Many of us want to retire early and many of us, regardless of our wants, are forced to due to health-related issues or job loss. It’s best to plan on early retirement, even if you plan to keep working past the full retirement age (66 or 67, depending on when you were born).
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How can the middle class best plan for an early retirement? Consider these six expert-recommended moves to make ASAP.
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Eliminate High-Interest Debt
Anybody who wants a life that isn’t gripped by ever-worsening financial crises needs to be laser-focused on eliminating high-interest debt (the kind that comes with credit cards). But middle-class folks planning an early retirement really can’t afford to delay taking action here. Make eliminating high-interest debt a top priority.
“Before accelerating your savings, it’s critical to address any high-interest debt, such as credit card balances or personal loans,” said Stoyan Panayotov, CFA, wealth advisor and founder at Babylon Wealth Management. “Carrying this kind of debt can significantly hinder your ability to build wealth, as the interest charges often outpace potential investment returns.”
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Build Wealth Across 3 Types of Tax-Advantaged Accounts
It’s important to be focused on saving for retirement starting the minute you start earning money, but “saving” is a pretty vague term. You need to think about how you save, too.
“For the middle class, building wealth across three types of accounts can give you flexibility, control and serious tax advantages,” said Trevor Houston, CEO at ClearPath Wealth Strategies, LLC.
Those three accounts:
Tax-deferred (401(k), IRA)
Tax-free (Roth IRA, HSA, cash value life insurance)
Taxable brokerage
“Retiring early means you’ll need flexible access to your money, especially before age 59½,” Houston said. “Having the right mix of accounts gives you more control over how and when you withdraw funds, no matter what tax rates look like down the road.”
Optimize and Consolidate All Forgotten Retirement Accounts
How many companies have you worked for where you had an active 401(k) plan? What did you do with the investments in those plans when you changed jobs? Make sure you keep track of this money and ensure it’s still performing optimally.
“Yes, you can leave it where it is, cash it out (with consequences) but when you bring them all together into one IRA or new employer plan, you’re not just getting organized, you’re taking back control and setting yourself up for a smarter, more strategic future,” Houston said. “Some financial institutions provide cash incentives to customers who transfer or roll over their funds. We’re talking a few hundred to even a few thousand dollars in real incentives just for consolidating.”
Don’t Let Your Home Trap Your Wealth
As Derek Russell Munchow, CFP, managing partner at Augustus Wealth, put it, in early retirement, “flexibility matters more than square footage.” Be open to changing your living arrangements to best support your early retirement plan. And don’t wait until you retire to take action.
“Locking too much of your asset base into an illiquid home can limit your options,” Munchow said. “Downsizing, relocating or keeping your costs low might be what unlocks your freedom years earlier.”
Use the 3.5% Rule Instead of the 4% Rule
How much do you need to retire? What’s the magic number? You can figure this out by using the 4% rule — if you want to retire “on time.” If you want to retire early, be more aggressive.
“The 4% rule in a nutshell means you can withdraw 4% of your portfolio balance at the beginning of retirement, then adjust that amount for inflation each year thereafter, with a low probability of running out of money before you die (based on historical 30-year retirement periods),” said Jake Skelhorn, partner and wealth advisor at Spark Wealth Advisors. “However, for the middle class who want to retire early, a more conservative withdrawal rate may make sense, since their retirement period may be longer than 30 years.
“Assuming a 3.5% withdrawal rate, take your expected annual expenses in retirement, and divide by .035 to arrive at a rough estimate of your ‘retirement number,’ i.e. $50,000/.035 = $1,428,571,” Skelhorn said. “If you expect to have any other fixed income sources, subtract this from your annual expense number.”
Think About the Life You Want, Not Just About the Money You’ll Need
When planning for retirement, early or not, it’s easy to get wrapped up in the math of it all and to fixate on the elusive magic number you need to reach to ensure comfort. Remember that part of a smart retirement plan isn’t just about the number. It’s about your life.
“Early retirement goes beyond mathematical calculations, it’s about building a life that actually means something,” Houston said. “Your strategy should support your purpose, your relationships and the kind of freedom you want to experience, not just your bank account balance.”
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This article originally appeared on GOBankingRates.com: 6 Smart Ways the Middle Class Can Retire Early
