Planning for Early Retirement: Unlocking Your Dream

You are planning for early retirement. Where do you start? Are you dreaming of traveling the world, starting a small business, or embracing that #vanlife? Your goals, like your plan, are uniquely yours. Once you identify what retirement looks like, set financial goals. 

• Assess your current financial situation. Look closely at your income and expenses, both must-haves and nice-to-haves (we call those non-discretionary and discretionary.) 
• Begin with the end in mind – find your number. Determining your “number” is a daunting task. Breaking it out into phases helps. First, think about your retirement and what your expenses will be. Don’t get distracted by your expenses now; consider the future: will you travel more? Will you still need to pay for parking? Eat out more (or less)? What will health insurance cost? Start to scenario plan based on varying market outcomes, things like long-term care needs that can spike expenses, etc. Tools are available online, and a qualified advisor can help. 
• Break down your goals. It also helps to automate wherever possible. Max out savings into a 401(k), set up an automatic monthly transfer and investment into a brokerage account, etc. Dividing into smaller, clearly attainable goals and automating the process makes the journey less overwhelming and ensures you will stay on track. 

Start early and save aggressively

Time is your greatest ally. The earlier you start saving, the more your money will grow. As the saying goes, a dollar saved today is worth more than tomorrow’s. Harnessing the power of compound growth can make your dream a reality.  

Consider all savings vehicles that might be available to you, including:   

• 401(k): Take advantage of employer-sponsored 401(k) plans. If your employer matches contributions, contribute at least that amount to make the most of the free money. If you cannot contribute the maximum amount today, set up automatic annual increases so that as your compensation rises, so will your 401(k) contributions. And avoid some common 401(K) mistakes. 
• Individual Retirement Accounts (IRAs): Traditional IRAs offer tax-deferred growth, while Roth IRAs offer tax-free growth if the conditions are met. Maximizing Roth IRA contributions, if you are eligible, is a great tool to build tax-free wealth. Also, consider the relative benefits and tax implications of converting from a traditional IRA to a Roth IRA. 
• Health Savings Accounts (HSAs): If eligible, contribute to an HSA for medical expenses. HSAs offer triple tax benefits – contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. Unlike Flexible Spending Accounts (FSAs), the money you grow in your HSA is yours forever. An HSA is a valuable retirement healthcare resource. 
• Brokerage Accounts: Once you have maximized savings into 401(k)s and IRAs, utilizing a brokerage account to capture excess savings enables you to build a larger portfolio faster. A combination of 401(k)/Traditional IRA, Roth, and brokerage assets will give you the flexibility to control your taxable income, and therefore your tax liability, in retirement. 

Invest wisely and diversify your portfolio

The benefits of compound growth come from investing in a diversified portfolio. Diversification – investing in various investments that offer different opportunities for returns – helps manage risk and increases the probability of long-term success. 

• Invest in the Whole Market: Invest in companies of different sizes and industries to avoid concentration risk. Your overall portfolio won’t be heavily impacted if one company or sector takes a hit.  
• Invest in the Whole World: Look beyond your home country. Investing globally provides more growth opportunities and reduces your dependency on one region.  
• Include Different Asset Classes: Mix up the types of assets you own. Combining stocks, bonds, and real estate helps to balance stability and protect income while offering opportunities for long-term growth. 

Create multiple income streams

Diversify your income sources to create financial stability and accelerate your timeline. Considering side hustles, freelance work, and passive income streams as part of your retirement can get you to your number faster. For example, renting out a spare room on platforms like Airbnb or earning income through a passion project means you need less savings for a comfortable retirement.  

Eliminate high-interest debt

Pay off high-interest debt, like credit cards, as soon as possible. Reducing monthly debt payments means more money in your pocket to save for retirement. Prioritize paying off debt with the highest interest rates. For example, allocating an extra $200 monthly to pay off credit card debt can save you thousands in interest over time.  For long-term, fixed-rate debt like a low-interest 30-year mortgage, there is no need to accelerate payments – leveraging that kind of low-interest debt and saving more will help your portfolio long-term. 

Live below your means

Adopting a more frugal lifestyle by cutting unnecessary expenses can accelerate an early retirement. Differentiate between wants and needs and make conscious decisions to save more money. Opting for home-cooked meals over dining out can save hundreds of dollars each month. Not only will looking for ways to save money month to month allow you to save more, but it will also empower you to create a meaningful early retirement lifestyle with lower expenses, lowering your number and allowing you to live your dream that much sooner. Hundreds of dollars extra saved and invested each month will compound and get you hurling towards your number. 

Plan for healthcare costs

Don’t underestimate the impact of healthcare on your retirement budget. Research healthcare plans, consider long-term care insurance, and account for potential medical expenses, including: 

• Health Insurance Marketplace: A wide variety of plans are available, and costs can vary. Consider your providers and their networks, what coverage you want to pay more for, and what kind of deductible your plan can handle. Subsidies may be available depending on your income in early retirement. 
• Medicare Understanding: when it comes time to transition, familiarize yourself with Medicare options and enroll during the open enrollment period to avoid penalties. Consider supplemental insurance to fill the gaps left by Medicare. 
• Long-Term Care Planning: Anticipate potential long-term care needs. Investigate long-term care insurance to protect your retirement savings from the financial burden of extended, expensive care needs. Compare insurance to other backstops like tapping into home equity or reducing expenses. No matter what, have a plan! 

Ultimately, achieving early retirement requires commitment, discipline, and strategic planning. Following some of the steps above can help pave the way.

A trusted financial advisor is your co-pilot on the journey to early retirement.