Had enough of the rat race? Eager to follow your passions of travel, volunteering or sleeping in? Jealous of your grandparents? Then maybe it’s time to retire early. To get to this stage of your life you need a how, meaning assets, health, planning and so on. You also need a when.
Deciding the when is an important step for a variety of reasons. “As soon as possible” isn’t specific enough to provide any context to what action items are necessary. Instead of setting a goal of retiring as soon as possible you could define your goal as doing so early. However, even early needs to be further explored.
What Does Retire Early Really Mean?
If you are a 20 or 30 something and climbing the corporate ladder; retiring earlier than 80 may seem like a momentous task. That doesn’t have to be your fate. Let’s take a look at the retirement average for Americans nationwide?
Most people retire somewhere between 62 and 66. This can often depend on the state they live in, according to SmartAsset.com. Nowadays most workers just want to retire earlier than their parents did, or plan to. Here are some common reference points in the Social Security program. Starting at 62 for the earliest age you can begin receiving payments to age 70 for the latest age. This age is known as your Full Retirement Age (FRA).
FRA is anywhere from age 65 to age 67 depending on your year of birth. You can look up what Social Security considers your FRA here https://www.ssa.gov/planners/retire/ageincrease.html. This age range though is the age at which you can elect to receive benefit payments and choose to still work without an earnings test to retain the benefits they are paying you. So for choosing an early retirement date your FRA might be irrelevant to your plans.
Learn More About FRA
Check out more about the FRA at Social Security’s website to fully understand it’s features and requirements. Age 65 was considered the standard retirement age goal among workers for decades for two primary reasons. One is it use to be Social Security’s FRA prior to Congress pushing it back in the 1980s2, and age 65 is still the official age a worker can transition to Medicare, the federal government administered health care program for seniors.
Lastly how about age 59.5 as a possible early retirement age due to IRS rules that allow you to begin taking withdrawals from IRAs, 401ks, Roth IRAs and annuities without a penalty?
Investments To Consider Based On Age Prior to 59.5
In America today the primary method workers use to save for retirement is through tax deferred vehicles like IRAs and 401ks. This system has its faults but for those disciplined savers who allow time and compounding to work, there is opportunity to accumulate large sums for retirement. Taking money out prior to 59.5 years of age, however prevents tax challenges.
Unless the money being withdrawn is part of a method referred to as 72T, due to a reason deemed an exclusion by the IRS, or taken out of a 401k from your prior employer after working there through age 55, a 10% penalty on those withdrawals could be owed. Therefore looking elsewhere for money to spend between your early retirement age, and when you can start to access your traditional retirement funds may be necessary. Proceeds from the sale of a business, or rental property, the rent from an investment property, or accumulating investment assets outside IRAs or 401ks are typical examples.
Age 59.5 to Age 70
Retiring early but still in this traditional age range of life is often about cash flow. One major expense that affects that is your personal home. Still having a mortgage while retired can cause cash flow issues. When money needs to be withdrawn from taxable accounts, like an IRA, to pay a monthly bill are sometimes not deductible now due to the recent tax legislation. Alternatively paying off a for home, or mostly paying off a home by the time you retire may allow you to downsize. Hopefully, to a geographic area you want to live in and still have money left over to spend or create additional income.
There are a wide variety of opinions on the traditional theory of paying down your mortgage as a retirement strategy. What’s clearly a good planning technique is keeping in mind how to maximize the equity in your home for retirement. This can happen using realistic goals and comprises to make sure your assets and cash flow are sufficient.
Age 70 & Above
Whether you are retiring at 70, or already retired but now considering how to allocate your assets to assure you don’t run out of money. Looking at what those assets are producing for you are considerations you must assess. Investments like bonds, real estate, dividend paying stocks, preferred stocks, and even CDs are designed to send a consistent check to the owner or lender.
That check in most instances is simply the interest or earnings due to having your principal. It is not typically in a structure that includes any of your principal. Therefore that continues to work for you long term. There are concerns with income investing as well such as inflation, market fluctuation, and the viability of the investment or borrower. Principal can be kept intact the longer It can last for your lifetime.
What steps are you taking to retire early? Share some of your tips with us in the comments below.
Looking for more great retirement articles? Give these a try:
- Only 317%of Millenials Have Retirement Accounts
- 5 Ways To Take Charge of Your Life In Retirement
- Should You Rethink Whether To Postpone Your Retirement
Brian Kuhn CFP® is a financial planner and writer based in Fulton MD. He is the author of “Total Compensation: A Practical Guide to Federal Employee Benefits” and “The Personal Finance Handbook”, a Guide to the Most Common Personal Finance Questions”. He is available at www.PSGClarity.com and @IRAGuidance on Twitter. No content in this article should be construed as a specific investment recommendation. Securities offered through Triad Advisors, Member FINRA / SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC