How to Retire Early | The Essentials of Early Retirement Planning

Thirty-five percent of Americans are retiring earlier simply because they can. But the decision to transition from working life to retirement is a personal and financially significant one – it’s a life-changing moment that requires careful planning. Failing to adequately account for changes in retirement age and life expectancy can dramatically change the size and longevity of your portfolio and your quality of life in the long term.

That said, retiring early is possible.

In this article, we’ll cover the essentials of how to retire early and achieve financial independence without sacrificing financial stability.

Key Takeaways

Early retirement planning requires careful planning, including estimating expenses, optimizing retirement accounts, managing investments, and minimizing tax liabilities. High-net-worth individuals have additional tools like trusts, tax-efficient investment strategies, and global diversification to maximize financial security.
Early retirees need diversified income sources, such as dividends, rental income, and REITs, while strategically withdrawing from taxable and tax-advantaged accounts. Managing Social Security timing, portfolio risk, and healthcare expenses ensures long-term financial stability.
Deciding how to retire early and maintaining wealth requires working with experienced, objective fiduciary advisors who specialize in high-net-worth financial planning. A well-planned approach ensures a secure and enjoyable retirement while preserving wealth for future generations.

What is Early Retirement Planning?

Retiring early means many different things to different people. It can be retiring decades in advance at 40 or just a few years early at 60. The most common age range for early retirees is between 55 and 59. Only 1% retire at 40, highlighting both the challenges of achieving financial freedom young and the importance of early retirement planning.

Successfully retiring early involves understanding how retiring at a younger age will affect your retirement investment accounts, delaying social security benefits, and self-funding strategies.

Early retirees need to manage their wealth strategically, as Social Security benefits aren’t available until age 62, and taking them early reduces monthly payouts. For high-net-worth individuals, deciding how to retire early is not just about leaving work but maintaining a luxury lifestyle and achieving legacy goals.

Evaluate Your Expenses

The first step towards understanding how much you need to retire early is to estimate monthly and annual retirement expenses, including taxes, health coverage, general living expenses, and discretionary spending. Consider unique costs, such as maintaining multiple properties, travel, and legacy planning. It’s also critical to factor in inflation, luxury lifestyle costs, and unexpected expenses. In addition, it’s important to tack on legacy costs, such as wealth transfers and charitable contributions.

Retirement calculators and financial tracking apps can help you rapidly get a reasonable preliminary estimate. However, having an estimate alone isn’t enough for a solid retirement plan. Sharing your calculations with a trusted financial advisor enables you to develop a specific understanding of your situation and a nuanced strategy to accelerate early retirement planning.

How to Retire Early With Optimized Retirement Accounts

One of the most common strategies to retire early is to contribute to your tax-advantaged retirement accounts, such as 401(k), IRAs, and HSAs to maximize savings. However, there are additional options for high-net-worth individuals. For example, defined benefit plans, cash balance plans, and mega backdoor Roth IRAs can all bolster retirement savings.

Roth conversion ladders, in particular, are useful for early retirees. These conversions allow individuals to access retirement funds before 59 ½ and to develop significant tax-free balances for the later stages of retirement.

Furthermore, it can be helpful to direct additional funds toward non-qualified brokerage accounts for liquidity during early retirement.

Investing Early for Long-Term Growth

Sustainable gains are often related to long-term growth, not short-term spurts. Investing a higher percentage of your annual income into a diversified portfolio to achieve early retirement is key. It is important to allocate funds across stocks, bonds, low-cost index funds, and alternative investments, such as private equity, real estate, and venture capital. Municipal bonds may also provide tax-free income in your investment strategy.

Furthermore, it’s helpful to stress-test your portfolio to ensure you can sustain early withdrawals and withstand market downturns.

Keep Expenses and Debt in Check

Another core aspect of early retirement planning is thoroughly and regularly reviewing expenses and debt. Minimizing wasteful and/or unplanned spending while maintaining your desired lifestyle is key and requires planning.

Reducing debt, especially high-interest or luxury-related debt, is usually a good priority, but not all debt is bad. In fact, eliminating the wrong type of debt might actually be counterproductive.

At the same time, you’ll want to optimize tax liabilities on high-value property sales using strategies like 1031 exchanges or primary residence exemptions. Another common strategy is to relocate to tax-friendly states or countries to reduce expenses and improve tax efficiency.

Creating a Sustainable Retirement Income Strategy

Next, you’ll want to create a diverse retirement income stream, using real estate investment trusts (REITs), rental income, and dividend stocks for retirement. You can then leverage tax-efficient withdrawal strategies, including drawing from non-qualified accounts before leaning on retirement accounts. As taxable income changes from year to year, it can be very helpful to have the ability to strategically withdraw from regular retirement accounts and Roth-type accounts in years when each makes the most sense.

