BRIDGING THE GAP: Navigating the Decade of Early Retirement
"Early retirement isn’t just about having enough money, it’s about bridging the gap between freedom at 50 and access at 59½."
Retoro Capital Investments
Retire at 50: Thrive Until 59½ The Dilemma of "The Gap"
My husband and I retired early at ages 48 and 46. While this is a milestone worth celebrating, it requires careful planning. Like us and every American with an Individual Retirement Account (IRA), your IRA remains inaccessible without penalties until 59½. If you want to retire around age 50, as most of our investors do, the 10-year gap requires a plan to cover living expenses while preserving long-term growth.
As fund managers at Retoro Capital Investments, we’ve navigated this ourselves, and each partner has managed early retirement challenges in different ways. Supporting family needs with minor children still at home, young adult children who haven't quite become financially independent, caring for aging parents or special needs children, makes investing for the future a challenge, especially after leaving a job with a steady paycheck in favor of time freedom. We also have several investors who have retired early or have goals to retire early. We’ll share observations from these various perspectives on balancing investing through taxable accounts for cash flow alongside Self-Directed IRAs (SDIRAs) for tax-advantaged returns, using private lending with us at 10-12% on a $2M portfolio as the example returns.
We’re not financial or tax advisors, but we do use professional advisors ourselves for tax and financial planning. The information shared here is anecdotal based on our experiences and general observations, for educational purposes only and not intended as personalized advice. Tax laws and investment outcomes vary widely, so we strongly recommend consulting competent professionals, such as a certified financial planner or tax advisor, who have experience with goals similar to yours and can provide guidance tailored to your unique situation. Consider this your guide for strategies to consider!
The Gap Decade Defined: Why It’s Challenging
The gap decade spans from age 50 to 59.5, when early retirees can’t access IRAs without penalties, relying on taxable accounts instead. Based on 2025 trends, early retirees often need $80K-$100K/year, and with a $2M portfolio, a 10% withdrawal can meet this while preserving principal. How much do we keep in taxable accounts versus retirement accounts and what could possibly work for you?
Living Off Taxable Accounts: Your Gap Decade Strategy
Taxable accounts offer accessible funds for the gap decade. Our early retiree investors rely heavily on private real estate lending for steady 10-12% APR payments. (Retoro Capital offers 10% for under $200K deals and 12% for $200K+ investments, secured by first-lien property collateral.)
Some consider allocating 40-50% of their portfolio to taxable accounts (such as $800K-$1M of $2M) for cash flow, with the rest in SDIRAs for growth. While preserving capital without overly drawing down accounts is important, you don't want to have to have $2M in taxable accounts with another $2M in retirement accounts. Consider drawing down taxable cash accounts during the gap decade to maximize cash flow and an active lifestyle while IRA accounts are compounding and waiting patiently for you to turn 60. Discuss ideal allocation splits and total dollars invested for your desire income with a financial advisor experienced in early retirement planning and private market investing.
Becoming a Real Estate Professional (REPS): Explore Extra Tax Benefits
Like we have, some investors explore attaining Real Estate Professional Status (REPS), an IRS designation allowing real estate activities to be treated as non-passive, potentially enabling depreciation deductions to offset active income (IRS Topic No. 425). Without this designation, depreciation only offsets passive income, so using depreciation to offset all active income is a huge tax savings.
REPS requires spending 750+ hours/year on real estate and more than half your working time, plus material participation in a legitimate real estate business. Managing a portfolio outside an IRA can count toward hours if you own property (like rentals or syndications), run a real estate business such as an agent, mortgage broker, or lender, as long as you run the underlying business. This business and depreciating properties would mostly be in addition to passive limited partner investments in other businesses you don't own or manage. Remember, the business and hours worked must be documented in case of IRS audit or litigation: this must be a legitimate business, not a game to avoid paying income or capital gains taxes. Also, the investor must own real property that is depreciating to have anything to offset passive and active income.
In our experience, REPS has helped us offset taxable income, such as interest from private loans, during the gap years before we are old enough to access our retirement accounts. In addition, the fulfillment and even stress of running a business keep us active and engaged while leaving plenty of time to spend relaxing with family or volunteering. Our goal was to have a lifestyle business, not one that took over our lives. Explore the REPS option with a tax expert familiar with your situation.
