When most of us think about retirement we think about the age 65.
What if this didn’t have to be the case though? What if our retirement age was up to us? In this post we uncover 10 ways (plus a bonus way) to retire early and begin the life of a freedom.
This a multi-faceted piece of retiring early. The first part of it is understanding what you want retirement to be. Be completely honest with yourself. Is your idea of retirement to sit on the front porch all day reading a good book and relaxing? Do you want to travel the world? Do you have aspirations of starting your own business? All of these different lifestyles have different financial needs.
The other part of knowing thyself is to know your current situation. Once you know what your retirement will look like and you know what the financial needs will be, then we need to figure out how close you are. Are you 10%, 50%, 75% of the way there? Again if you don’t know how close you are to the target, how will you know when you hit it? You could already be there even. You won’t know until you complete this step.
The largest financial decision you will make in your life is your spouse. Period. (Yes, far larger than your house.)
Below we will discuss an amazing concept of “protecting your assets”. No other choice has the potential to instantly make two thirds of your wealth disappear. (You get 1/3, your spouse gets 1/3 and your lawyers get 1/3...ok, so that may not be technically true, but you get the picture.)
Wisconsin is a community property state. Prenups are possible, but not as robust as they are in some other states. If you're afraid of tying your fate to another person without a prenuptial agreement it may be a sign that they aren't a wise choice. Choose carefully.
When most people think about ways to save money, the conversation instantly shifts to ways to cut spending. (Pack a lunch, get a car with better gas mileage, drop the dish/cable, etc. for more ideas check out the 12 Ways to Save $1,200/year in, Conversations that Count) That's only 1/2 of the cashflow conversation however.
The other half is ways to earn more income. Part time jobs, starting a business, consulting gigs, online tasks, selling items you don't use anymore, going back to school for a certificate or degree for a promotion or more job options, the list goes on and on.
What are your largest expenses? Most people say their housing, and then they aren't sure. What about taxes? For the average American, this is one of their largest expenses.
Think about it, not just Federal Income Tax (Though that's a huge one) State Income Tax, Sales Tax, Property Tax, Capital Gains Tax, FICA/Payroll Tax...it's a HUGE part of your expenses.
I can't tell you how many times I've seen someone working with a discount tax preparer or a software program go to a tax expert like a CPA and be shocked at the tax savings they've been missing. There's no substitute for an experienced expert.
In Conversations that Count, a chapter that began with the quote “You cannot manage debt you can only destroy it.” This is true, but when it comes to mathematically optimizing/accelerating retirement, there are different types of debt.
Any credit card/high-interest debt should be your number one focus for any discretionary funds. I don’t have any investments that can guarantee you an 18% return, but when you pay off $1 of credit card debt principal, you just pocketed 18 cents of interest you won’t have to pay on that money over the next year. I would say any debt over 6-8% is an automatic elimination candidate.
The other type of debt (sorry, Mr. Ramsey) is “Good” debt. There’s two types of “good” debt.
First, Business/Opportunity debt – Borrowing money for an opportunity, a business you know well, etc.
The second, “Cheap Money.” Low interest debt. If you have a mortgage, you already have a low rate if you took it out or refinanced it in the last several years. Also, you have a tax deduction on mortgage interest that reduces the effective interest rate you are paying. For example, if you have a 4% mortgage rate and are in the 15% tax bracket, you are really only borrowing that money at 3.4%.
You may be wondering "How can a big emergency fund help me retire earlier?" Simple, emergencies don't result in large balances of high interest debt if you have a sufficient emergency fund. You are also much more comfortable saving large portions of your income in longer term vehicles when you know you have a “war chest” standing between you and uncertainty.
How big is big? Well, the industry generally recommends 3-6 months of your expenses. At the very least we recommend 6 months to a year.
A large “cash stash” will allow you more flexibility in every area of your retirement plan.
If you want to retire early, you don't want to use vehicles that punish you for doing so. For example, Individual Retirement Accounts (IRA’s) generally only allow penalty-free access after age 59 ½. Doing so would normally accrue a sizeable penalty of 10% of distributions.
Did you know there are multiple ways of getting money out of these retirement accounts if you retire before 59 ½?
One is something called a 72(t). We typically will not recommend these because they are complex and inflexible.
The other way however, is inside your 401k. Most people are unaware there is exception to the early withdrawal tax if you are over 55 and no longer working at your company. You are able to make withdrawals penalty-free.
Finally, many people don’t know that contributions to a Roth IRA are accessible at any time, penalty-free. For example, if you contributed $50,000 to a Roth IRA over a long period of time and it grew to $100,000, you would have the ability to pull out up to $50,000 penalty-free, at any time.
This strategy is basic and powerful. $500,000 in the United States is much different than $500,000 in Costa Rica. $1 in New York City doesn’t go as far as $1 in Green Bay, Wisconsin. To turbo-charge your retirement date, look into other areas to live to get more bang for your retirement buck.
In 2015, the government took away a lot of the creative planning strategies for Social Security. This definitely hurts the benefit you can get from Social Security.
However, planning Social Security properly is still a hundred thousand dollar decision. Yes you read that right.
Planning Social Security properly could make the difference of hundreds of thousands of dollars over your lifetime. Don’t overlook it just because you read it was “broke”.
You can’t retire if you lose all your money. Shocking and insightful, we know. Protecting principal is all fine and dandy as a concept, but did you know?:
Return of your money is always going to be more important that return on your money. Often times people misunderstand that these two things go hand in hand. The reason that returns on the S&P 500 have been so atrocious from 2000-2013 is not because there hasn’t been upside movement. The real reason is that two massive downturns resulting in losses of -45% and -55% have rocked the market leaving crater size holes to climb out from.
Now it is unlikely that the average investor will be able to avoid all bear markets but even lessening the impact of these markets can have a significant effect. Invest with better tools, better systems, better advice, and……
Fix your own sewage back up without a plumber?
Wire your own house without an electrician?
Do your own heart surgery? Or hire a “discount” surgeon?
That’s fine if you would, but if you think hiring an expert is too expensive, try not hiring one. You’re stepping over a dollar to pick up a dime.
If you would rather pick up the dollar, click the button below. If not, no hard feelings. After all, we’re just talking about retirement here :)