Some individuals may choose to use trusts to generate income while protecting assets. Charitable remainder trusts (CRTs), in particular, can combine income generation with long-term philanthropic goals.

Consider how claiming benefits early will impact your long-term guaranteed retirement income. You may want to explore spouse benefits to optimize tax efficiency.

High-net-worth individuals will likely not rely on Social Security in the short term, but optimizing these benefits whenever possible is still important.

It’s also important to keep in mind that the earlier you take Social Security income, the less you receive. Waiting until the full retirement age to start withdrawing Social Security increases your benefits. For retirees, this is an important factor in determining how much you need to retire early.

Minimize Risk and Maximize Returns

Portfolio stress testing gives you an idea of portfolio resilience and allows you to balance growth and stability. This is a go-to tactic to minimize risks for financial advisors, who can do this for you with advanced risk analysis software.

If your portfolio is unbalanced, there are ways to maximize rewards and hedge risk. For example, you can shield wealth if you incorporate asset protection strategies, such as offshore trusts or LLC structures. Using global diversification can reduce exposure to single-market risks. Furthermore, inflation-protected securities like TIPS preserve purchasing power.

Prepare for the First Few Years of Retirement

Financial planning for your transition is vital to optimizing retirement savings and preserving peace of mind. Plan for the gap between early retirement and Medicare eligibility at age 65. Private health insurance, ACA Marketplace plans, or concierge healthcare options can help fill the gap – but these options aren’t cheap.

Even once you are eligible for Medicare, other unexpected expenses may occur. You’ll want to use dynamic spending withdrawal strategies based on your unique portfolio assets to ensure your funds last.

Advanced Tax Planning for Retirement Savings

Diversify your tax strategy across taxable, tax-deferred, and tax-free accounts to shrink tax obligations. To further bolster your funds, you can minimize capital gains taxes with tax-loss harvesting and Opportunity Zone investments.

You can also diversify your tax strategy by using different ownership structures. Structured ownership of various accounts in special trusts, such as grantor-retained annuity trusts (GRATs) or dynasty trusts, can be done for tax-efficient wealth transfer. Donor-advised funds (DAFs) or Charitable remainder trusts (CRTs) can facilitate your charitable giving goals, reducing taxes while also generating retirement income.

Tax planning, however, is tricky. Working with a financial professional – such as a tax advisor – is often recommended to ensure compliance and avoid potential penalties.

Putting it All Together

An early retirement is possible but requires a financial plan tailored to your wealth, lifestyle, and financial goals. An effective plan also considers legacy, healthcare, and unexpected expenses. To ensure you meet your retirement goals, it’s essential to also track your progress toward your “retirement number” and adjust strategies as needed. You cannot just “set it and forget it.”

Working with a wealth manager who understands the needs of high-net-worth individuals to optimize your early retirement planning can give you peace of mind. Keep in mind that wealth managers are not created equally. There are some great ones, good ones, and not-so-good ones.

The key to greatness is objectivity and experience, which results in a track record of success in helping clients in a similar situation to yours. The best way to find an objective wealth manager is to specifically ask for a 100% objective fiduciary financial advisor. Next, make sure that the fiduciary advisor has a solid track record.

Here at First Financial Consulting, we have been providing 100% objective wealth management for 45+ years, with an almost unparalleled successful track record. Contact our fiduciary, fee-only experts for a free complimentary meeting today.

Schedule Your Complimentary Consultation

Meet Greg Welborn

Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.

Meet Greg Welborn

Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.

FAQ | How to Retire Early

How much money do I need to retire early?

The amount of money you need to save for retirement depends on your monthly and annual retirement expenses, tax liabilities, healthcare costs, lifestyle choices, and inflation. Working with a financial advisor to stress-test your portfolio ensures your savings will last.

What are the biggest risks of retiring early?

Key risks include rising healthcare costs before Medicare eligibility, inflation, market downturns, and outliving your savings. Diversifying investments, optimizing tax strategies, and maintaining liquid assets help mitigate these risks.

What are the best investment strategies for early retirement?

A strong portfolio includes a mix of stocks, bonds, real estate, tax-advantaged accounts, and alternative investments. High-net-worth individuals may also benefit from municipal bonds and international diversification.

How can I minimize taxes while retiring early?

Tax-efficient strategies include Roth conversions, tax-loss harvesting, utilizing Opportunity Zone investments, and structuring accounts using GRATs or dynasty trusts to optimize wealth transfer.

