Assets Outside Retirement Accounts

There are several numbers and ratios about your finances that you may not be aware of and may not have thought about, but they could turn out to be critical to you successfully being able to implement adjustments and changes to your plan mid-stream.

One of those less common numbers is called your liquid net worth. It is the assets that you have outside retirement accounts that are invested in the type of vehicle that you can turn into cash quickly, so real estate and your business don't count and neither do other investments that aren't readily turned into cash.

I’m not sure there is a rule-of-thumb percentage to keep outside of retirement accounts because it really depends on the family, their situation, and what they might need those funds to cover. And don't forget to include the unexpected, which can never be precisely planned for, but you can put yourself in a position to be prepared and better handle unexpected events.

A couple of years ago I had a conversation with a client when he was age 51. At that time he had a net worth of $5M.

About $2M of that was in real estate between their family home and some rental properties. The remaining $3M was in mutual funds and other liquid assets, but over 90% of that was in retirement accounts, leaving only $300,000 available in his reserve accounts.

He had a family situation come up where he wanted to retire early and since he was only 51, he couldn’t access the retirement accounts without the early withdrawal penalties.

We looked a the $5M in assets and sliced and diced it in several different ways.

Over 1/2 of his $5M was outside retirement accounts, but with $2M being in real estate, that portion was illiquid and thus didn’t really help.

He had $3M in mutual funds and other liquid investments, but 90% of that was in retirement accounts and thus he couldn’t access without penalty before age 59 1/2.

In the end, only the $300,000 was accessible out of the $5M, so about 6%, and that wasn’t going to create nearly enough cash flow to get him the 8 years he had until age 59 1/2 when he could access the retirement funds without penalty, so we had to look at other avenues.

At that point everything was on the table as a potential solution and there are a couple of more complicated and exotic ways to access retirement funds early without penalty like the Rule of 55 and IRS code 72(t) which we researched and ran the calculations.

Based on the net worth of $5M, you might think no problem retiring early, but because of the location of those assets, he only had $300,000 available in reserve and thus early retirement wasn’t possible the way he had envisioned, so we had to work together and come up with alternate solutions.