WHAT IS A BRIDGE ACCOUNT? (How To Retire Early) - YouTube

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!