How do I cover healthcare costs before Medicare at age 65?

Options include ACA Marketplace plans, private health insurance, concierge healthcare, or HSAs. Planning for these costs in advance prevents unexpected financial strain.

Should I take Social Security early or delay it?

Taking Social Security before full retirement age reduces benefits, while delaying increases them. High-net-worth retirees often delay benefits to maximize long-term guaranteed income and reduce taxable income strategically.

How do I create a sustainable income stream in early retirement?

A diverse retirement income strategy includes dividend-paying stocks, REITs, rental income, trusts, and tax-efficient withdrawal strategies. Some also use charitable remainder trusts (CRTs) to align income with philanthropic goals.

Greg Welborn

What is a Family Limited Partnership

A Family Limited Partnership is simply a formal partnership where the partners are family members. Like other partnerships, a Family Limited Partnership (FLP) is a real business selling products, services, or renting property to real customers. The difference here is that family members are involved, and the partnership is structured to provide a number of significant tax and legal benefits for the family. The three most powerful benefits are:

Reduction in estate taxes
Preventing future growth in asset values from being estate taxed
Protection from lawsuits or divorce actions.

If constructed and managed correctly, the Family Limited Partnership can be a powerful tool for high-net-worth families. Interested in learning more? Schedule a meeting with one of our advisors to see if FLPs are right for your situation.

When we say there is a “real” business involved, we don’t mean that you have to start a new business. In fact, most FLPs are created to take ownership of an existing business or investment real estate. Whether you already own a manufacturing, distribution, or services company or own several real estate investments, you can transfer ownership into the FLP to take advantage of its key benefits.

Understanding the Family Limited Partnership

Here’s how it typically works. On day one, you have an attorney create a Family Limited Partnership agreement. There needs to be at least one general partner and one limited partner, but typically, there are several limited partners. To activate the partnership, you would transfer your ownership of your business or investment real estate into the partnership in exchange for all the general and limited partnership shares. On day two, you would own 100% of the partnership, which now owns 100% of your business or investment real estate.

Here’s where the fun begins. To take advantage of the key benefits we’ve mentioned, you need to gift some or all of the limited partnership shares to other family members. This isn’t just a series of random gifts; you’re gifting shares to each family member whom you eventually want to own your assets after you’ve passed away.

You’re fast-tracking your estate plan. Instead of waiting until you’ve passed away when your heirs would receive your assets, you’re giving them away now in a manner that reduces gift and estate taxes while providing some creditor protection. To understand why you need to understand more about the difference between general and limited partners.

General vs. Limited Partnership Interests

General Partners

General partners in a Family Limited Partnership are responsible for the management of the partnerships and its assets. They control management of the partnership very similarly to how a business owner controls his or her company. The general partners have unlimited liability for debts incurred by the partnership agreement, but there are ways for general partners to protect themselves against liability. The general partners can be paid a salary just as a business owner is paid a salary.

Limited Partners

Limited partners in a Family Limited Partnership are only responsible for management duties that the general manager assigns them. They also can be paid a salary. The limited partner is not responsible for the partnership’s liabilities, and the limited partners do not have any control over the partnership. All that control stays with the general partners. These limited partners are generally the youngest family members – typically children or grandchildren.

Percentage Ownership

The responsibility and control described above is NOT affected by the percentage each partner owns. In other words, if the general partner(s) own 2% of the partnership, they still control 100% of the partnership and, therefore, 100% of the business or investment real estate in the partnership.

The limited partners could own 98% of the partnership, but they still would NOT control the partnership, nor any of the business or investment real estate in the partnership.

The profits of the Family Limited Partnership (after salaries and other expenses) must be shared with all the partners in the same percentage as their ownership. In our example above, the general partner(s) would control 100% but would own 2% and therefore only be entitled to 2% of the profits; the limited partners would not control anything but would own 98% and therefore be entitled to 98% of the profits.

Remember, the general partner controls who fills different management roles and which family member is paid a salary. The general partner can take a substantial salary in keeping with his/her management role.

Cashflow distributions are discretionary. The general manager determines whether a distribution will be made. This is important – and goes to the heart of the benefits we mentioned – because the limited partners are entitled to a share of profits (and have to pay income taxes on them), but the limited partners are not entitled to cash if the general partner decides he or she isn’t going to make a distribution that year.

The partnership agreement allows the general partner to keep management control over the business or real estate and to keep control over cash flow.

Advantages of Family Limited Partnership

The unique ownership structure of Family Limited Partnerships is what allows this estate planning tool to provide such powerful benefits.

