If you're looking to retire early,
you're going to need what's called a bridge account or a gap account.
This is designed to bridge the gap from when you retire until you can access your 401k or your ira.
Hey guys! I'm Tim Wolffe, welcome to my channel. Go ahead hit the SUBSCRIBE button if you want to
see more videos like this and hit the LIKE button so that this video gets pushed out to more people
and I can continue to make these videos. So when we're talking about planning for retirement you
probably have an employer-sponsored plan such as a 401k, 457b, 403b, or a TSP. You may also have
an ira like a roth ira or a traditional ira on the side as well. But all those accounts because
they have awesome tax benefits, which you should definitely be taking advantage of, but because
they have those tax benefits the government mandates that you cannot withdraw the money in
those accounts until age 59 and a half. Under most circumstances. If you do withdraw it before age 59
and a half you're subject to face a 10% penalty and watch to the end of the video and I'll give
you a bonus tip on a legal loophole that you can use to withdraw money before age 59 and a half.
And that's exactly where a bridge account comes into play. If you want to access the money before
that age, say you want to retire age 40 or 45 or 50 even 55, you're not going to have social
security checks coming in yet and you're also not going to have access to those accounts. So what
you need to do is have a separate account that you can start withdrawing money from whenever you need
to. And that account needs to cover the gap of expenses you're going to have from when you choose
to retire early until you hit age 59 and a half and start getting your employer-sponsored plans,
your iras and then eventually social security. And the earlier you retire the more years you're going
to need to live off of this bridge account. So how does the bridge account function? Most of the
time it's going to start in the form of a regular brokerage account through a company like charles
schwab, e-trade or fidelity. Pick whatever company you're comfortable with and you want to go with.
They all have regular brokerage accounts. This is completely separate from any retirement ira or
401k you may have with the same company. You may have heard of a brokerage account before because
that is how people do day trading and trade stocks. To put money into a brokerage account
you just deposit money from your bank account into your e-trade or your fidelity account then
you can go ahead and invest it in stocks, mutual funds, or index funds. And continue to contribute
monthly to that bridge account until you hit the goal that you're trying to reach or when you hit
the age that you're ready to retire early. So once you have a pile of money in there and it's fully
invested and it's gaining interest and you're ready to use that money. Well because there's no
tax benefits necessarily for a brokerage account, there's no restrictions on when you can pull
out the money. You can deposit money in there, trade stocks on a day-to-day basis and put it in
this week and pull it out the following week.The only tax you have to think about is what's called
"long-term capital gains tax"- if you own the stock for more than a year then it's an advantage
because you won't have to pay your current income tax rate. So if you make $85,000 a year
and you pay taxes at 22%, any profit that you made in that bridge account when you withdraw it
the profit is going to be taxed at 22%. But if you own the stocks within that bridge account for more
than a year you only have to pay long-term capital gains tax. Which could range from 0% percent to
20%. For most people it's probably going to be 0% to 15. Which like I said if you're making $85,000,
getting taxed at 22% now you're only paying 15% taxes. So you save paying an extra 7% on the
profits that you made. The original money that you deposited into the bridge account you don't
have to pay taxes o. The taxes were already taken out when you got that money through your paycheck.
