|Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.|
The Secrets to Attaining Your Retirement Dream Early
Thinking about an early retirement? You’re not alone. An increasing number of people are setting their sights on an early exit from the working world, which is a little surprising considering the economic and financial turmoil of recent years. In fact, many people are formulating specific plans for achieving early retirement, and chief among their strategies for accomplishing that are scaling back their current life styles, increasing their retirement plan contributions and reducing their standard of living expectations in retirement. A touch of frugality mixed with more aggressive savings sounds doable – difficult, but doable. But, if you truly have your sights set on retiring early, you may want to consider a phased strategy.
Start Your Early Retirement Plan Early
The challenge in early retirement planning is that it requires setting aggressive target dates and committing to an ambitious savings plan, both of which are good and doable. The problem lies in the reliance upon the cooperation of the markets to get you there. That’s fine too, except, one bad streak in the markets, or any significant change in your own circumstances can throw off the trajectory of your retirement plan. Of course, the worst case is that you could simply move the goal posts. But, to work all of that time making the financial sacrifice along the way, only to come up short would be extremely disappointing.
Also, if you come up a little short in your accumulation, you may be tempted to tap your Social Security benefits early. While this can help shore up your income, it will cost you tens of thousands of dollars of benefits that would otherwise be payable to you were you able to wait until 65, or, better yet 70. A sound early retirement plan should enable you to postpone your Social Security benefits as long as you can in order to optimize your lifetime income.
Phase into Early Retirement
Instead, you could consider a phased retirement goal combined with the use of annuities that will enable you to transition into an early retirement without overburdening your assets or requiring you to tap into your Social Security too early. It is much more measured approach set to benchmarks which means, if you approach a phase in better financial condition than you planned, you could either shorten that particular phase or skip it altogether depending on where precisely you are in relation to the ultimate goal. The phase approach also enables you to make the necessary life style adjustments that will make your final transition into retirement feel seamless.
Phase 1: Start your business
OK, you may not have been thinking about starting a business in retirement, but the reality is that most people expect to generate earnings, either from another vocation, part time work, or through their own business. You can never be certain of what type of vocation or part time work you’ll get in retirement, but you can certainly control what type of business you own and operate. By starting a business in Phase 1 (8 to 10 years before the target date), your revenue flow will be established and stable. Plus, everyone could use the extra income while they are working. Think small initially – a home-based business, monetizing a hobby, establishing a consultancy – then grow it gradually.
Phase 2: Convert your home into income
You’ve planned to replace your oversized house with a smaller home in retirement, why not do it early. Sometime around five to eight years out, take your tax free equity proceeds (if you qualify for the home sale exemption) and put it into a deferred annuity. Why an annuity? Well, you can’t dump it into your qualified retirement plan, so an annuity will allow your funds to accumulate tax deferred while securing the principle. An indexed annuity will enable your funds to earn market-like returns, and these products include features that can eliminate your downside risk. Apply the monthly cash savings towards retirement savings or investing in your business.
Phase 3: Begin de-employment
Much of your plan will depend on your employment situation, but if circumstances are such that you can arrange a reduced schedule with your employer, you could begin the de-employment process three to five years out from your target date. Some people are able to negotiate an independent contracting arrangement. It would help the process if one of the spouses continued to work full-time in their position to maintain benefits, etc. You can use the extra time to work on your own business.
Phase 4: Retire
You have your business in place as a source of income that will bridge you to your pension or retirement plan withdrawals. You’re retirement assets are now in place. It’s time to decouple.
This is where you turn your home equity into a constant stream of income that will, initially, bridge you to your Social Security benefits at age 65 or later, and then provide the safety net of income you will need for as long as you live. The first stage of the conversion consists of transferring a portion of your deferred annuity to an immediate annuity. Then elect to receive your guaranteed payments for the number of years until you plan to take Social Security. For example, if you retire early at age 60, and you want to postpone Social Security until age 68, you would elect to receive your payments for 8 years.
Allow the balance of the deferred annuity to accumulate for that same time period. At that time, you can then annuitize it to generate a guaranteed income for life, which will allow you to phase out your business if you so desire.
There are a number of ways to build these phases, and they may include some combination of these or other tactics. The key is to start your early retirement plan early so your progress can be measured and you have the opportunity to secure your retirement foundation.
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