Retirement
Early Retirement Tips
Whether you equate early retirement with the youngest age you can begin collecting social security (currently 62) or an age much, much younger, here are five early retirement tips, tricks, and hacks to get there as soon as possible.
1. Start by Figuring Out a Target Amount of Savings You Might Need for an Early Retirement Creating a financial plan for an early retirement can be complicated because it will differ dramatically depending on what age you’d like to retire at — and literally hundreds of other criteria that can be difficult to predict and will shift and change over the years.
Find a tool that will enable you to build a detailed plan with what you have and your assumptions now, but where you can also try out different scenarios. Many online tools are available to help you build your plan
2. Cut Expenses Now
If you want to retire early, you might need to make some short and long-term sacrifices. Dramatically cutting expenses benefits you in several ways:
- It frees up more money to pay down debt and set aside for savings
- It conditions you to live on less money — which will come in handy when you lose earnings in retirement
- It reduces the amount of money you require to live on, thus lowering the amount you need to save (the “slingshot effect”)
Relentlessly look for ways to cut costs, like spending on subscriptions you don’t use or services you don’t need. In addition to cutting small expenses, get in the habit of periodically shopping around on larger expenses such as home repairs, car insurance, and cell phone plans.
3. Understand Why You Want to Retire — What Do You Want to Do?
Retiring early is about money. However, it is also about time. It is important to know what you want to do with your life once you are free from the shackles of your job. And, knowing where you are going can be very motivating. Many people retire to get away from something, then realize that they need to reinvent themselves and figure out how to spend their time.
You may find that you will have a more successful early retirement if you have a plan for what you want to do.
4. Make Sure You Have a Plan for Staying Engaged and Active in Retirement
Some studies show that an early retirement predicts a shorter lifespan.
The reason? Having a place to go, people to see, a reason for being are all critical to staying mentally, emotionally, and physically healthy.
Before you retire early, make sure you have a plan for staying engaged.
5. Adopt Healthy Habits
Adopting healthy habits can help you live longer and minimize your out-of-pocket health expenditures. Eat well, exercise, minimize stress, stay social, and have a purpose in life for better overall health.
Is a Roth IRA Conversion right for you?
Roth conversions can be an effective strategy for optimizing retirement savings, but they come with potential pitfalls. Converting pre-tax retirement accounts such as IRAs to after-tax Roth IRAs could allow you to keep growing funds tax-free and then make withdrawals in retirement without paying taxes.
Here are five of the most common mistakes to avoid when considering a Roth conversion.
1. Ignoring the Tax Impact
One of the most significant errors in a Roth conversion can be not fully accounting for the immediate tax consequences.
When you convert a traditional IRA to a Roth IRA, the converted amount is considered taxable income you must pay taxes on in the tax year of the conversion. Miscalculating this could lead to an unexpected and potentially hefty tax bill, which might push you into a higher tax bracket for the year.
2. Not Considering Future Tax Rates
The primary advantage of a Roth IRA is that withdrawals are tax-free in retirement.
However, if you anticipate being in a lower tax bracket in retirement than you are now, the conversion may not be as beneficial. It can be important to project your future income and tax scenario to make an informed decision.
This is something a financial advisor could help with.
3. Converting Too Much at Once
Many individuals may make the mistake of converting large sums all at once.
This approach could potentially lead to a significant tax burden in a single year. Instead, spreading the conversion over several years may help manage the tax impact and potentially avoid pushing yourself into a higher tax bracket. This strategy could require careful planning and timing to optimize tax efficiency.
4. Overlooking the Five-Year Rule
Roth IRAs have a five-year rule requiring you to wait five years after the conversion before you can withdraw the earnings tax-free.
If not, you might face taxes and potential penalties on the withdrawn earnings. This rule applies to each conversion separately, so it can be important to keep track of the timing for each conversion to avoid potential costly mistakes.
5. Not Coordinating with Social Security Benefits
A Roth conversion could also impact how your Social Security benefits are taxed.
If the conversion increases your income significantly, it may cause a larger portion of your Social Security benefits to be taxed. Be sure to understand how the conversion could affect your overall financial situation, including Social Security, to avoid potential unintended consequences.
Retirement Regrets: Five Things Retirees Wish They Would Have Done Differently
Recent research suggests that retirees can point to clear planning steps they could have taken that would have made a dramatic impact on being prepared for retirement. Here are five ways today’s retirees say they would have planned differently, and how you can do better.
1. Save More
Retirees who were less confident about their financial situations say not saving was a major regret. Other savings regrets included not making the most of their 401(k) plan, not enrolling in the plan early enough, and not saving the maximum amount allowed by their plan.
2. Document an Overall Plan
A written plan will help put your worries to rest. Creating a written plan takes time, but a plan will help you discover opportunities for more wealth and security.
3. Plan More Carefully for the Fun You Want to Have in Retirement
While many older Americans believe once they retire they’ll spend less as a result of having a lower income, financial experts say most retirees often spend more in at least the first few years of retirement.
4. Plan for Healthcare
Before you retire, you should get a reasonable estimate of your healthcare costs and make sure you can afford them. Medicare does not cover everything, and most people spend hundreds of thousands of dollars in out-of-pocket healthcare expenses in retirement — not even including funding a long-term care need.
5. Retire Earlier
Not all retirement regrets are related to poor planning. In fact, it is common to hear many people rue not retiring sooner.
It is common, particularly among those who have been financially responsible their whole lives, to have a difficult time making the switch to retirement. Leaving behind an income stream and the habits of saving can feel like a leap of faith. Retiring too late or years after you could have is a regret about how you have spent your time, which can feel more demoralizing than sorrows about money.