LifeGoal Investments Blog
How To Retire Early: A Step-by-Step Plan
How To Retire Early: A Step-by-Step PlanRetiring early is a dream held by many people. Is it possible? Yes, but it may not be for everyone. Financial situations vary from person to person, but with focus and discipline it can be achieved.
Don’t give up hope. Realizing what you need to do is the first step in making your dream come true. Let’s continue to learn how you can take flight and travel, or sit back and relax on your own schedule during early retirement.
What Does Early Retirement Mean to You?Before you can step foot into retirement, have you thought about what it may look like to you?
- What age would you like to retire at?
- Do you plan to never receive another paycheck from an employer?
- Are you seeking financial independence instead, where you no longer have to rely on an employer to live?
- Are there non-income producing hobbies you want to focus on such as travelling, sports, music, etc.?
- Are you planning to open your own business?
Defining what retirement means to you defines the price tag attached to your retirement plan. It is the first step in being able to plan ahead. Sure, your original plan may be critiqued through time and look completely different at the end, but it’s a start.
F.I.R.E. MovementF.I.R.E. stands for Financial Independence, Retire Early. Younger generations are aggressively taking retirement to a new level through F.I.R.E., searching for methods with anticipation to retire as early as their 30s or 40s.
Anything is possible, but to what extent would someone need to go to make it happen? On paper it sounds simple, investing 50-75% of your income. But if you are investing nearly half your income, how are you able to pay for your living expenses?
This all dates back to the original question of what you plan to do during retirement. Those engaged in the F.I.R.E. movements are searching for financial freedom, not exotic travel. They look for ways to increase their income and reduce their expenses so that they don’t have to rely on a full-time job the remainder of their life. Let that sink in for a moment.
What Is Your Net Worth?Once you have a target age for retirement in mind, and paint a picture of how you’d like to spend it you’ll need to get a gauge on your finances today. Your net worth is different from a budget. It represents your financial standing.
Calculating Net Worth
Do you know what your net worth is? If not, let’s calculate it.
Start with your assets. This is anything that you own, such as a vehicle, a home, or investment portfolio. Offset your assets by your liabilities. This is any type of debt that is attached such as a vehicle loan or a mortgage. How did you do?
Your net worth should be evaluated frequently. Use it alongside your budget. This will give you a clearer assessment to whether or not your objectives will meet your preferred lifestyle at retirement.
Create Your BudgetA budget is a resourceful tool when it comes to managing money. It tallies your net income by offsetting the total amount of money brought in each month by your financial obligations (i.e. mortgage, utilities, groceries, etc.).
Retirement BudgetYour budget today will look different at retirement. Creating a mock-up of your retirement budget can give you a logical perspective. The trick is including the specifics. There may be expenses you’ll incur during retirement that you don’t have today, and vice versa. For example, you may not include your current mortgage payments with the intent that your house will be paid in full when you retire.
Include healthcare costs in your retirement budget. Currently, you may have a healthcare plan provided by an employer and not even be thinking about alternatives during retirement, assuming you are not planning on working a part-time job with benefits. Healthcare can get expensive fast.
Social Security and/or Pension Income
In addition to investment income, Social Security and pension benefits, if offered by your employer, are two fixed sources of income you can incorporate in your retirement plans.
Social Security benefits are available as early as the age of 62; however, your full retirement age returns the greatest percentage back to you. When planning for early retirement, your benefits are impacted. Factor this into your bottom line when preparing your budget.
Don’t Spend What You Don’t HaveUnfortunately, you can’t have the best of both worlds. If you are determined and focused on saving for retirement, you can’t actively spend money on non-essential things.
F.I.R.E. StrategiesTypes of financial freedom include:
- FatFIRE - being able to afford basic expenses in addition to spending for leisure and luxury items. In other words, planning to live off a higher amount of income than the norm.
- LeanFIRE - opposite of FatFIRE, having a smaller income during retirement but still living comfortably.
- CoastFIRE - saving and investing at an early age until your target number is reached. Then, you stop and allow your money to skirt untouched.
- BaristaFIRE - still want to work part-time during retirement, with benefits? This would be the strategy you’d follow.
- CashflowFIRE - no longer having a need to depend on a primary source of income, but a cash flow from another independent source.
Since financial freedom is not a one-size-fits-all approach, take a deep breath and determine the strategy that best suits your current financial situation and your future retirement goals.
Trim Down the Non-EssentialsTake a look through your budget. Is there anything popping out in your expenses that you can live without? Here are a few examples:
- Subscriptions - most are set-up for automatic renewals. Check what you may be subscribed to (i.e. music, magazines, etc.) and determine its value from there.
- Memberships - have a gym membership but find yourself not going? Cancel it!
- TV Provider - look for ways to cut the costs of cable/satellite providers. Or, maybe you have multiple network subscriptions you can cut down on.
- Entertainment - think about that cup of coffee you find yourself needing daily. Then calculate what putting that money into your retirement portfolio looks like years down the road.
- Clothing - if you need it, get it. But if you can wear non-branded clothing or become a minimalist in your closet your retirement fund will thank you.
We are not saying that you can’t have nice things, but to have a firm grasp of where your money currently goes, and what you can consider cutting down to add to your retirement fund instead.
Pay Down DebtGrabbing a piece of plastic to pay for goods and services is effortless, and dangerous. Destroy those cards and discourage this action. Going back to paying with paper currency may require a lifestyle change, but it’ll be worth it. Debt can destroy a person’s retirement. Don’t let it crush your dreams, stay ahead of it.
Before paying down your debt, stop incurring it! This refers back to not spending when you don’t have it. The interest rate alone on the debt can eat away your retirement funds.
