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.
Navigating Social Security Benefits
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.
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.
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.