We're just talking about paying taxes on the profits. So as you begin to withdraw this money
when you're in early retirement you're going to pay long-term capital gains tax and what's left
over is what you're going to need to live off of. So if you have monthly expenses that are $3,000
a month and you're going to retire at say age 50 (10 years early) we need this account to last
for 10 years. Which means we would need $360,000 dollars in that bridge account. So you have that
goal of $360,000 and if you're age 25 right now you need to calculate how much you need
to save from age 25 to age 50 in order to have $360,000 in your bridge account when you hit age
50. Which for this example would be about $275 every month if your investments are getting 10%
interest every year. So that's one way to deplete the bridge account from the time you retire early
to the time that you have access to your 401k. However a better strategy would be to use that
$360,000 that you have saved and keep it invested and if it continues to get 10% a year that's
$36,000 in profit it'll make every year and you withdraw the $36,000 in profit which would be
$3,000 a month for you to live off of. So you never actually touch the nest egg of the bridge
account just like you're never supposed to touch the nest egg of your 401k, you just live off of
the interest that it makes. Obviously though you need to account for things like inflation which
on average is about two to two and a half percent every year. So you can't withdraw everything that
your bridge account makes but you get what I'm saying,. The strategy is you're still just living
off of the interest it's making so if you want to retire really early like at age 35 and you
want to make $60,000 a year to live off of you're probably going to need around $1 million dollars
in your bridge account by the time you retire. In order for that bridge account to last you can't
withdraw the full 10% it makes every single year. I'd recommend withdrawing more conservatively like
6%. So if you have a million dollars and it makes a hundred thousand dollars every year,
if you withdraw sixty thousand dollars and leave the other forty thousand dollars of profit in
there to continue to account for inflation and protect you on years that aren't going to gain
10% then that bridge account will help sustain you. But it's an equation that you have to figure
out yourself because it depends exactly on the age and your living expenses and when you're going to
retire early and. If you need help calculating this you can always comment below and I'll
calculate your exact numbers for you to let you know how much you need in your bridge account. But
the function of the bridge account is going to be a chunk of money that you're going to live off of
until you hit social security or your 401k or both. But when should you actually start investing
in the bridge account? So the short answer when you should start investing is when you feel
comfortable that you're investing enough into your ira and your 401k and you still have extra
money left over. Put it into the bridge account. A longer answer would be something such as put at
least 15% away towards retirement, talking about retirement accounts like the ira and the 401k,
everything above 15% of your salary (the more the better) put that towards a bridge account.
So if you do 15% of your salary towards your 401k and you can afford to do another 5%,
so you're investing 20% total of your salary every paycheck. Then put the 15%
in your 401k so we know the future is locked in and we're getting maximum benefits out of a
tax advantage account such as the 401k. Then take the other 5% and start investing it in the bridge
account. So that you could retire at say age 55 instead of waiting until age 59 and a half.
Something else you could think about is investing in rental properties or a business that's also
going to pay you money without having to have any age restrictions on it. So maybe instead of having
$360,000 in a brokerage account you wanna save up three hundred sixty thousand dollars of real
estate that's going to pay you three thousand dollars of profit a month. Whatever form your
bridge account takes on whether it be investment real estate, a business or a brokerage account (a
brokerage account probably being the most easy to understand and most hands off) regardless,
whatever it is the sooner you start investing in that the more profitable it's going to be because
the more compound interest you're going to get. So first cover the bases of your 401k and your ira
and then immediately shift focus to your bridge account. So that you can retire as
early as possible. And start the investments in your bridge account more than a year out so
that you can benefit from long-term capital gains tax and like I mentioned in the beginning of the
video here is the BONUS TIP for you to withdraw money before age 59 and a half using a roth ira.
So with a roth ira as long as the account has been open for five years or more you can withdraw your
own contributions at any age. So the money that you physically put in (whether you're putting $500
a month) into your ira from age 25 to age 60 at any point after five years all the contributions
that you personally put into a roth ira you can withdraw with no taxes and no penalty.
Why? Because you already paid taxes on this money
when you got it through your paycheck. The government already got their taxes.
So if you've been contributing to a roth ira for a long time you may have a hundred
thousand dollars or a couple hundred thousand dollars of just your own contributions in your
roth ira and you can withdraw that money slowly out of your roth ira until you hit
age 59 and a half. So that's the basics of a bridge account the important thing being
make sure you least think about it if you want to retire early because what you don't want to do is
just save up money in your bank account gaining no interest whatsoever and not be able to retire
early because you don't have enough in your bank account. Get the money in a brokerage account, get
it invested, have it start compounding interest and whenever it hits the number that you need,
the pile of money that you need to live off of, boom that's when you can retire! Regardless of
what age you are. Thanks for watching this video guys I will see you next monday. Be
sure to SUBSCRIBE and hit the LIKE button it helps out tremendously! I'll see you in the next video!