Proven Ways To Retire Early

Written by Jane Genova. Posted in Personal Finance

Proven Ways To Retire Early

Early retirement is part of the American Dream and it might mean very different things to different people. Millennial entrepreneurs might hope to sell their companies, never to labor for profits or wages again while 45-year-old middle managers may not want to work past age 50. If you’re looking for advice on an early retirement, check out these tips you may want to follow.

No Guarantees  

Planning to retire early requires a comprehensive approach since there are no guarantees that you will be able to build a certain level of wealth through investments and sale of assets such as a house; depend on entitlements like Social Security and Medicare; and enjoy tax policies favorable to your particular situation. When the housing market crashed, so did some people’s plan to retire early or even at all. Just as importantly, you cannot predict, once you retire, your precise cash flow, what the rate of inflation will be, tax rates, medical costs, nursing home expenses and how long you will live.

Investments – Traditional and Alternate

Investments, both traditional like securities and alternate such as real estate, represent one cornerstone of preparing for early retirement. These can be effective in creating a nest egg because of the effects of compounded interest, which mean that each earning period there is interest earned on the interest from the earlier earning period. In addition, there can be capital gains from appreciation of the asset and dividends. On the other hand, there can also be losses. The younger you are when you begin investing, the better the odds that you can choose when to retire.

The types of investments include:

Employer retirement accounts:Many employers provide retirement savings programs such as the 401(k) and the 403(b). These allow before-tax money to be put in, which means the annual maximum allowed and any extra funding for those over-50 are deducted from taxable gross income. Some plans have provisions that, if the worker puts in a certain amount, employers will match it, representing “free money.” There are no taxes until the funds are withdrawn. These are portable, that is, can be rolled over into another account when leaving the employer.

Self-employed retirement accounts: Entrepreneurs can invest with pre-tax dollars in self-employment accounts. Some employees start side businesses for not only additional income, but the opportunity to establish self-employed retirement accounts.

Traditional IRA, Roth IRA: Those not covered by an employer retirement plan can fund a traditional IRA with pre-tax dollars. Those covered by an employer plan can fund the Roth IRA with after-tax dollars, but pay no taxes upon withdrawal.

Early withdrawal of funds without penalty:Many believe that the funds in those various retirement accounts cannot be tapped before the age of 59 1/2 without a penalty.  That is wrong. Arrangements can be made to do that before 59 1/2 without penalty for equal amounts to be distributed monthly over one’s lifetime. At that time, the taxes will be paid.

Another option, also not well known, is to leave the job where the retirement account is after age 55. There is then no penalty. At the time taxes will be paid.

Also, for medical expenses which total more than 7.5 percent of one’s total gross income, funds can be withdrawn without penalty. Taxes will have to be paid.

Sale of assets: Historically, real estate had been an excellent way of creating a nest egg for retirement. Although capital gains tax laws continually change, there has been no tax taken on the gains in the value of real estate up to $500,000 for a married couple and $250,000 for an individual. After the housing market crashed, some owners lost rather than gained money. However, housing’s value could return.

Other alternate investments include collectibles such as works of art or vintage comic books, income property and gold.

Too Young For Entitlements

Retiring early might mean being “too young” for entitlements like Medicare and full benefits from Social Security, but that does not have to deter you.

Medicare: Until you are eligible for Medicare, you might be able to obtain heath care coverage through a former employer, professional association, health maintenance organization or specific provisions of the Affordable Care Act. Another option is relocating to a nation with universal health care.

Social Security: Although you may not yet be the age to receive full Social Security benefits, you might be eligible to receive them at a reduced rate. The drawback is that the rate remains in effect for life.

Additional Strategies

Your comprehensive planning for retirement could also include the following tactics.

Strategic frugality: The objective is to free up money to put toward retirement by keeping fixed expenses low. No one is too young to adopt this habit.

Income from part-time jobs/businesses: Not only do jobs and businesses on the side bring in more income, they also “protect” your early retirement schedule if you lose your primary job. They might even become your main source of income and can be maintained even after retiring. Some retired “nomads” travel the U.S. and the world, shoring up income with odd jobs.

Employed or operating a business outside U.S.: Employers, both U.S. and foreign, needing American workers outside the U.S. will frequently provide perks, such as low cost or free housing, which allow for more savings. Entrepreneurs operating businesses, including digital ones, in a foreign country can have access to a lower standard of living and tax structure.

Retiring outside the U.S.: The cost of living in nations like Mexico, Ecuador, Bulgaria, and Cost Rica can be less than half that of the U.S. In addition, some of them, such as Mexico, provide universal health care at a cost even lower than Medicare.

Early retirement is both possible and probable. Both within the U.S. and around the world are former employees and entrepreneurs who achieved that goal, despite challenges ranging from stock market losses to concerns about affordable healthcare coverage. In most cases they created a comprehensive plan instead of relying on one strategy, such as the eventual sale of their house.


Jane Genova

Jane Genova

Jane Genova is a journalist, syndicated blogger, and ghostwriter on financial topics. Her analysis and commentary, under her own byline, have been published in The Wall Street Journal, Wall Street Job Report, Selling To Seniors, IP Watchdog and Motley Fool. She has been quoted in Bloomberg Business Week, The New York Times, Plain Dealer, New York Magazine, and Crain's. Currently, she operates her own boutique Genova Writing, Coaching, and More which provides ghostwriting services on financial issues for professional services firms and entrepreneurs. Under clients’ bylines, her publication credits include The Wall Street Journal, Fox Business, Seeking Alpha, American Banker, Bankruptcy Strategist, Yahoo!, The Washington Post, The New York Times, Hemisphers, USA Today and 20 books. She has an MA in linguistics from the University of Michigan and had attended Harvard Law School.

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