Some people love their careers and will happily work well into their 60s or later. Others would retire today if they could. If you fall into the latter category, there are several strategies you can deploy to bump up your retirement date. Targeted sacrifices, extra effort and smart money decisions may help you reach retirement sooner. If you are unhappy in your career and can't wait to leave your full-time job, it's worth exploring some ways to accelerate your exit. Consider these strategies to retire sooner and spend more time doing what you want to do.
Cut annual spending. If you can decrease your annual spending, it's mathematically possible to retire sooner. Financial advisors often use the 4 percent rule to determine when a person can comfortably retire. This rule of thumb says that if you withdraw 4 percent of your retirement nest egg every year to fund your lifestyle, the money will last for 30 years. Since most people retire in their 60s, they can use the 4 percent rule to make sure they don't run out of money too soon.
For example, a person with $1.5 million in assets can safely live off $60,000 per year. If you can lower your annual spending, you can also decrease the amount you need to retire. For example, if you can comfortably reduce your annual living expenses to $50,000, you can retire with $1.25 million in assets instead of $1.5 million. Factor in Social Security and pensions to get a more accurate picture of your savings needs.
Reducing your annual expenditures might take some effort. Consider permanently eliminating debt by paying off any credit card or car debt. Paying off the mortgage is a common goal for retirees, because not having a payment dramatically lowers your annual spending. Also, focus on reducing other recurring expenses such as unnecessary subscriptions or unused memberships. Many workers find lowering their living expenses to be a difficult change, but if you're serious about bumping up your retirement date, this should be your first step.
Work a supplemental job in your field. If you have time and can handle the extra workload, taking on extra work can accelerate your savings. Additional opportunities may exist in your profession that allow you to earn more. In teaching, for example, a coaching job or leadership position might boost your salary. Another option is to use your career skills to consult on side projects or perform side jobs, if your employer allows it. If overtime is available for your job, use the money earned to cushion your retirement savings. Any extra money you can earn and save will increase your nest egg and help secure an earlier retirement.
[See: 15 In-Demand Jobs for Seniors.]
Invest for income. Once you've maxed out your tax-advantaged accounts, consider using any additional monthly cash to invest in income producing assets. These assets will continue to pay you when you stop working, giving you more flexibility with your retirement planning. Sustainable income streams can be built with assets such as dividend-paying stocks, bonds or real estate.
Dividend stocks with a long history of paying and increasing dividends, such as those found on the dividend aristocrats list, are a good place to start. Dividend-focused exchange-traded funds can also provide reliable income with greater diversification.
Real estate can provide retirement income, and there are several tax benefits to real estate investing. However, real estate may require more of your attention if you decide to become a landlord. The income from real estate investments is taxable if it is not in a retirement account, but the tax rates are generally lower than ordinary income. The additional income streams will help cover living expenses in retirement, requiring a smaller nest egg in your tax-advantaged retirement accounts.
Start a side business. Owning a small business allows retirees to stay engaged in part-time work while doing something they enjoy. Instead of waiting for retirement, start your business on the side before you retire. You can potentially earn additional income before retirement and give yourself the option to continue to operate your business when you leave your full-time job.
Choose a business that is low stress, close to home and in a field or subject outside of your full-time career. Ideally, your side business will feel like an enjoyable hobby that earns money. That way, even though you may continue to work, it won't feel like your pre-retirement career. You'll stay busy, engaged and productive. Small amounts of earnings go a long way to help fund your retirement when combined with tax-advantaged savings accumulated during your career.
Relocate. Relocating is an option for retirees who live in expensive areas and are serious about leaving the workplace for good. The benefits of moving may include more affordable housing costs, a reduced cost of living and lower taxes, especially if you move to a state with no income tax. Withdrawals from retirement accounts in a state without income tax will last longer and the benefits add up over the duration of your retirement.
If moving to another state isn't desirable for the tax benefits or warmer weather, relocating is still an opportunity to downsize your home or move to a more suitable community. Look for affordable senior housing options in your hometown or a nearby area.
Convert to a Roth IRA. Workers who have amassed sizable retirement savings, but are far from traditional retirement age, can utilize certain strategies to access retirement account funds early without penalty. Roth IRA contributions can be distributed before age 59 1/2 without penalties or taxes. However, gains on those contributions cannot be withdrawn without consequences.
With foresight and patience, traditional IRA money can be accessed using a Roth IRA conversion. You'll pay taxes upfront on the amount you convert, but after five years the money is available without tax or penalty. Some early retirees create a "ladder" by converting small amounts from their traditional IRA to a Roth IRA each year, which provides access to each amount converted five years later. For example, if you execute a Roth IRA conversion at ages 50, 51 and 52, the funds will be available at ages 55, 56 and 57.
Keep in mind, if you choose to tap your retirement accounts early, you may experience a shortfall of funds later in life. Speak to a professional before converting large amounts to a Roth IRA to ensure you have enough money to last your expected lifespan.
Rebalance your retirement investments. Many workers invest in their employer's retirement investment plan or IRA, but fail to ensure the portfolio is properly allocated. A properly allocated retirement portfolio will maximize returns and lower downside risk based on your age and risk tolerance. Ignoring your investment allocation for more than a year can lead to excess cash or an unbalanced portfolio that may be too risky or not risky enough.
Talk to a fee-only financial advisor to help guide your portfolio reallocation, or consider using a robo advisor that can guide you to appropriate investments for a lower cost. Rebalancing your retirement investments annually in the years leading up to retirement will help optimize your returns, reduce losses and set a more solid foundation for the next phase of your life.
Craig Stephens is a blogger at Retire Before Dad.
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