Running a real estate business for REPS cannot be done inside your IRA. Investments in SDIRAs must be passive, hands-off, and arm's length. REPS could be a gap strategy for 10 years while compounding passive investments inside your retirement accounts.
SDIRAs: The Long Game for Post-Gap Growth
SDIRAs provide both tax-deferred growth (Traditional) or tax-free growth (Roth), and you can open any type of investable account to be self-directed (Solo 401(k), SEP, HSA, Coverdell, etc.)
Using the example of private lending at 10-12% returns, we’ve observed investors allocating $1M+ of a $2M portfolio to SDIRA for 12% compounding (an average of $120K/year of compounding growth), targeting $3M+ in an IRA by age 59 ½.
While spending for expenses and lifestyle out of taxable cash accounts, not touching the gains inside an IRA can convert a 12% APR into an internal rate of return (IRR) of 15-20% through compounding by reinvesting during that 10-year waiting period. This approach builds a strong post-gap portfolio that grows while it waits for you. You could then live on taxable cash accounts, either drawing off only the gains, or even drawing them down partially or fully during that decade. Discuss SDIRA options and allocations with a professional who understands your retirement timeline.
Lifestyle Design: Retire Sooner or Maintain Lifestyle?
For us, the gap decade prompted a lifestyle choice. Some retirees cut costs by reducing expenses to retire at 50, while others invest more or work a few more years to support a the same income they had while working. We’ve definitely left income on the table by retiring early, and that sacrifice took planning. It was worth it for us as our children were homeschooled and location independent, and we wanted to take advantage of that while we still had minor children at home. Our partners have opted to run more active businesses and deeply integrate into their local communities. What are your priorities?
Retiring early doesn't have to mean you no longer have a budget and can buy a private jet. It means your basic bills are paid by passive income, and you then have options to continue working or building a business full or part time, take a sabbatical, and spend time on non-professional pursuits. Your gap decade depends on your priorities and how much you have invested at what rate of return. Reflect on this with your partner, family, and a financial planner.
Growth During the Gap Decade: Sustain Portfolio Value
How do you keep from killing the golden investment goose? What withdrawal rate should you use? First, preserve your portfolio by withdrawing only earnings, such as spending 10% APR from taxable lending, no compounding, for living expenses, and letting the full 12% compound in SDIRAs. Splitting this across publicly traded securities on the stock market and privately held assets such as rental properties and private business loans is a common choice for most investors.
A $2M split might yield $100K/year from taxable accounts while growing to $3.5M+ by 59 ½. We’ve seen investors reinvest SDIRA returns and diversify taxable investments into secured loans. At 12% compounding, $1M in SDIRA reaches $3.1M in 10 years, and adding REPS could enhance tax efficiency. Mitigate inflation and downturns by considering investing with us in 10-12% APR loans. We can meet with your professional advisors to discuss how we fit into your overall financial and early retirement plan.
Free Tools and Tips for Gap Decade Management
Build a reliable income with diversification across public and private markets inside and outside your IRAs. Some explore Roth conversions during the gap for a tax-free legacy. Invest $200K+ with Retoro for 12% APR in your SDIRA.
Read our free guide with practical tips on creating and using an IRA to invest with us and other private companies https://retorocapitalinvestments.com/sdira-freeguide
Also, use our free retirement calculator to see how much you need to invest to hit your desired income and timeline. Play around and adjust the inputs to create a custom plan https://retorocapitalinvestments.com/retirement-calculator
Review our past newsletter issues on using SDIRAs to invest, as well as how private lending works at https://www.linkedin.com/newsletters/retoro-investor-insider-7112950671234011136
Final Thoughts: Bridge the Gap, Build the Future
The gap decade is manageable with a balanced split between taxable cash flow and SDIRA growth. Explore REPS for tax benefits, design your lifestyle, preserve capital, and sustain growth with smart planning. Consider private real estate lending with us for some of the highest interest returns in the industry.
Ready to talk more? Book a call with Retoro Capital to discuss investing a portion of your your portfolio with us. We make it easy to earn the easiest money of your life.