In this video, Greg Welborn gives a review of some of the complexities and benefits to Family Limited Partnerships.

Tax Reduction

The FLP reduces estate and gift taxes because partnership shares are not worth the same amount. In a general corporation, one share of stock has the same fair market value as another share of stock. In a Family Limited Partnership, the general partner shares are uniquely different than the limited partner shares. The general partner shares (even just 2% ownership) are more valuable than the limited partner shares.

Think about this logically. If I told you I own a company worth $1,000,000 and want to sell 98% of it to you, you’d be willing to pay me $980,000 (98% of one million dollars). But if I told you that those 98% shares do NOT let you vote for the board of directors, do not let you fire/hire the managers of the company, and do not entitle you to any dividends or distributions, you would not pay me $980,000. You might still want to own part of this company, but you’d pay me a lot less for those shares.

A good general rule of thumb is that you’d pay roughly 60%. In other words, there would be a 40% discount in value for those shares which do not give you any control. That discount can vary, but it is a good rule of thumb.

The IRS acknowledges this economic fact. That means if you gift your kids/grandkids 98% of the Family Limited Partnership in limited partner shares, the IRS will acknowledge that you’ve made a monetary gift of roughly $588,000 (a 40% discount on $980K).

Tax laws only allow you to give away a certain amount of your net worth before estate taxes are due. If you use a FLP, you can give away almost all of a $1 million business or investment property but only use up a small amount of your lifetime estate tax exemption.

This is known as valuation discounting, and it is very powerful. If used on larger businesses or real estate, the tax savings are huge.

Preventing Future Growth From Being Taxed

This is a pretty simple concept. Once you’ve gifted the limited partner shares, they are out of your estate. No matter how large the underlying business or real estate grows, it won’t be subject to estate tax or gift tax as long as it stays within the Family Limited Partnership. This benefit can be continued for future generations if the limited partner shares are gifted to trusts for your kids instead of to the kids directly, but that’s a topic for a different article.

To understand the power of this technique, let’s assume the business or real estate grows by 6% per year. In 24 years, the $1 million value will have grown to $4 million, but there will not be any estate or gift tax on that $3 million in growth.

Creditor and Divorce Protection

The sad reality is that many civil lawsuits and divorces are not settled on their merits but instead are settled on whose lawyer is the best poker player. It’s mostly a negotiating game. If your kids are seen as “deep-pockets” with lots of cash flow coming their way, the attorney suing them is going to go for the jugular and not be motivated to settle.

On the other hand, if your child’s attorney points out that a substantial portion of your child’s net worth is limited partnership shares offering no control, no rights to liquidate, no cashflow, but potentially a substantial tax liability, well, that other attorney is more motivated to settle quickly and for less money. In fact, if structured properly, FLP shares couldn’t even be included in your child’s or grandchild’s divorce case; they would be off-limits.

The Right Structure and Right Asset Are Critical

Family Limited Partnerships are powerful tools for high-net-worth families, but not all FLPs are created equal. The key is choosing the right asset or investment real estate to be owned by the partnership. You need to balance cash flow, earnings, future growth, potential future asset sales, and a number of other factors before deciding which assets to place into a FLP. You need to carefully consider what restrictions you want to place on the limited partners to maximize the tax and creditor protections.

It all starts with a well-crafted and personally tailored wealth and estate plan. Understanding where you are now, what you want retirement to look like, and how best to achieve that are all precursors to establishing a Family Limited Partnership. We highly recommend you engage the services of a 100% objective wealth advisor – someone who qualifies as a fiduciary and is legally bound to act in your best interests – to design your family’s plan and help you implement it.

How to Retire Early | The Essentials of Early Retirement Planning

What is Early Retirement Planning?

Evaluate Your Expenses

How to Retire Early With Optimized Retirement Accounts

Investing Early for Long-Term Growth

Keep Expenses and Debt in Check

Creating a Sustainable Retirement Income Strategy

Navigating Social Security Benefits

Minimize Risk and Maximize Returns

Prepare for the First Few Years of Retirement

Advanced Tax Planning for Retirement Savings

Putting it All Together

Schedule Your Complimentary Consultation

FAQ | How to Retire Early

What is a Family Limited Partnership

Understanding the Family Limited Partnership

General vs. Limited Partnership Interests

General Partners

Limited Partners

Percentage Ownership

Sharing Profits and Cashflow

Advantages of Family Limited Partnership

Tax Reduction

Preventing Future Growth From Being Taxed

Creditor and Divorce Protection

The Right Structure and Right Asset Are Critical

Schedule Your Complimentary Consultation