specific purpose and they're retiring with the goal of pursuing whatever it is that gives them that purpose. It can be a hobby, travel, volunteering, whatever. It just needs to be a passion that you're looking forward to doing in retirement. When I see or help people retire, and their main reason for retirement is that they just hate their job and they want to escape what they do for work, it's likely that the transition into retirement will be problematic. This group of people often finds themselves bored or lost in retirement. They often get depressed once retired. And this is the group I find goes back to some form of work most often in retirement. So keep all this in mind as you journey towards your retirement. If you're following the fire movement, reading Divorce CIRS, and listening to this podcast, I tip my hat to you. If you want to learn more about the fire movement, just look online and you'll be immersed in resources that can help you. I also have a short video about the many types of fire there are these days, which I'll link in the show description in case you'd like to check that out. Now many people who follow fire philosophies also consider real estate as a fire investment and for cash flow. In the next episode, let's explore how real estate works within the context of divorcing the IRS. So stay tuned and keep saving.

SPEAKER_00

Want even more ideas, tools, and resources on how to navigate your financial life? Check out all the resources on the Divorce the IRS website at divorce-the-IRS.com or the Bayob Wealth website at BayobubWealth.com and subscribe to the blog to stay up to date on issues affecting retirement income planning. Don't forget to subscribe to the podcast so you never miss an episode. Bayobub Wealth and Bayabub Wealth Abroad are DBAs of Bayobub Wealth LLC, a Florida registered investment advisor. This podcast is designed for general education purposes only and shouldn't be taken as legal investment or tax advice. You should seek out a qualified tax professional or licensed financial advisor to determine what is best for your personal situation.