Retiring early doesn’t just need to be a dream. With a solid financial planning checklist and disciplined savings habits, you can make early retirement a reality. Below, we’ll explore the steps and strategies needed to retire before the typical retirement age.
Evaluating Early Retirement Goals
Before you can create a financial planning checklist for early retirement, it’s first necessary to define your early retirement. What’s your target age for retiring? What hobbies or traveling do you hope to do? What lifestyle do you want to maintain? Where would you like to live?
These and other questions will help you clarify your early retirement. Once you have an age, desired lifestyle, and other details, it’s then possible to calculate what you’ll need and strategize how you might save and invest toward that amount.
Additionally, having a clearly defined early retirement can help you stay motivated. Retiring early takes a lot of work and discipline. It can be motivating to know what you’re working toward each day.
Financial Planning Pre-Check List Before Retirement
After defining where you hope to be financially, the next step is to check where you currently are. Use a financial planning checklist to take stock of your situation. What are your:
1. Current Savings and Investments
Review all of your current assets, including savings accounts, retirement accounts, real estate, annuities, and any other investments you might have. You should also note the current value of your home (if you own). You may need to adjust your savings rate after reviewing your current assets.
2. Debt Levels
How much debt do you currently have, and how much is the interest on it? Be sure to include credit cards, student loans, car loans, home mortgages, and all other loans that you have.
You’ll probably want to pay off high- and moderate-interest debt, as the interest payments negatively impact cash flow. Whether you pay off low-interest debt depends on your situation and feelings toward being debt-free.
3. Income Streams
Consider both current income and potential passive income sources that could support you in retirement. These could include Social Security, a pension, annuities, sustainable savings withdrawals, rental payments, royalties, or other sources.
A financial advisor can help you calculate potential Social Security payments, and assess your other income sources.
4. Emergency Fund
Make sure you have an adequate emergency fund to cover unexpected expenses, such as unplanned home or auto repairs.
A common recommendation is to have 3-6 months of living expenses in liquid assets that can be quickly accessed. You might choose to have a larger emergency fund in some cases, though.
Planning Steps for Early Retirement
With a clear understanding of your current financial position and retirement goals, you can begin to lay out the steps needed to achieve early retirement:
- Budget Frugally: Almost no one gets to retire early without a budget, and it’s often a fairly frugal budget relative to income level. Keeping expenses low now allows you to save more. Keeping expenses low in the future means you’ll need less to sustain your desired lifestyle during retirement.
- Aggressively Save: You’ll likely have to save much more than the traditional 10-20% of income. A savings rate of 30-50% is fairly common among the FIRE community (Financial Independence, Retire Early).
- Invest Smartly: Develop a robust investment plan that balances growth with risk management. Don’t make the mistake of being too aggressive simply because your time until retirement is shorter, but also don’t assume you can get to early retirement without successfully investing. (Investments carry risk, and success isn’t guaranteed.)
A financial advisor or investment advisor can help you develop an investment strategy according to your early retirement goal and risk tolerance. Connect with a financial advisor if you don’t already have one. - Bridge the Gap: Depending on your age at retirement, you’ll likely have to cover a health insurance and/or financial gap.
Medicare generally isn’t available until age 65, so you should find a health insurance solution until then. Tax-advantaged retirement accounts normally can be used without penalty until age 59½, so you should have another source to draw from at least until then (if not longer). - Review and Adjust: As your financial situation and goals evolve, review and adjust your plan accordingly to ensure you stay on track for early retirement.
You’ll also need to evaluate how major costs can be handled later in retirement. Specifically, have plans for managing possible healthcare costs and long-term care costs later in life. Supplemental health insurance and long-term care insurance often can help.
Optimizing Your Early Retirement Strategy
A few simple tactics can help you set up for a successful early retirement. You may be able to optimize your strategy by:
- Long-Term Investing: Try to use your tax-advantaged accounts (especially Roth IRA and HSA) for long-term investing. This can help you realize the maximum tax benefits, and may be a viable way to cover some larger costs later on in retirement.
