Retiring Earlier than Expected? Consider These Strategies from a Financial Advisor in Gilbert
For the majority of the working population, all financial roads lead to retirement. Whether you decide to use your money to travel the world, start a business, undertake an important charitable endeavor, or any other purpose, retirement is still on the horizon.
But what happens if you want or need to retire early? Retiring sooner rather than later can be a dream for some, but a nightmare for others. As time is a key factor in financial growth, cutting your working life short can put severe pressure on your finances, before your nest egg is fully formed.
Nevertheless, there are still some helpful strategies at your disposal to make your early retirement smoother.
Boost Your Retirement Savings With Catch-up Contributions
The benefits of maximizing your retirement account savings cannot be overstated. Remember, every dollar you put in a retirement account is tax-advantaged. Regardless of whether you choose a traditional IRA or a Roth-IRA, you’ll at least avoid capital gains taxes and receive some form of a tax advantage.
Your stocks, mutual funds, bonds, or any other investments in your retirement accounts can appreciate in value or pay dividends. You will only pay taxes on the gains when the money is withdrawn, at typically a lower tax rate. Money deposited and invested in a retirement account is like jet fuel for your financial future.
Therefore, once you turn 50 years old and become eligible for catch-up contributions, take full advantage of the higher contribution limit.
A Solid Boost to Your Future Retirement Income
Individual retirement accounts like traditional and Roth-IRAs may receive an extra $1,000 per year, a 16% increase. Your 401(k) limit could increase by $6,500, which is a 33% increase. Keep in mind that any investor would be thrilled to earn a 16% or 33% return on a stock. Your financial advisor can guide you in these decisions.
This extra boost to your retirement accounts is available to you once you turn 50, and you can invest the extra money too! When regular savings and investment returns work together, your wealth can experience tremendous growth over time.
If you’re retiring early, whether voluntarily or involuntarily, make retirement contributions and catch-up contributions a priority for your savings. You’ll either get a deduction now, or potentially tax-free gains and withdrawals later. These funds will be a key supplement to your retirement income, among other sources like social security, pensions, and your bank savings.
Do you have questions about early retirement? Schedule a no-obligation conversation with the team at Watts Gwilliam and Company to see how we can help.
Using Equity or Other Assets
Typically, the equity you have can pay you back in spades when used properly. The equity you generate can be used for a number of purposes. Whether it’s equity in your home, business interests, or otherwise any other asset, the funds can be used to generate additional income for you in the future.
Also, you can refinance your home to find a more favorable rate, increase your monthly savings, or use the money to make other lucrative investments
Do you own a business? When you retire, your equity share in your business can be used to fund your retirement further.
Apply Rule 72t, Also Known as SEPP
Substantially Equal Periodic Payments (SEPP) is a retirement account withdrawal method retirement that benefits those who make withdrawals before 59½. Named after IRS rule 72(t), these withdrawals avoid the early withdrawal penalty of 10% of the distributed amount. While helpful, there are three key rules to keep in mind.
To begin, you must take at least one payment a year. Several SEPP payments can be taken, but you must take at least one payment per year for five years, or until you’re 59 ½. If you miss a year, you’ll owe the IRS early withdrawal penalties on all withdrawn funds.
Next, you’re required to pay income taxes on money that is yet to be taxed. Earnings withdrawn from your Roth are taxable, as well as funds from your pre-tax retirement accounts. Lastly, no withdrawals can be made from employer-sponsored plans if you’re actively employed by them.
If you retire before age 59 1/2, keep in mind that retirement account withdrawals are both penalized and taxed. If you find yourself in this position, try to use other savings sources first. But, if you meet the criteria above, and absolutely must make a withdrawal from your retirement account, try to use a SEPP strategy.
Review Your Plans with a Financial Advisor in Gilbert
Retiring early may or may not be your first choice, especially since the beginning of the pandemic. To solve this financial puzzle, you’ll need all of the support and strategy you can get. Fortunately, a dedicated financial advisor is the perfect candidate to help you successfully navigate an early retirement. Here are some tips you can use to evaluate your financial advisor.
Your financial advisor can take a detailed look at all of the components of your financial life, and bring everything into alignment. Your assets, liabilities, income sources, and special considerations, must all be considered when forming your financial plan. Financial advisors are perfectly equipped to help you plan, implement, and maintain your financial plan, taking all of the heavy lifting off your plate.
Your Advisor Can Help Make Your Preferred Retirement Lifestyle a Reality
How much will you spend each month in retirement? In order to spend that amount, how much do your current savings and investments need to grow? Financial advisors can help you flesh out your spending goals, and put together an investment plan that can potentially fund your preferred lifestyle during retirement. In truth, this is precisely why we invest.
Plus, complex matters like health insurance, estate planning, social security, and more, will all be made easy and can be manageable by your advisor. You don’t need to take on these challenging matters alone.
In short, a financial advisor is your advocate, and one of your best chances at reaching your financial success. Don’t retire early without one. So your golden years—while occurring early—can still be golden.
Take a look at our Retirement Timeline to help prepare for the change.
Watts Gwilliam & Company is a fee-only, fiduciary financial advisory firm headquartered in Gilbert, Arizona but serving investors nationwide. Our firm was established to provide a conflict-free environment that’s dedicated to your success. We provide innovative investment and financial planning strategies so you can build wealth, generate income and secure your future.