A lot of people may want to retire early but without a definite plan, it’s just a pipe dream. In order to retire early, make a plan, contribute to Roth IRA and building a portfolio to generate passive income can get you there.
Turn your dream into a reality by having a plan.
First Step: Plan
Include in your plan, when you intend to retire, how much you’ll need, and how you intend to meet your target savings.
How Much You Need
In order to figure out how much you need to retire, first, calculate your annual expense. Track all your expenses. You can do this on a spreadsheet or use an app. An average monthly expense for Americans is $5,200 per month so you can use this number if it’s easier for you.
Rule of 25
Once you figure out your annual expense, multiply it by 25. That’s your target number. The Rule of 25 is the inverse of Rule of 4%. You can safely withdraw 4% without running out of money. In order to retire on $60,000 per year, you’ll need roughly $1.5 million.
FI (financial independent) number= annual expense X 25.
Second Step: Go for the Target
A lot of people put all their eggs in one basket (401k/ 403b) and realize too late that their money is locked up until age 59 1/2. By following these steps, you’ll have a good chance of having savings in the right vehicles to retire early.
Invest in 401k/ 403b
Invest in a 401k/ 403 up to the match only. If your employer does not match your contribution, skip to the second step.
A lot of people put all their eggs in one basket (401k/ 403b) and realize too late that their money is locked up until age 59 1/2. By following these steps, you’ll have a good chance of having savings in the right vehicle to retire early.
Build Your Emergency Fund
Save at least 3-6 months of expenses for an emergency fund in a high yield savings account. Murphy’s Law is that is you have it, you won’t need it.
Roth IRA
Contribute the maximum to Roth IRA. The maximum you can contribute to Roth IRA is $6,000. The biggest benefit of Roth IRA is that you can withdraw the contributions you made at any time penalty free. Roth IRA in 2021 has an income limit of $124,000 for single and $196,000 for married. Start your Roth IRA early so that you’re not restricted by income limits. You can withdraw the principle from your Roth IRA any time. The equity and the interest earned on Roth IRA can be accessed after age 59 1/2.
Contribute Maximum to Your 401k/ 403b
Go back to your 401k/ 403b and contribute up to the maximum, which is $19,500. You’ll want to do this especially if you’re a high income earner for tax benefits.
After Tax Brokerage Account
Invest your money in a taxable brokerage account such as Fidelity, TD Ameritrade (now Schwab), or Vanguard. The earlier you want to retire, the more money you’ll need in this account. This fund can bridge your time until you can withdraw from your 401k/ 403b.
Other Consideration
Real Estate
This is one of my favorite wealth building vehicle. Investing in a rental property early will allow time for your tenants to pay down the mortgage. Depending on how aggressive you want to be, you can pay off the mortgage by the time you retire and live on the rental income as passive income. Alternatively, you can sell one of your investment properties and fund your early retirement.
Rule of 55
The IRS Rule of 55 allows an employee who is laid off, fired, or quits a job between the ages of 55 and 59 1/2 to take money from their 401(k) or 403(b) plan without the 10% penalty for early withdrawal.
Passive Income
Positioning yourself to generate passive income through dividends, annual investment returns, rental income, royalties or other stream of income will ensure your early retirement.
Best Part of Financial Freedom
“Fridays aren’t the best days of the week anymore.”