No one wants to feel enslaved to the 9:00 – 5:00 grind. Some of us are so uncomfortably entrenched in our careers that we make it a financial goal to retire early, put our working days behind us, and explore everything else life has to offer—traveling, sleeping in, and being on your own schedule.
If you’ve been feeling the itch to say goodbye to the working world and are considering an early retirement, here are three steps you should take to pave your way to future financial freedom.
Step 1: Know Your Full Retirement Age
Strictly speaking, an “early retirement” is achievable as young as 62, the age at which you can first begin receiving Social Security benefits. However, depending on your birthday and your full retirement age (FRA), retiring at 66 could still be considered “early”—which means your benefit amount will be reduced if you retire before that time.
Don’t think four years makes a difference? Think again. Not only does the Social Security Administration (SSA) hit you with heavy penalties when filing for benefits before your FRA, but if you try to dip into a traditional retirement account such as an IRA or 401(k) before the age of 59½, you could look at a 10% taxation penalty on your early distributions.
When income is limited in retirement, being financially aware of your options is a must. Not only do you lose the traditional cash flow you’ve been used to, but medical expenses begin to pile up and most of life’s grand offerings come with a steep price tag. On top of that, you need to plan on making whatever savings you have accumulated last at least 20 plus years for a traditional retirement—more like 30+ if you retire early.
Step number one is learning your exact FRA and the provisions on your retirement account distributions. Being financially aware means calculating tax implications so that you can plan appropriately.
Step 2: Establish Your Retirement Savings Vehicles
Hopefully you’ve already been contributing to your employer-sponsored 401(k) or personal IRA. If you haven’t, consider starting now. There’s never a soon enough time to begin planning for your financial future—the more disciplined you are now, the longer and larger your savings will be able to work for themselves in vested accounts. There are several last-minute strategies for retirement income, such as an FHA Reverse Mortgage or an Immediate Annuity, but these are generally considered much riskier than saving and investing.
If you’re self-employed or you’ve never had access to a retirement vehicle due to the nature of your industry, you might consider a establishing a Defined Benefit (DB) Plan instead of a traditional SEP IRA. These are similar to personal pension plans that allow people to make large, tax-deductible contributions that can result it huge savings—sole proprietors, LLCs, and corporations, may be eligible to deduct $100,000 or more from annual business income.
There are a number of tax hacks that you can strategically use now to bolster your retirement savings down the road. One lesser known strategy is using your Health Savings Account (HSA)—which is typically known for complementing a high-deductible health insurance plan—as a retirement vehicle. Depending on where you live, HSAs are triple tax-advantaged, which incentivizes some investors to maximize their annual contributions and instead pay out-of-pocket for medical expenses to allow the invested funds to grow.
Step 3: Maximize Annual Contributions
On that note, regardless of whatever vehicle you use for saving, it’s wise to contribute the maximum amount every year. The only exception to this rule would be allocating contribution funds towards lucrative investment opportunities, such as peer-to-peer lending or stock in the online gaming industry.
Rental real estate properties are another investing strategy, if you have the money to do so and when the economy is running smoothly. Sure, they take much more work compared to other investments, but the return is much greater and the tangible wealth is often more satisfying. If you don’t want to deal with your rental properties and tenants yourself, you can always hire a property manager to run the business for you. If things don’t work out or you need more income during your early retirement, you always have the option to sell the property—ideally at a profit.
Overall, the most important step you can take toward an early retirement is to save, save, save and invest alongside your savings!
About Money & Mimosas: Money & Mimosas was started as a passion project by Danetha, a former NFL cheerleader turned entrepreneur and financial journalist. After a brunch conversation with girlfriends, Danetha was inspired to launch a blog to explore her journey of becoming rich, sexy and confident.