What Does it Take to Retire Before 40?

Camilla, a teacher in her late thirties, is ready to pull back from full-time work and travel the world. Despite paying off significant student debt by teaching overseas, she has deep-seated money anxiety stemming from a difficult childhood and fears running out of funds. With $800,000 saved, Camila’s wondering how to withdraw her retirement savings in a tax-efficient way while ensuring her portfolio’s continued growth.

In this episode, Camilla sits down with Crystal, a Morgan Stanley Financial Advisor, and discusses her options, including tax-loss harvesting to offset capital gains taxes, Roth IRA conversions and a high-yield emergency savings fund.

For more information about this episode and the topics covered, check out our episode page and explore how you can connect with a Morgan Stanley Financial Advisor. 

DISCLOSURES

The conversation in this podcast is solely intended as a case study between a client/prospective client with a Financial Advisor and is not intended to serve as individualized investment or financial advice. No portion should be construed as a recommendation to employ any of the guidance contained within this podcast. Each investor has their own unique facts and circumstances and must determine what is appropriate for their own situation. Participants in this podcast are not compensated and are not affiliated with Morgan Stanley.

Investing involves risk, including the potential loss of principal invested.

Exchange-traded funds (ETFs) are subject to risks similar to those of other diversified portfolios. Although some ETFs are generally designed to provide investment results that generally correspond to the performance of their respective underlying indexes, they may not be able to exactly replicate the performance of the indexes because of expenses and other factors. There are also brokerage commissions associated with trading some ETFs. ETFs are required to distribute their portfolio gains to shareholders at year-end. These gains may be generated by portfolio rebalancing or other trading. ETF trading will also generate tax consequences. Actively managed ETFs are not guaranteed to accomplish their investment objectives and can lose money.

Dividend yields provide an idea of the cash dividend expected from an investment in a stock. Dividend yields can change daily, as they are based on the prior day's closing stock price. There are risks involved with dividend-yield investing strategies, such as the company not paying a dividend or the dividend being less than what is anticipated. Furthermore, dividend yield should not be solely relied on when deciding to invest in a stock.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally, the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

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Tax-loss harvesting: IRS rules stipulate that if a security is sold by an investor at a tax loss, the tax loss will not be currently usable if the investor has acquired (or has entered into a contract or option on) the same or substantially identical securities 30 days before or after the sale that generated the loss. This so-called "wash sale" rule is applied with respect to all of the investor's transactions across all accounts. There is no guarantee that tax-loss harvesting will achieve any particular tax result, or that it’s necessarily appropriate for your circumstances. Before implementing any tax strategy, check with your accountant or other U.S. tax advisor.

Roth IRAs: A 10% penalty tax will apply on funds converted to a Roth if those funds are withdrawn before five years have elapsed unless the owner is age 59.5 or another exception applies. A Roth Conversion may not be right for everyone. There are a number of factors taxpayers should consider before converting, including (but not limited to) whether or not the cost of paying taxes today outweighs the benefit of income tax-free Qualified Distributions in the future. Before converting, taxpayers should consult their tax and legal advisors based on their specific facts and circumstances.

IMPORTANT: The projections or other information generated by the Monte Carlo tool referenced within this podcast regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results.

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