Optimize Your Social Security Benefits
Prepare a budget and determine how your cash flow needs will be met. Yes, you can take Social Security as early as age 62. However, if youre in good health and have access to other sources of income, it usually pays to wait and let your benefit grow.
Taking your benefit at 62 will reduce your lifetime payment, and spousal survivor benefit, by as much as 30%. On the other hand, youll receive an 8% increase, plus inflation increases, for every year you wait after your full retirement age, up to age 70.
Id consider a part-time job to bridge the gap and let your benefits grow. Receiving a guaranteed, lifetime revenue stream, inflation-adjusted, and not subject to market volatility should not be underestimated.
Work with a CFP professional who performs Social Security optimization as part of their retirement planning process.
Brett Tushingham, CFP® | Tushingham Wealth Strategies
How Much Do I Need To Retire At Age 60
This husband and wife both turned 39 in 2020, and theyre saving fairly aggressively, especially for people in their age bracket. But although their contributions are moderately high, they only commit 10 percent to stocks. They could take more risks if they still have 20 years until retirement at age 60.
Here is where they stand:
- Ages: 39
- Amount added to savings each month: $2,000
- Percentage of savings in stocks: 10%
- Other debt: $45,000
While their savings arent terribly high, they contribute a healthy portion every month. So in 20 years, it will have grown substantially. Their retirement savings is projected to last until they reach the age of 81, which is past their life expectancy.
They are projected to have between $720K and $1.1M by the time they reach their early retirement age, and their projected need is between $460K and $2.4M. But they also lack a lifetime annuity or Medicare Supplemental Insurance, which could lower those figures to $310 to $960K.
Even without additional insurance, this couples savings should last through retirement. They have long-term-care insurance, which covers the risk of unexpected health care costs. If they increased their savings distribution to 25 percent stocks, they should have a well-funded retirement.
- Maximum amount needed to retire by age 60: $460K and $2.4M
You dont need a partner to live well and retire early.
Hardships Early Withdrawals And Loans
Generally, a retirement plan can distribute benefits only when certain events occur. Your summary plan description should clearly state when a distribution can be made. The plan document and summary description must also state whether the plan allows hardship distributions, early withdrawals or loans from your plan account.
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Medical Expenses Or Insurance
If you incur unreimbursed medical expenses that are greater than 10% of your adjusted gross income in that year, you are able to pay for them out of an IRA without incurring a penalty.
For a 401k withdrawal, if your unreimbursed medical expenses exceed 7.5% of your adjusted gross income for the year then the penalty will likely be waived.
Evaluate Your Current Financial Situation
When planning for retirement, the next step is to work out how much money you need. To do this, evaluate your current financial situation. Here are some questions to help:
- What is your current household income?
- How much money do you spend on expenses each month?
- How much money are you saving and investing each month?
Once you know the answer to these questions, its time to do some math.
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Can You Retire Early At 57
A worker can choose to retire as early as age 62, but doing so may result in a reduction of as much as 30 percent. Starting to receive benefits after normal retirement age may result in larger benefits. With delayed retirement credits, a person can receive his or her largest benefit by retiring at age 70.
Cut Your Investing Fees
When youre investing over a period of decades, management fees can really do you in. The 4% rule becomes more like a 2% rule if youre paying 2% annual fees to a big bank!
Consider a lower fee investment option like Weathsimple, which charges between 0.5% and 0.7% annually. If youre knowledgeable about investing , consider slashing fees to the bone by choosing one of Canadas Online Brokers.
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Understanding Your Investment Account Options
Now that youve made the right choice in deciding to save for retirement, make sure you are investing that money wisely.
The lineup of retirement accounts is a giant bowl of alphabet soup: 401s, 403s, 457s, I.R.A.s, Roth I.R.A.s, Solo 401s and all the rest. They came into existence over the decades for specific reasons, designed to help people who couldnt get all the benefits of the other accounts. But the result is a system that leaves many confused.
The first thing you need to know is that your account options will depend in large part on where and how you work.
Have A Positive Attitude
Want to know how to retire early? A positive attitude is key! A positive attitude can get you through a lot of difficulties you might experience.
Gilbert noticed that almost everyone he knows who has retired early is positive. He talked about this positivity, I think its really important to focus on your attitude. Jeskes like, Hey, Im fine winging it. Im good with that. He has an attitude of positivity. And, Chris, I think youve got the attitude, where youre receptive to try new things, Hey, lets move to Utah and climb mountains.’
I think having a positive attitude and having a curious mindset is really the key.
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Prep Your Meals For Physical And Financial Fitness
According to the Environmental Protection Agency, nearly $408 billion in food is thrown away yearly in the United States. Meal prepping not only helps to alleviate food wastage and helps you to make a healthier choice but also helps you save on groceries. Meal prepping entails cooking in bulk and portioning out meals ahead of time.
