For decades, the concept of a conventional retirement has been one in which you decide to leave the workforce at around age 65 to pursue other life-fulfilling activities. Our society and system of laws have reinforced this tradition with things like receiving social security as early as 62, Medicare eligibility at 65, eliminating early withdrawal penalties from retirement accounts in your 59 1/2, additional standard deductions at age 65, etc. But there are some things that you can do now to help accelerate your journey towards early retirement and provide you with flexibility and freedom from worrying about money.
Save More
There will come a time when you are no longer receiving income from your primary employment, and you will rely on the income (e.g., pensions, social security, passive income) and assets you have accumulated while working to help you enjoy your much-deserved retirement. The early retirement lifestyle is predicated on saving more to proactively accumulate enough wealth to unlock the freedom of financial independence.
One way to help with this is automating your savings. By doing this, you are employing a 'pay yourself first' philosophy. This could mean increasing the amount you save to a company 401(k) every pay period, setting up automatic transfers from your checking account to a taxable brokerage account, etc. Automating and systematizing your savings keeps you disciplined and puts less pressure on you to manually transfer money every month.
Keep in mind that you will want to have a healthy mix of assets across different types of accounts: retirement, non-retirement (taxable), health savings accounts, etc. Since you generally cannot withdraw money from retirement accounts before 59 1/2 without incurring penalties, you will want to have money in taxable accounts to meet your expenses. Plus, since retirement accounts are tax-advantaged, you will want to preserve that tax-advantaged status for as long as possible. Health Savings Accounts also have the added benefit of paying for qualified medical expenses tax-free, and after you turn 65, you can withdraw from an HSA and treat it like a Traditional IRA (only paying ordinary income taxes on distributions with no penalties).
Spend Less
This point goes hand in hand with the previous one – if you can spend less, you can save more. Let's face it: everyone has items they spend money on that they do not need. How seriously you want to retire early and your goal for what age you want to achieve financial independence will dictate how stringent you need to be with your budget. There will be times when you need to look at how much you are spending and ask yourself: would I rather retire earlier or keep my spending where it is today? The point is that you are living beneath your means to save money for your early retirement.
If you find yourself struggling to cut back on spending, try putting your expenses into a financial journal utilizing a spreadsheet or notepad. You can do it for a few months, a year, or whatever you prefer. Categorize the expenses however you want (e.g., food, health, home, shopping, transportation, subscriptions, etc.). Then, next to each expense, assign a numerical value from one to ten based on how much value it provides to you and your family. You will quickly find that there are things that you cannot cut back on (e.g., personal care, electricity, mortgage/rent, internet, prescription medications, etc.). You will also find that some things on your list do not provide that much value to you. Maybe you have been paying for an expensive gym membership, but you do most of your exercising at home or on runs. Maybe you have a few too many subscriptions that you are not getting much use out of anymore. This exercise will help you lay out your expenses, see where your money is going, and provide you with a system to cut back.
Adjusting Your Spending Needs In Retirement
Retirement planning revolves around projections – using the amount you are saving, assuming a reasonable rate of return on your investments, and keeping in mind inflation, how much will you have to retire at a specific date, and how much do you project to spend when the time comes? Remember that you will not need to spend as much money on certain things in retirement as you do while you are working. Maybe you spend money on dry cleaning for your job. Maybe you will not be commuting, so you spend less on parking, tolls, maintenance, public transportation, etc.
Just as it is essential to remember that you may spend less in retirement, you also do not want to under-save. People generally have increased health care costs as they get older; plus, long-term care considerations can add significant expenses towards the end of life. Most professional financial plans will include these expenses as a base in your plan, but you also want to make sure there is some cushion. You may not want to live a minimalistic lifestyle in retirement, so you will thank yourself later for having some room for discretionary spending. This will leave you some breathing room to pick up hobbies, travel, dine out, or do other things without worrying about every expense.
Diversify Your Income Streams
Having more than one income stream serves three purposes:
First, the more money you bring in, the more you can save. Therefore, this strategy is only effective if you use the income generated to increase your savings rate.
Second, multiple income streams can help you weather storms more confidently. This is especially true with income streams that are uncorrelated with one another. This is why diversification with investments is so important – while one sector of the market may be struggling and in the process of recovering, another is doing well and driving growth in your portfolio.
Third, with any luck, these income streams can continue into your retirement, and you can continue to receive that money without significant input of time or resources.
Be careful, though. Diversifying your income streams with something like a side hustle can be a great way to pursue a passion while also making some money. However, you want to avoid getting caught in a trap where your side hustle is costing you money for too long rather than increasing your savings. As a general rule, if your side hustle is not making money in three years, it may be time to try something different.
Define (Or Re-Evaluate) What Retirement Looks Like For You
Even with today's challenges, never before have there been more tools available to help you achieve financial independence earlier in life. That said, it is essential to define how you want your retirement to look so that you can set attainable goals and implement a roadmap for how to achieve them. For example, would you be comfortable living a frugal lifestyle if it means retiring faster, or do you want to live more lavishly? Would you like to stop working entirely, or would moving to a part-time role also work for you? How about planning on taking a sabbatical, also referred to as a 'mini-retirement?'
These concepts are simply ways to accelerate your retirement using traditional methods. Understanding these strategies can help you concentrate on what is truly important to you and streamline your path to retirement. While these tasks are achievable, they can also be emotionally and mentally challenging. Working with a financial advisor can lend an objective viewpoint to your overall financial plan, help keep you disciplined on your journey, and lend expertise along the way to get you further ahead.
If you want to retire early and are looking for a financial advisor to help craft a plan, check us out! You can schedule a complimentary, no-obligation call with us here.
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About the Author
Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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