How to retire early - Part 3
More than one income stream can help safeguard your well-thought-out early retirement strategy.
Part three in our how-to-retire-early series will focus on additional retirement income strategies that can help you turbocharge your way to early retirement. If you haven’t, check out parts one and two, which discuss building your early retirement plan while tackling debt and boosting your nest egg.
Once you set your foundation, consider expanding your plan with these income-building strategies, which, when used in concert, can enhance both income and stability as you transition from the office to your next phase of life.
Boost your retirement plan assets as much as possible
Retirement savings accounts are usually the first recommended stop for savers of all stripes, but particularly for those with their eye on the early retirement prize. That’s because each of these qualified plans fall under a section of the US tax code that allows for contributions that are made either tax-deferred or after-tax, but with tax-free compounding.
The 401(k), 403(b) and 457(b) are the most common employer-sponsored retirement plans. While there are some slight differences, each program allows participants to stash up to $20,500 in the account for 2022. Many employers even match a portion of your contributions, which can help workers reach savings goals even faster. Even more, the 50 and over crowd can save an additional $6,500 per year to help “catch up” on retirement savings goals. Never mind if you’re already ahead of the game though—that “catch up” feature is based on your age, not the amount you previously saved.
If your employer doesn’t offer these plans—or you just want to save more (and why shouldn’t you, if you can!)— savers may open an individual retirement account (IRA) and save an additional $6,000 per year or $7,000 for those age 50 or up. Income limits apply to qualify for the tax advantages that come with either the traditional or Roth IRA but there’s a well-loved workaround for high-income savers, known as the backdoor Roth IRA. For the latter option, the devil is in the “pro-rata rule” details, so perform careful research or seek out your financial planner before moving forward on your own.
If you’re self-employed, you can consider a small business retirement plan like an Individual 401(k), SEP or Keogh plan. Contribution limits differ by plan, income and even by how the plan documents are structured, but the key takeaway is that it’s not difficult for even a sole proprietor or LLC business owner to take advantage of the tax advantages associated with a qualified retirement plan.
(All contribution limits listed are current for the 2022 tax year.)
Real estate investing
When it comes down to it, the most successful early retirees find a way to recreate at least one steady stream of income. An investment in real estate can provide a number of perks.
- Real estate values often rise and fall at different times than stocks and bonds, which creates a level of investment diversification that can reduce an investor’s overall level of risk.
- An additional income stream can reduce the risk that an unexpected event—like a market downturn just after you leave your nine-to-five—can have on your nest egg.
- You don't have to be a landlord to invest in real estate. Consider a passive investment in a real estate investment trust (REIT) to add portfolio diversity without the hassle of unclogging toilets.
Consider an annuity
Another easy way to an income stream is by buying an annuity. One type of annuity, a Fixed Annuity, will typically guarantee a regular fixed payment, often monthly, for a specified period of time or the remainder of your life. Fixed annuity benefits are easy to plan around—the amount you receive will always remain the same—so they’re a predictable complement for savers who want to maintain some income stability, no matter how investment or real estate markets may move. There are other types of annuities as well.
You may want to consult with a financial professional who can help determine what type of annuity, if any, may be right for you. Remember all guarantees are backed by the claims-paying ability of the issuer.
Think about alternative income strategies
Finally, retirement doesn’t necessarily mean cutting ties with your income-earning years. Even a part-time income from a consulting gig, side job, or freelance work can go a long way toward preserving the nest egg you worked hard to diligently save. That’s because every dollar you make is one less dollar you’ll withdraw from retirement savings, which will keep your balance intact, while also preserving compounding capability.
In the end, retirement isn’t just about leaving a job. It’s a transitional time when many leave careers they love, start a new venture, build out a hobby or spend time with family. That’s often true whether you retire at the traditional age of 65—or at the aggressive age of 40.
Either way, a joy-filled retirement isn’t often accidental. Instead, it’s built through a solid foundation of planning, both at the emotional and financial levels. Consider working with a professional financial partner who can help you build a framework to meet your end of career goals.