The main benefit of meal planning is it encourages you to eat healthier. More importantly, you can save money on takeout and alleviate food waste. The funds saved by utilizing meal prepping can go towards your retirement fund so you can retire sooner.
Charmaine | LuvMeKitchen
Alternatives To Rule Of 55 Withdrawals
The rule of 55, which doesnt apply to traditional or Roth IRAs, isnt the only way to get money from your retirement plan early. For example, you wont pay the penalty if you take distributions early because:
- You become totally and permanently disabled.
- You pass away and your beneficiary or estate is withdrawing money from the plan.
- Youre taking distributions to pay deductible medical expenses that exceed 7.5% of your adjusted gross income.
- Distributions are the result of an IRS levy.
- Youre receiving qualified reservist distributions.
You can also avoid the 10% early withdrawal penalty if early distributions are made as part of a series of substantially equal periodic payments, known as a SEPP plan. You have to be separated from service to qualify for this exception if youre taking money from an employers plan, but youre not subject to the 55 or older requirement. The payment amounts youd receive come from your life expectancy.
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How Much Do I Need To Retire At 65
This couple is in their early 40s, and theyve been on track for a while. And although they do want to retire early, that only means by age 65 instead of waiting until they turn 67, which is what some experts recommend for maximizing retirement savings and income.
Here are their statistics:
- Amount contributed to savings each month: $1,000
- Percentage of savings in stocks: 25%
- Other debt: $25,000
These two are in fairly good shape. Using NewRetirements retirement planning calculator, their savings is projected to last from retirement at 65 until sometime between the ages of 79 to 120 years old.
Based on their current situation, including income, savings patterns, investments, and debt, theyre projected to need between $480K to $2.2M, lacking a lifetime annuity or Medicare Supplemental Insurance. If they choose to add those insurance products, their projected need changes to $650K to $1M.
Whatever this couple chooses to do, their current savings and investments should last well past their projected life expectancy of 78. But there are possible medical and long-term-care needs that could increase their income need in retirement, which could change their situation dramatically.
- Maximum amount needed to retire at age 65: $480K to $2.2M
Work With An Investment Pro
Is early retirement in your future? Are you doing all you can to reach your retirement goals? Whether youre a seasoned investor or just starting out, you dont have to figure it all out on your own. Connect with a SmartVestor Pro today, and get on a path to early retirement thats right for you.
About the author
Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
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Establish Multiple Sources Of Income
You must generate enough money to retire early. Saving money and downsizing can only stretch your budget so much when inflation is going through the roof. The current annual increase in the inflation rate is 8.6% ending May 2022, according to the Bureau of Labor Statistics. The cost of living is always an upward trend. It is crucial to set up multiple sources of income that generate revenue through minimal input.
Retiring early does not mean one will stop working. It simply means you are not trading so many hours for compensation. Youll enjoy things you love and, at the same time, produce enough income to live comfortably. Start with a side hustle and build a business that is semi if not entirely passive.
Ram Chakradhar | Dollar for Cent
Dont Take Any Risks With Your Portfolio
Suppose youre planning to retire at 50. You should be more conservative with your portfolio in your late 40s than your peers who plan to keep working until 65. The objective is to avoid whats called the sequence of return risk. This is the risk of having a series of bad markets occur at a time when your finances are particularly fragile.
In fact, according to Dr. Wade Pfau, professor of retirement income at the American College of Financial Services, this is what makes the first couple of years in retirement so dangerous.
Ive estimated that if somebody is planning for a 30-year retirement, the market returns they experience in the first 10 years can explain 80% of the retirement outcome, he told Barrons. If you get a market downturn early on, and markets recover, later on, that doesnt help all that much when youre spending from that portfolio because you have less remaining to benefit from the subsequent market recovery.
The solution?
There are four ways to manage the sequence-of-return risk, Dr. Pfau adds. One, spend conservatively. Two, spend flexibly. You can manage sequence-of-return risk if you can reduce your spending after a market downturn by not selling as many shares to meet spending needs.
A third option is to be strategic about volatility in your portfolio, even using the idea of a rising equity glide path, he states. The fourth option is using buffer assets like cash, a reverse mortgage or whole life policy with cash value.
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When Do I Have To Start Making Withdrawals From My Ira
You cant keep your funds in a retirement account indefinitely. Generally, youre required to start taking withdrawals from your traditional IRA when you reach age 70 ½ . Roth IRAs, however, dont require withdrawals until the owner of the account dies.
