By Jeff Rose | U.S. News
Early retirement rarely happens by chance. Like any other big goal, early retirement requires intricate planning, serious dedication and a whole lot of work. If your goal is retiring before age 50, the time to start laying the groundwork is now. Here are some steps aspiring early retirees should implement right away.
1. Make as much money as you can. Retiring early on your regular salary may not be easy if you don’t earn a lot. It helps to find ways to make as much money as you can. By boosting your income through investing, part-time work or some other means, you can increase the amount of cash you have and put it to work for you.
Of course, your early retirement goal will come easier if you start investing as early as you can. If your goal is retirement at 50, you need to start saving with your first paycheck. “One factor that makes early retirement much more difficult is the fact you have a lot less time to save,” says Taylor Schulte, a certified financial planner for Define Financial in San Diego. “While it may not seem like it now, those extra ten or 20 years in the workforce can make a huge difference.”
2. Build up non-qualified assets. Earning more and saving more will help you retire early, but where you stash that money matters, too. The biggest hurdle for early retirees is to effectively bridge the income gap, according to Joseph Azzopardi, a certified financial planner for The Well Planned Retirement in Orange County, California. “Before clients can tap into Social Security and other sources of retirement assets, they’re going to need a plan to bridge their income in the early years.”
This is where assets held outside of retirement accounts come into play. Non-qualified assets can include an array of options, such as taxable brokerage accounts, cash investments and certificates of deposit. “If you plan on retiring before age 50 you will need to build up your non-qualified assets,” says Alex Whitehouse, a financial advisor for Whitehouse Wealth Management in Vancouver, Washington. “Qualified assets, such as IRAs or 401(k)s, have a 10 percent penalty if you withdraw funds prior to 59 1/2. In order to avoid penalties, enough should be saved in non-qualified accounts to provide adequate income until the qualified accounts can be accessed penalty-free.”
3. Invest in a Roth IRA. Early retirees shouldn’t overlook the Roth IRA. These accounts are funded with after-tax dollars, so you can withdraw your contributions from your Roth IRA at any time without penalty or taxes. If you plan to use your Roth IRA for the goal of early retirement, aim to max out your Roth IRA from now until you’re ready to leave the workforce. However, keep in mind that you can’t withdraw your earnings without a penalty until you’re age 59 1/2 or older unless certain specifications are met. You can contribute up to $5,500 to a Roth IRA in 2017, provided you meet the income requirements. By taking advantage of these accounts, you can build up tax-free money you can access at any time.
4. Reduce your mortgage payment or pay it off completely. If you have a 30-year mortgage and plan to retire before the end of the term, you can also consider refinancing your mortgage so its end date coincides with your ideal retirement date, says Anthony Montenegro, founder of Blackmont Advisors in Orange County, California. “This way you have more liquidity to use towards other necessary expenses in retirement.”
If you’re unable to refinance or don’t want to for any reason, you can also pay extra toward the principal of your loan to pay it off early. While it’s possible to retire early while you still owe money on your house, it’s a lot easier to afford early retirement when you don’t have a mortgage hanging over your head.
5. Reduce your spending and learn to live on less. Retiring early requires savvy investing, but work needs to be done on the spending end, too. In other words, if you want to retire early and stay retired, you must keep your spending in check. “Get clear about what actually brings you joy in life, and avoid spending money on everything else,” says Brian Hanks, an Idaho financial planner and author of “How to Buy a Dental Practice.” “If you can keep your monthly budget low, not only will you need a smaller pile of money to retire with at age 50, but you’ll have the discipline to keep spending low when you are ready to walk away from your job.”
6. Build multiple streams of income, including passive income. Most people save a certain amount in their work-sponsored 401(k) accounts until they have enough to retire. Early retirees know they need more than the income from their jobs to get by.
One way to set yourself up for retirement is to create multiple income streams, including streams that are passive, according to Jude Wilson, founder and chief financial strategist of Wilson Group Financial in Orlando, Florida. With passive income, you can set up a system once and collect checks effortlessly for the long haul. Passive income streams to consider could include peer-to-peer lending, a taxable brokerage account, buying rental property or investing in real estate investment trusts. The more streams of income you have coming in, the better off you’ll be.
7. Hire a fee-only financial planner to help you achieve your goals. Most people who retire early have a carefully crafted plan that took decades to execute, often with the help of a qualified financial planner. “One step that must be completed to retire at age 50 is to hire and develop a trusting relationship with an independent fiduciary-based retirement advisor who can create a retirement plan using the best from the securities world and the best from the insurance world,” says Matthew Jackson, a financial advisor for Solid Wealth Advisors in Fort Collins, Colorado. “Don’t get fooled into thinking the tools and strategies you use to retire at age 50 will be the best tools and strategies you will use to stay retired for, hopefully, many decades.” While you can do it on your own, having professional help can help you get there faster.
Prudent saving and investing are essential to retire early, but it’s equally important to know the purpose of your early retirement. “Retiring at age 50 is a great goal, but knowing and affirming the purpose of it all is what will help you make early retirement a reality,” says Morgan Ranstrom, a financial planner for Trailhead Planners in Minneapolis, Minnesota. “Whether its traveling the world, spending more time with family or transitioning into volunteer work you really care about, knowing your ‘why’ will make all the difference.”
Those who do the best retiring early have a great sense of purpose in their lives other than a life of leisure. “Money is a great tool to fund a purpose, but it cannot help us find a purpose,” says Don Roork, a financial planner for AssetDynamics Wealth Management in Toledo, Ohio. “Once you have the cash, but before you pull the retirement trigger, take the step of finding a retirement purpose that matters just as much as having the money.”