- Maximize Contributions: Take full advantage of any IRA, 401(k), HSA, or other tax-advantaged account you’re able to. Contributing the maximum amount allowed to each account can significantly boost your retirement fund.
- Tax-Efficient Withdrawals: Strategically withdraw from your accounts, in order to minimize your tax liability during retirement. A broad guideline is to use taxable accounts, then tax-deferred accounts, and finally tax-free ones. Consult with a financial advisor or tax professional to confirm that this is the right order for you, though.
- Delay Social Security Benefits: Delaying your Social Security benefits can significantly increase your monthly income, especially if you wait until age 70. Waiting so that your monthly payments are higher will provide more guaranteed income during the latter portion of your retirement.
- Side Work: Consider side work, either now or once semi-retired. This could be a part-time job, regular side hustle, periodic odd job, or possibly consulting in your field.
View side work as a way to boost your income while having a little fun. Consider jobs in destinations where you’d like to visit, or side hustles related to hobbies you have.
Leveraging Assets for Tax-Efficient Income Generation
In addition to strategically withdrawing from various accounts, there are some other strategies that can help lower your tax liability.
1. Backdoor Roth IRA
One common strategy for high-income earners is the Backdoor Roth IRA. This involves opening and fully funding a Traditional IRA, which is then converted to a Roth IRA for tax-free growth. Gains within and withdrawals from Roth IRAs aren’t taxed.
You can only contribute directly to a Roth IRA if your modified adjusted gross income (MAGI) is below the limit. The 2024 limit is $146,000 for single tax filers and $230,000 for those filing jointly. A backdoor Roth is an indirect way of contributing if your income is above the applicable limit.
2. Capital Gains Tactics
There are at least a couple of ways that capital gains might be handled so that the capital gains tax owed is minimized.
First, harvesting capital gains strategically times when capital gains are realized since they’re only taxed once realized.
At a most basic level, it can be helpful to hold an asset for at least 1 year, so any gains are taxed as long-term capital gains rather than short-term ones. Long-term capital gains are taxed at a lower rate. A more advanced approach times the sale of assets so that gains are realized in years when income is low, and thus the gains might be taxed at a lower rate.
Second, tax-loss harvesting uses losses from financial investments to offset other investments’ gains. This has long been limited to a maximum of $3,000, but it’s a way to get something from an investment loss.
While it can be prudent to manage capital gains in a way that reduces tax liability, it’s usually not wise to hold onto a bad investment simply for the tax benefit. A financial advisor can help evaluate how an investment is performing, and whether you should wait for a specific tax benefit before realizing any gains.
3. Asset Location
What types of accounts different investments are held in can change how the investments are taxed.
You might put high-growth investments into a Roth IRA so that any gains won’t be taxed. Investments that generate income more immediately could be better off in a tax-deferred IRA or 401(k), and a taxable account may be used for more conservative investments that likely won’t grow as much.
Along with recommending specific investments, a financial advisor can also suggest which accounts those investments might be placed in. If you’d like investment guidance from a financial advisor, use our advisor match tool to find one.
(Gains are not guaranteed regardless of what account they’re held in. Investments carry risk whether they’re in a Roth or almost any other account.)
How Working With A Financial Advisor Can Help You
Retiring early requires hard work and dedication, but also know-how. That’s where a financial advisor can help. They’re able to walk you through the decisions, provide investment guidance, and develop a plan that’s specifically tailored to your goals.
Financial investors have helped others get to early retirement, and they have the expertise necessary to show you the way. They’ll also continue to monitor your progress, encourage you along, and assist with making adjustments when necessary.
Connect With a Financial Advisor
If you’re aiming for an early retirement, let us at Invested Better help you along the way. Answer a few quick questions so that we better understand your goals, and then we’ll help you connect with the perfect financial advisor. They’ll be able to understand your situation, and show you the path toward the early retirement you’re aiming for.
General Disclaimer: The information provided on this site is for informational purposes only and should not be construed as financial advice. Invested Better does not guarantee the accuracy or completeness of the information provided. Please consult with a licensed financial advisor before making any financial decisions.
Investment Risk Disclaimer: Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results.