Look for debt repayment plans that are aligned with your goals. For example, there is a debt snowball method you can follow. This method focuses on paying the small balances first, then rolling the payments into the larger balances until, you guessed it, no more debt! A secondary option is the debt avalanche method. This one focuses on paying the highest interest rate first.
Discourage Debt with an Emergency Fund
Many times people incur debt because of an unplanned event. Savings towards an emergency fund that covers 3 to 6 months of your monthly expenses is greatly encouraged. This way, you aren’t swiping a card and incurring interest but paying for the value of the item and moving on.
Invest AggressivelyInvesting your money early lets you take advantage of compounding interest. You can also take advantage of tax savings that are built into investment plans.
401(k)401(k)s, or 403(b)s by non-profit organizations, are long-term investment accounts designed for an employee's retirement. The employee is allowed to contribute to the fund, and depending upon the plan the employer may offer to match. The max contribution in 2021 is $19,500 and in 2022 is $20.500. That’s what you should focus on. Contributions are tax-deductible, and any growth to the plan is tax-deferred. The only downside to early retirement with a 401(k) is that you won’t be able to withdraw from the account without penalty until age 59 ½.
Enrolling in a 401(k) is not complicated. Work with your employer to elect for automatic payroll deductions. Saving 15% of your monthly gross income is all it takes to start off on the right foot. Though, you may want to increase the percentage to stay on track and retire early.
IRAsTraditional IRAs and Roth IRAs allow for annual contributions of $6,000 with an additional $1,000 “catchup” on top of that if you’re age 50 or over Traditional IRA contributions are tax deductible, too.
Should you withdraw from an IRA for early retirement, there is no initial penalty as you are withdrawing from your contributions. Once that is exhausted, along with any rollovers or conversions, you will begin to be charged an early withdrawal penalty fee of 10% prior to age 59 1/2 in addition to being subjected to tax.
Investment AccountsAlso referred to as a bridge account, investment accounts serve as an overpass between when you plan to retire and when you are eligible for withdrawals from retirement accounts.
Consider investing in:
- Mutual Funds
- Exchange Traded Funds, ETFs
These won’t provide you with tax savings as 401(k)s and IRAs do, but they all allow for additional contributions without any caps and the ability to withdraw with no age restrictions.
The Bottom LineRetiring early requires a strategic approach and a lot of ambition. Ask yourself, how hard are you willing to work to achieve your dream? It’s important to define what retirement means to you and build your objectives from there. Don’t compare your approach to others, as they may have a different definition to financial freedom. With determination and focus, early retirement goals can be achieved.
If you are in the market to grow your wealth, exchange traded funds are worth looking into. Visit LifeGoal Investments to learn more about ETFs built specifically for financial growth. Remember, growth takes time. It may look like a long road ahead, but time and patience are on your side to achieve “boring success.”
How to Retire Early
How to retire early so you can work, travel, and relax on your own schedule
6 Steps to Take if You Have to Retire Early
What Is the FIRE Movement? | RamseySolutions.com
Benefits Planner: Retirement | Retirement Age Calculator | SSA
Carefully consider the Fund’s investment objective, risks, charges and expenses before investing. This and other additional information may be found in the statutory and summary prospectus, which may be obtained by calling 1-888-920-7275, or by reading the prospectus. Read the prospectus carefully before investing.
Distributed by Foreside Fund Services, LLC. Member FINRA.
ETFs are only one option when seeking to achieve goals. Prior to investing in any of the LifeGoal ETFs you should consult with your financial advisor to determine whether the specific funds are appropriate for you and, if so, how your investment plan should be implemented. The LifeGoal ETFs are not intended to be short term savings vehicles for payment of monthly expenses.
This tax information is not intended to be a substitute for specific individualized tax advice. Lifegoal recommends that you consult with your tax advisor. Depending on the type of account you have, there are different rules for withdrawals, penalties, and distributions.
IMPORTANT RISK INFORMATION:
Investing involves risk, including loss of principal, and there is no guarantee that that Fund will meet its investment objectives. The value of a fund’s shares, when redeemed, may be worth more or less than their original cost. The Fund bears all risks of investment strategies employed by the underlying funds, including the risk that the underlying funds will not meet their investment objectives. ETFs may trade in the secondary market at prices below the value of their underlying portfolios and may not be liquid. Fixed income investments are affected by a number of risks, including fluctuation in interest rates, credit risk, and prepayment risk. In general, as prevailing interest rates rise, fixed income prices will fall. Lower-quality bonds present greater risk, including an increased risk of default. An economic downtown or period of rising interest rates could adversely affect the market for these bonds and reduce the Fund’s ability to sell its bonds. The lack of a liquid market for these bonds could decrease the Fund’s share price. Investments in international markets present special risks including currency fluctuation, the potential for diplomatic and political instability, regulatory and liquidity risks, foreign taxation, and differences in auditing and other financial standards. Exposure to the commodities market may subject the Fund to greater volatility than investments in traditional securities. The Fund is a new ETF with a limited history of operations for investors to evaluate.
Investments made through an ETF and the results that those investments generate are not expected to be the same as those made through any other ETF from LifeGoal Investments, including one with a similar name. Additionally, a new or developing ETF’s performance may not be representative of how that ETF will perform in the future. Newer ETFs that are still developing may not yet have the assets to reach efficient investing and trading status. Furthermore, certain factors may affect the performance of a smaller or developing ETF in its early stages. An ETF may need to sell portions of its portfolio at certain points due to unpredictable purchasing patterns. However, the changes in an ETF’s overall value as the result of an unexpected portfolio change are not expected to be representative of the ETF’s long-term performance.