Early Retirement

What we don’t plan for can’t happen, so it’s critical to make an early retirement plan now. Whatever early retirement age you aim for—it doesn’t have to be 40—these strategies will help you realize your goal.

1. Maximize your 401(k) contributions

The first step toward early retirement is to save for retirement as aggressively as possible, starting with your 401(k) plan. At a minimum, you should contribute enough to maximize your employer’s matching contribution. If you can afford it, contribute the maximum allowed to your 401(k). In 2022, that amount is $20,500, and people over 50 are allowed to contribute an additional $6,500. Even if your early retirement age is 60 rather than 65, pushing the limits of your 401(k) is an excellent way to build retirement security.

2. Open a Roth IRA

Roth IRAs are individual retirement accounts with a twist. Rather than making pre-tax contributions then paying income tax when you take the money out, Roth contributions are after-tax. When you withdraw funds from your Roth IRA, you won’t pay any taxes. With proper planning, you can also avoid capital gains taxes on your Roth investments. Start working toward early retirement now by making the maximum Roth IRA contribution.

Roth IRAs are only available to people under a specific income level (the Roth income cap changes annually). You’ll have to wait until age 59 ½ to make withdrawals without a penalty, so it’s crucial to have other strategies to support your life in early retirement.

3. Don’t accrue credit card debt

Life costs money, and you need to buy stuff. But, when you use credit rather than cash to cover your everyday expenses, you are likely to end up paying much more than the sticker price for your purchases.

Even with good credit, you can expect to pay around 20% interest on credit card purchases, and that interest is compounded, so you end up paying interest on the interest. Funds that you could set aside towards your early retirement plan go to your credit card company instead.

Of course, you’ll have to make some purchases on credit. It’s fine to take out a mortgage or a car loan, and you’ll generally pay much lower interest rates to your lender than you would on a credit card. In addition, many people have student loan debt they have to pay off. Those debts are all investments in your life, and they have a fixed payment term, unlike credit card debt which can be an endless drain on your wealth.

4. Buy a multifamily house

Buying a multifamily house is a terrific investment if you want to retire by 40. Plan to live in one unit and rent the others after you retire, giving yourself a steady income without a steady job. And multifamily dwellings are also a good value: the price of a four-unit building is less than four single-family homes.

5. Save your side hustle income for retirement

A side hustle is an excellent way to work toward early retirement now. If you consult or do gig work on the side, you can use that income to move up your early retirement age. Simply open a SIMPLE IRA. A SIMPLE IRA can serve as a type of retirement plan for small employers, and you can use it to save all of your side hustle income for retirement.

You may also want to continue a side-hustle or part-time work after retiring from your full-time job. Creating a small business today is a terrific way to start working toward early retirement now.

6. Include Social Security in your early retirement plan

If you retire at age 40, you’ll need other savings to get you through your initial years after you stop working, but you should still include Social Security in your early retirement plan. You can start collecting benefits as early as age 62, though the amount will be less than if you wait till your full retirement age. If you can wait until age 70, you will receive a higher monthly benefit. However, you might collect more benefits in the long run by taking Social Security early.

7. Get help from a financial advisor

What kinds of IRAs should you open, and how much should you contribute? Where should you invest your retirement savings? When is the optimum time to apply for Social Security? How can you work toward early retirement now? These are all questions that a financial advisor can help you answer.

Planning is critical if you want to retire at 40 (or 50 or 60). No matter how much money you make or even if you were to win the lottery, your money—and your future security—can slip through your fingers without a financial plan. Financial planning is an investment in your future that can pay the dividend of more years to travel, spend time with family, or volunteer.