The amount that youre required to withdraw is called a required minimum distribution . You can withdraw more than the RMD amount, but withdrawals from a Traditional IRA are included in your taxable income. If you fail to make withdrawals that meet the RMD standards, you may be subject to a 50% excise tax. Roth IRAs do not require RMDs. Your money grows tax-free, since contributions are made from after-tax dollars, and your withdrawals in retirement aren’t taxed.
Whats The Catch With These Payments
Popular IRA expert Ed Slott tends to discourage the use of SEPP withdrawals. He cautions that a lot of things can go wrong with this as a strategy for paying for your early retirement. He has a point.
- First, recognize that while these payments, properly calculated and executed, avoid the 10% penalty, they are still subject to ordinary income taxation.
- Further, once youve committed to taking these distributions, with few exceptions, youre obligated to stick with the withdrawals. Even if Mary at some point decides she doesnt want these taxable payments, she has to take them until she reaches age 59½ or suffer the 10% penalty on all her payments. While this sounds easy enough to live with, the reality is that over the years, its easy to make a mistake or miss a date. The result is a penalty on the whole transaction.
- In my mind, however, the biggest risk with SEPPs is that youre committing to a strategy that may run out your retirement savings before you run out of oxygen. Just because you can now withdraw more each year doesnt mean you can afford to draw that much. For example, if Mary withdraws $60,312 each year during the SEPP period, she will likely have depleted well over half of her $1 million retirement savings by the time she reaches age 60. She may live for decades longer, yet she will be starting her 60s with less than $500,000.
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Check With The Department Of Labor
If youre missing information about your former employers and any potentially lost 401 balances, start with the U.S Department of Labor. Every employer with a benefit plan is required to have a Form 5500 on file with the DOL. You can use this annual report to track down contact information for any of your former employers. Another option is to register an account on the DOLs FreeERISA site, which is a free way to look up information about accounts at former employers.
Use The Right Investment Accounts
An often overlooked item for those on the path to early retirement is what we call savings location. Its important to save money in the correct account type and that is magnified for people retiring before age 59 and-a-half. Saving into accounts other than 401s, IRAs, and Roth IRAs is key meaning that taxable accounts can still be your friend.
My clients with large taxable accounts often have more optionality than those that dont. There are still tax-efficient ways to invest using a taxable account and they dont have an age padlock with penalties like many retirement accounts do. A lot of retirement is focused on accumulating dollars for later. Its important to accumulate those dollars in an efficient way so that the withdrawal phase can go as smoothly as possible.
Doug Oosterhart, CFP® | LifePoint Planning
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Change Zip Codes To Reduce Your Cost Of Living
If youre looking to retire sooner rather than later, you may want to consider moving to a place with a lower cost of living. By making this move, you can reduce your expenses and save more money each month, which will help you reach your retirement goals sooner.
We moved from Colorado to Oklahoma for work opportunities and a better quality of life around the cost of living. Tulsa, Oklahoma has a cost of living index of 83.2 compared to 121.1 in Colorado. In addition, in Oklahoma, the housing market is 35% lower than the national average .
On top of a lower cost of living, Oklahoma has incredible state parks and trails without the crowds and traffic!
Ashlee Fechino | The Happiness Function
You Need To Pay Down Debt
There are some debts you need to tackle before you retire. If you have high-interest debt, claiming Social Security early can help you pay the debt down. Depending on the interest rate you’re paying, the 8% yearly boost to your benefits that you receive for each year you wait past full retirement age might not be worth the increased monthly benefit. Using the early benefits to reduce or eliminate your debt earlier could mean you’ll be able to keep more of your benefits in the future.
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Reinvest Your Rrsp Refund In A Tfsa
A tax refund from your Registered Retirement Savings Plan might seem like additional spending money, but you should consider it as money to grow your wealth.
Consider reinvesting your RRSP funds into your investment portfolio to compound your wealth growth. Also, investing in a Tax-Free Savings Account lets you withdraw the money tax-free instead of moving to a higher tax bracket by investing too much in your RRSP.
Retirement Can Be Tough On Couples
“Retirement is a major life transition, and you have to be patient with yourself and your spouse, says Patti Black, a certified financial planner in Birmingham, Alabama. Most retired couples do not look like those pictured in ads and commercials. You’ll have to decide how work around the house will change. Will you really share cooking, cleaning and yard work? And do you honestly want to be together 24-7, particularly if you downsize to a smaller home?
These decisions can have serious consequences for a marriage. Gray divorce, or divorce after age 50, has doubled since 1990 while declining across all other age groups, Black warns. And it is most often the wife who asks for divorce after age 50.”
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter forKiplinger’s Personal FinanceandUSA Todayand has written books on investing and the 2008 financial crisis. Waggoner’sUSA Todayinvesting column ran in dozens of newspapers for 25 years.
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