Retirement Planners: 10 Tips To Retire Early

If you want to retire earlier than the traditional retirement age of around 65 to 70 years old, planning for it should be on your mind a lot — and with good reason.

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Barring an unforeseen windfall, early retirement takes strategic and even aggressive planning. Simply putting money into a traditional savings account won’t get you there. Here, retirement and financial planning experts explain several tips to retire early.

Be Proactive About Tax Planning

Chris Urban, CFP, RICP, founder of Discovery Wealth Planning, said that people who want to retire early should be very proactive with tax planning. They should also be thoughtful about their spending plan in retirement, particularly how to generate income to live in retirement. 

“As you accumulate wealth, ideally you want to save and invest in accounts with different tax treatment. For example, good tax diversification might mean you have a pre-tax account (i.e. Traditional 401k and/or IRA), an after-tax account (i.e. Roth 401k and/or Roth IRA) and a taxable brokerage account,” Urban explained. 

Once you get to retirement, you will have much greater flexibility with drawing down your assets in a tax-efficient manner if you have assets to pull from in accounts with different tax treatment, he said.

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Be Realistic About Expenditures

Another way to be sure you save enough for an early retirement is to think realistically about your expenditures.

“Too many people focus on the size of their nest egg when, in reality…the most important factor for considering when to retire is how much you will actually be spending,” Urban said.

He suggested that it is important to think about such things as where you will live, how much it will cost, your overall tax situation (income, property, etc.), your healthcare risks and costs and your short-, medium- and long-term goals.

Live Below Your Means

Another secret to building the kind of wealth that allows you to retire early is living below your means, according to Melissa Murphy Pavone, CFP, CDFA, director of investments at Oppenheimer & Co. Inc

She said, “You need to be clear on the income coming in and the expenses going out. Pay yourself first. The results of compound interest are powerful. As your income increases lifestyle inflation creeps in. Avoid the urge to spend more as you make more. Save more. Invest the difference. Your future self will thank you.”

Open and Max Out Retirement Savings Accounts

If your company has a retirement account offering, Pavone urges you to enroll. If it doesn’t, open an IRA and max it out.

According to David Edmisten, CFP and founder of Next Phase Financial Planning, LLC, the last years of your career are a great time to accelerate your savings for retirement. “Use higher income and bonuses to make larger contributions to your investments. Contribution limits for 401(k) and similar workplace retirement savings plans increased to $23,000 in 2024. IRA contribution limits increased to $7,000 as well.”

Make Catch-Up Contributions 

If you are age 50 or over, you can take advantage of catch-up contributions to your 401(k) and IRA accounts to save thousands more, Edmisten said. 

“Catch-up contributions for a 401(k) plan are $7,500 in 2024 and you can add a catch-up contribution of $1,000 to your IRA, if eligible, for even more retirement savings.”

Utilize a Health Savings Account

Another overlooked way to increase your retirement savings in a tax-smart way is to maximize your HSA if you are eligible for one, Edmisten added.

“Contribution limits for an HSA account are relatively high. Individuals can contribute up to $4,150 to an HSA in 2024, and up to $8,300 for a family plan. If you’re 55 or older, you can make an extra ‘catch-up’ contribution of $1,000 per year and a spouse who is 55 or older can do the same if each of you has your own HSA account.”

Save 18 to 24 Months of Spending Cash 

Building a cash reserve of up to two years of living expenses at the time of retirement allows you to enter retirement confidently.

“You’ll already have the cash set aside to cover all of your yearly retirement expenses for the first year or two before you retire. You won’t have to worry about a bad stock market or other economic changes throwing your plans off course. You can allow your investments time to adjust if conditions are bad and store up any growth or income from your nest egg for future spending,” Edmisten said.

You can plan to set up a recurring monthly withdrawal from your cash reserve to your checking account once you enter retirement, so the funds are ready to spend when you need them.

Add More to a Brokerage Account 

There’s also no limit on how much you can contribute to a taxable brokerage account, though these accounts are also not tax deductible.

Edmisten said, “So if you have more money available to save, consider adding to these accounts. Adding funds to your taxable investment accounts gives you more money to grow for your future.”

Lower Your Expenses

Another great way to be prepared to retire early is to lower your living expenses before you retire.

“Paying off expensive debt is one of the most impactful ways to reduce your monthly budget. Getting rid of credit card debt, student or business loans, car payments, and potentially even paying off your home mortgage are effective ways to lower the most significant expenses in your budget,” Edmisten said. 

You can also review all other areas of spending to see what you can reduce or eliminate, he urged. “Typical candidates for reduction include online subscriptions, internet and cell phone plans, impulse purchases, travel costs, dining out, etc. Keep those items that allow you to enjoy your lifestyle, but you may be surprised how much you can save.”

Define Your Purpose

Though not a piece of financial advice necessarily, Edmisten also pointed out that retirement is a time of defining “new meaning of purpose and engagement.”

“Having a plan for how you will spend your time to continue to develop your community, creativity and contribution is a very important part of planning well for retirement,” he advised.

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This article originally appeared on Retirement Planners: 10 Tips To Retire Early

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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