I recently came across a quote from Fulton Oursler, a journalist and prolific playwright, that shook me to my core. “We crucify ourselves between two thieves: regret for yesterday and fear of tomorrow.”
In my opinion, that’s spot-on when it comes to every facet of life. But, I think it’s it’s especially applicable when it comes to retirement.
For instance, according to a Transamerica survey, the most commonly cited retirement fear is outliving your savings. Fifty-two percent of all workers, both young and old, reported that they’re afraid of outliving their savings and investments. What’s more, 42 percent are worried about meeting their basic financial needs.
As for regrets? Bronnie Ware, an Australian palliative care professional who wrote “The Top Five Regrets of the Dying,” says that these are the five most common wishes she heard from her soon-to-depart clients;
- I wish I’d had the courage to live a life true to myself, not the life others expected of me.
- I wish I hadn’t worked so hard.
- I wish I’d had the courage to express my feelings.
- I wish I’d stayed in touch with my friends.
- I wish I had let myself be happier.
While there isn’t a one-size-fits-all solution, I think it’s possible to not have regrets for yesterday while reducing your fear of tomorrow. How so? By being smart so that you can realistically retire early with absolutely no remorse.
Does that sound impossible? It’s not if you follow these ten tips.
1. Define what early retirement means to you.
Unless it’s your goal, you don’t have to give up working if you retire early. Instead, when people refer to early retirement, they mean they aren’t working to make ends meet.
In other words, you’re financially independent enough that you don’t have to work your 9-to-5 anymore. But, you could still work part-time or find ways to earn a passive income, like becoming a consultant. In between, however, you can spend time with friends and family or travel the world. Or, maybe you just want to spend your days by the pool or engage in hobbies that you enjoy for fun.
To start down the road to early retirement, you have to figure out what early retirement means specifically to you. And, from there, you can begin to put the wheels in motion. I would recommend that you answer the following questions if you’re stuck defining your ideal early retirement;
- Are you open to working part-time, full-time, or not at all?
- Do you plan to move or remain where you are?
- What kind of lifestyle do you want to live? Traveling and hobbies, for example, have price tags. But, spending time with your family and volunteering don’t.
- Is your cost of living going to change?
You’ll know when you can realistically retire if you answer these questions correctly, as well as a ballpark dollar amount on what you’ll need.
2. Take inventory.
“There are two things you need to know in order to make a plan for the future,” Leif Dahleen, the blogger behind the Physician on FIRE told Business Insider. “First, you should calculate your net worth. This can be done in a matter of hours.”
What’s your net worth? It’s what remains after you deduct your liabilities (the amount you owe) from your assets (the assets you own). However, you shouldn’t confuse your net worth with your income. The latter is what you earn from your salary and what appears on your tax return. By contrast, net worth refers to your individual financial standing.
“The second thing you need to calculate is your annual spending. You may be able to guesstimate this based on credit-card statements and your checking account habits,” Dahleen adds. “It’s a good idea to set up semi-automated tracking with an app to verify how much money actually goes out the door every year.”
After you leave your job, and you plan to continue to spend the same as before, your target savings amount will simply be a multiple of your spending level. By using a method like the 4% rule, the common benchmark is 25 times your annual spending. As a result, when you invest a sum equal to 25 times what you spend in one year, you can withdraw 4% each year of that nest egg indefinitely.
“These two puzzle pieces will help you craft a plan to reach financial independence,” he says. “It’s tough to reach any destination without knowing your starting point.”
3. Be more mindful of your financial decisions.
Making the right financial decisions is the only way you will reach your retirement goals, regardless of your specific retirement plan. By committing to smart decisions today, you can ensure your financial success in the future.
Where should you begin? Always start with the basics, such as;
- Create a budget so that you don’t spend what you can’t afford. Also, consider drafting a mock retirement budget on what you’ll need each month. Then, you can work backward to calculate how much it would cost to maintain that way of life.
- Paying off debts with high-interest rates, such as credit cards.
- Establish an emergency fund so that you won’t pull from your savings.
- You should put the money you get from tax returns, bonuses, or saving on unnecessary purchases to good use. The obvious examples are paying off debt or contributing to a retirement or emergency fund.
There’s a good chance you’ve heard this advice more times than you can count. However, there’s a valid reason why. Simply following these steps can help you set aside money, manage the unexpected, and plan for the future.
4. Max out your 401(k) and IRA.
Almost every financial independence or early retirement story reveals an essential strategy: early and consistent saving. One of the best ways to implement this strategy? Invest, and max out, retirement accounts like a 401(k) and IRA.
Tax benefits and investment growth provided by employer-sponsored retirement plans and IRAs are among the best. For instance, your employer might match your 401(k) contributions. Not taking advantage of that is literally leaving money behind. In addition, you can contribute $20,500 for 2022. In 2021 and 2022, anyone 50 or over is eligible to receive a catch-up contribution of $6,500
Also, if you switch jobs, you can roll over your previous contributions into your new plan.
With a traditional IRA, the annual contribution is $6,000, or $7,000 if you’re over 50. Additionally, you can deduct taxes on your current-year tax return.
You can contribute pre- or post-tax funds when you save for retirement through a Roth IRA. In traditional contributions, you lower your taxable income in the present by using pre-tax dollars. With Roth contributions, you’re paying taxes now so you don’t have to pay them later.
Whenever you’re planning to retire early, the only con is that withdrawals are restricted from your retirement accounts. A 401(k) cannot be accessed without penalty until at least age 59 and a half. Roth IRAs, however, which are funded with after-tax money, allow you to withdraw your contributions tax-free at any time – and your earnings are not included.
Once you’ve maxed out your contributions, and you have the money to do so, consider purchasing an annuity. This will provide you with a guaranteed lifetime income that grows tax-deferred. And, unlike other retirement plans, there aren’t contribution limits.
5. Diversify your income.
When you are unable to invest or save aggressively, what can you do? Consider getting a second job or setting up a side business to boost your income. As an added bonus, having multiple income streams can help you cover emergencies or pay for essentials if you lost your primary income source.
Also, include a system of checks and balances in your investment portfolio. The idea is to have a mix of stocks, bonds, and cash in your portfolio and also a mix of industries where investments are made within those asset classes.
6. Avoid pulling from your retirement savings early.
“If you need money and don’t have a lot of assets, pulling cash out of your 401(k) may not seem like the world’s worst idea,” writes Robert Farrington in Forbes. “You can borrow from your retirement account with a 401(k) loan, after all, and these loans aren’t all that bad. You get to repay your 401(k) loan via payroll deductions, and the interest payments are typically paid back to yourself, helping you recoup some potential losses.”
“On top of that option, you’ve always been able to take contributions (not earnings) out of a Roth IRA without penalty if you have this type of account,” he adds. “Furthermore, the IRS has lets consumers withdraw retirement funds without penalty due to undue hardship, and you may be able to withdraw funds penalty-free for medical expenses or the purchase of a first home.”
In addition to these options, the Setting Every Community Up for Retirement Enhancement (SECURE) Act just passed in December 2019 has brought with it a few new ways to access your retirement savings.
In spite of this, you still shouldn’t withdraw your retirement savings. For one, if you’re not 59 and a half, the IRS will impose a 10% withdrawal penalty. On top of that, you’ll have to pay income taxes. And, you’re also missing out on the power of compound interest that can supercharge your savings.
And, you might have to work longer in order to replace the money that you’ve taken out.
7. Don’t neglect your health (insurance).
The cost of insurance can eat up a lot of your income, so be careful how you spend it. Let’s say that you have a spouse or children you don’t rely on you financially. Since they’re financially independent without you, you may not need a life insurance policy.
In the meantime, long-term care insurance may be worth considering. In addition to the costs associated with long-term care, medical insurance for it can be expensive as well. You should keep an eye on it while you’re still middle-aged, since buying it earlier will reduce your costs. People with less wealth may not be able to afford it, and wealthier people may be able to pay for it themselves. As such, middle-income people are the best candidates.
By eating more nutritiously and exercising more, you may also be able to save a lot of money and years in retirement by taking care of your health. And, don’t forget to learn about your Medicare options whenever you approach 65.
8. Be strategic with Social Security.
Do you know that you can control the size of your Social Security check? It’s true — at least to some extent. And, it comes down to when you start collecting your benefits.
“About 1 out of 3 Social Security recipients apply for benefits at the earliest age, which is 62,” writes author and certified financial planner Liz Weston. “It’s often a mistake.”
“Benefits grow by a guaranteed 5% to 8% each year that the applicant delays,” she states. “Starting early also can stunt the survivor benefit that one spouse will have to live on when the other dies.”
Be patient and wait for the right time. By doing so, your Social Security benefits will increase.
9. Meet regularly with a financial advisor.
It’s important that you pay attention to your finances. After all, it’s the only to make sure that you’re on track and can make adjustments accordingly.
Also, when you encounter unfamiliar concepts and terminology, you should always ask questions. Keep an eye on your financial portfolio and change strategies when necessary. And, never make decisions until after you’ve discussed it with a trusted financial advisor.
10. Stick to your plan but enjoy life too.
To execute your plan, you will need both discipline and time. While you should continue saving and investing, don’t forget to enjoy your life while you can. I mean if you plan to climb Mount Kilimanjaro, you probably should do that while you’re younger and in the shape to do so.
Or, as early retiree Steven Adcock perfectly wrote on his blog, “Sacrifice is necessary to retire early, but it’s not all we do, either. It is important to treat and reward ourselves along the way by celebrating those smaller achievements.”
Frequently Asked Questions About Retiring Smart and Early
1. Can you afford to retire early?
If you have not yet decided how you will spend your time in retirement or where you will live, this can be a hard question to answer. Ideally, at the very least, you want to be be able to either replace your current income or have enough saved to cover you essentials or current lifestyle.
However, you may want to plan for other retirement goals that would affect your current budget. For instance, you might consider buying a second home, relocating to a different area with a higher or lower cost of living, or traveling across the country in a RV.
It is a good idea to consider all the possible “what if” scenarios. You’ll then be able to determine how additional years of working and saving may affect your long-term spending goals when considering an early retirement.
2. How long will your savings last?
Your savings need to last longer if you retire early. A volatile stock market and low yields on bonds can put further strain on your investment portfolio. A too-aggressive approach to investing may leave you vulnerable to a fall from which you may not be able to recover, while a too-conservative approach could result in inflation not able to keep pace with it.
It is essential that you generate at least enough income to pay for your basic expenses – food, clothing, shelter, transportation, and healthcare.
You will also need enough money to fund other things beside the basics if you want to live a comfortable retirement. This category includes your discretionary expenditures, such as travel, dining, hobbies, and club memberships. For those who want to leave a legacy for their children, grandchildren, or charitable organizations, you may need to have even more money saved then planned.
3. Have I paid off all of my debt?
Your ability to comfortably retire can be affected by existing loans. You will have more freedom to budget your retirement lifestyle once you’ve paid off your student loans, car loans, and mortgage. Taking these steps will likely make you more confident when you start your early retirement journey.
A considerable amount of work is required for some individuals to accumulate enough funds to pay off all their debt. Even so, since you won’t have to deal with so many monthly bills when you decide to retire several years down the road, this may actually ease your mind.
4. How will my Social Security benefits be affected?
Generally, you can begin receiving Social Security retirement benefits at age 62. But your benefits may be reduced by up to 30%.
To determine whether receiving benefits prior to reaching full retirement age would be worth it, you must look at the numbers. Full retirement age can range from 65 to 67, depending on when you were born.
5. Will I still have health insurance?
Health insurance coverage is usually interrupted when an employee retires because most of their healthcare benefits are provided by their employer. However, some companies offer retired employees health coverage.
However, taking out a private non-group policy can be expensive. So what other options do you have?
- You are covered by your spouse’s insurance. It is always possible to enroll as a dependent under your spouse’s employer-sponsored plan. In an early retirement situation, this is the most economical option.
- Retirement Marketplace. To enable easier access to healthcare, the Affordable Care Act created Health Insurance Marketplaces. In many states and the federal marketplace, you can choose from a wide variety of plans.
- Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA requires your employer to continue providing health care coverage for up to 18 months after you leave your job. This usually applies to businesses with at least 20 employees.