Retiring early has obvious appeals – more freedom, more time and the chance to enjoy life while you’re still young and healthy. But retiring early also means your savings may need to last for 40 to 50 years. This requires a strategy based on flexibility, tax awareness and careful planning.
Here are some smart moves you need to make now to make early retirement sustainable, financial planners say.
Having funds outside of accounts like 401(k) plans and IRAs will provide the flexibility and liquidity needed for early retirement.
“Without this, retirement is not realistic for someone in their 40s or 50s,” says Derek Munchow, CFP, founder of Augustus Wealth. “Most retirement plans are effective for tax deferral, but they limit access and limit options.”
He recommends using a non-qualified brokerage account to avoid early withdrawal penalties before you turn 59 1/2.
“This becomes an engine for flexibility, liquidity and choice before age 60,” Munchow said. “In addition, it allows your retirement account to continue compounding to pay for expenses you will face later in life — namely medical expenses.”
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Even if you prioritize savings outside of your 401(k), don’t skip the free money.
“Contribute enough to your employer’s retirement plan to get the full match from the company,” Monshaw says. “Don’t leave money on the table.”
Before exiting the workforce, make sure you have an emergency fund to cover three to six months of expenses and that you’ve paid off high-interest debt like credit card debt.
“Liquidity and balance sheet strength take priority over growth,” Monjo said.
A strong foundation makes your early retirement more resilient.
While you’re still working, you need to set aside as much of your income as possible for retirement savings.
“The goal is to reach critical mass as quickly and efficiently as possible,” Monshaw said. This means building an asset base that can accommodate your lifestyle, handle emergencies, and continue to compound interest.
This usually requires:
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High savings rate while working
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Growth-focused long-term investment strategy
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Minimize lifestyle inflation
The faster you build your base, the sooner early retirement becomes a reality.
To mitigate the risk of inflation and poor market returns, Steven Rogé, CFP, CEO of RW Rogé & Company, Inc., says to put money into three different “buckets”:
