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THE Wealthier + Wiser Blog

Helping you better understand your money so you can reach your goals

Positioning yourself for early retirement

Who doesn’t dream of retiring early? More time for travel, to work on your house or to follow passions without worrying if it can pay the bills. For most of us it stays a dream, but it doesn’t have to. There are financial moves you can make today that will make your dream of early retirement a reality, and now is a perfect time to do it.

If you’re a follower of FIRE (financial independence, retire early) you may already be well on your way. The FIRE movement espouses saving and investing 50%-70% of your income until you hit your target dollar amount and then only withdrawing 4% annually (adjusted for inflation) throughout the rest of your life. It would be great to retire in your 40s, but most of us would find that path to early retirement a bit too steep. Here are some less painful ways to get there even if it does take a little more time.

Your first step is to determine how much money you’ll need in retirement to support the standard of living you’d like to have. While you may prefer to enter retirement debt free, you should focus on your overall expenses (cash flow): housing costs, utilities, food, transportation, insurance (medical, car and home) and other incidentals. Do you want to travel? Do you have a hobby you want to pursue? What additional expenses will you incur during retirement? Factor all that into your monthly costs. Once you have your monthly number, you’ll have a better idea of how much you’ll need annually. Remember that some of these costs may last several years while others may last your lifetime. Ensure that you have a good feel for how these costs change over time, and factor inflation into the mix as well.

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Next, you’ll need a crystal-clear picture of where you are today (both your current cash flow and your current net worth). If you don’t already have a financial planner, this is where you should strongly consider getting one. They can help you pull all your financial data into one place. Your bank accounts, 401k accounts, outstanding debts, investments, stocks, savings, pensions and more. All the data you’ll need to clearly see where you are today in relation to where you need to be at your target retirement age to have the life you dream of.

Now it’s time to run the numbers. How do you get from where you are to where you want to be? Your financial planner can help draw you a map, but here are some tips for what you can do today.

There’s nothing glamorous about making a budget but it’s key to attaining any financial goal. One thing to remember is sticking to a budget is a lot like sticking to a diet. If you want long-term success, don’t make it hurt. Budget in fun things and creature comforts. You’ll also want to factor in the unexpected. A new water heater, new tires or a drop-dead gorgeous pair of shoes may be in your immediate future so leave some wiggle room.

Another great way to get to the golf course faster is to max out your retirement accounts. IRAs and 401(k)s allow your pre-tax dollars to grow tax free. You can contribute up to $19,500 ($26k if you’re 50+ with a catch-up contribution) to your 401(k) and $6,000 ($7,000 if you’re 50+ with a catch-up contribution) to your IRA. Throw as much cash as you can at these accounts and take full advantage of any employee matching program. Once you max out retirement plans, there are additional opportunities to save in a brokerage account.

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Speaking of maxing out retirement accounts, be sure to take full advantage of the tax-free Health Savings Accounts. For 2022, the limit on pre-tax contributions to HSAs is $3,650 for yourself and $7,300 for family coverage.

Another tip is to evaluate your insurance coverage. You may be paying too much for too little coverage on your home, auto and life insurance policies. Those premiums can add up quick, so taking a close look can save you a significant amount of money.

Lastly, take full advantage of any tax savings you can. The less you pay to Uncle Sam, the more you can invest in your future. Both Arizona and the federal government offer tax credits that reduce your tax liability.

Remember, an early retirement ultimately comes down to some combination of saving more before retirement, spending less in retirement, or investing more aggressively (with higher annualized returns) before and during retirement.

Every point we’ve discussed moves the needle in the right direction and any improvements, even little ones, can make huge waves you can ride in retirement.

Drake A. Qualls, CFP™ is a Certified Financial Planner for Henry+Horne Wealth Management. He can be reached at (480) 483-3489 or [email protected].

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