Almost everybody daydreams of early retirement. The freedom of all responsibilities and everything that comes with it.
Before, early retirement is the moment you stopped working forever. Now, it is the moment that you no longer have to work for money.
Make your dream into reality. Join the FIRE movement – Financially Independent, Retire Early. Retire at the age of 50s or even younger. Spend more time traveling, pursue projects you’re passionate about, or simply not work.
Focus on the financial decisions about when, how, and for whom you work. Most importantly, know the best and safest places to save money for early retirement.
4 Best and Safest Places To Save Money For Early Retirement
Take note of the following best places to save money for early retirement.
Health Savings Account (HSA)
One great way to save money for early retirement is a Health Savings Account. It’s focused on healthcare expenses.
First, receive a tax deduction on your contribution. Once the threshold is reached, invest in HSA contributions. The interests and earnings of HSA are tax-free.
Furthermore, contributions withdrawal is tax-free at any age. Just use the money for health expenses.
Still, have HSA money at the age of 65? Turn it into Traditional IRAs or 401k. This time, use the money on any expenses while being taxed like ordinary income.
Taxable Brokerage Account
The next best place to save money for early retirement is a taxable brokerage account.
Pay taxes on contributions and growth regularly. In the future, use the money at any time without penalty. Imagine how much better the return for your money compared to a savings account.
Consider opening an account with Robo-advisors. It builds portfolios to match your risk preference. Also, it minimizes taxes through tax-loss harvesting techniques.
In addition, invest in individual stocks – no capital gains taxes until you sell. Even if you choose long-term capital gains, tax is capped at 15%.
Real estate is proven as one of the best places to save money for early retirement.
Property investment provides a steady passive income. Also, the tax code allows landlords to take away a large percentage of rental income.
More importantly, no need to pay capital gains tax on the profit if you sell a home you lived in. Make sure you owned and lived in the home for at least 2 of the previous 5 years.
Real estate investment has a diverse portfolio – a crowdfunding platform. Invest in real estate projects and properties together with other investors. Earn income passively every time a property is sold.
Traditional International Retirement Account (IRA)
Traditional IRAs and 401(k) accounts are a great choice to save money for early retirement. It allows individuals to contribute pre-tax funds to a retirement account. This investment grows tax-deferred until withdrawal during retirement. Withdrawals upon retirement are taxed at the IRA owner’s current income rate.
However, a 10% penalty is charged for withdrawal before the age of 59 ½. If you need money before the 59 ½ age, use HSA and a taxable brokerage account.
Early retirement should be fun and exciting. Save money at the best and safest places and enjoy the perks.
How To Save Money For Early Retirement?
Be strategic for early retirement. Follow these steps.
Adjust Current Budget
Focus the budget into savings. Slowly shy away from active loans from licensed moneylenders in tampines by cutting large and small expenses. Be creative to save money on housing costs, transportation, utilities, and food.
Also, find ways to bring extra income to your early retirement savings. Earn more for a comfortable lifestyle and increase earnings. Try out either investments or side hustles.
Calculate Annual Retirement Spending
Take a look at your current monthly spending. Assess what will go down and up, and what might be added or eliminated.
Calculate your annual retirement needs. Add the estimated monthly expenses then multiply by 12. Increase it by 10%-20% so you have extra for splurging.
Also, include taxes and healthcare in your spending. These two have a great impact on your finances.
Estimate Total Spending Needs
First, follow the rule of 25. Before you retire, save 25 times your planned annual spending. If you plan to spend $20,000 in the first year of retirement, you should have invested $500,000 before leaving work. It serves as a budget motivation.
Proceed with the 4% rule – withdrawal of 4% in invested savings during the first year of retirement. Afterward, adjust the amount based on inflation.
Be reminded that neither of these rules is foolproof. Look for a reputable financial advisor for guaranteed results.
Invest For Growth
Investment is the best friend of early retirement. For best returns, invest in a balanced portfolio geared toward long-term growth. Typically, low-cost index funds are recommended.
If you have a shorter time before retirement, take a lesser risk. As the retirement date comes, shift to a small amount of savings into a safer, more liquid haven. You can tap it anytime without losing a selling investment.
Afterward, slowly shift your investment to cash. Follow the 4% distribution rate discussed earlier.
Keep Expenses In Check
Sticking to the estimated plan is the hardest part of early retirement. Don’t spend outside the box. Comply with the 4% rule. Allow spending to increase with inflation but not withstand spending beyond that.
Whenever you increase spending, the likelihood of running out money increases as well. Savor the fruits of your labor when you retire early. Take advantage of the best and safest places to save money for early retirement. Avoid unexpected financial hiccups. Keep in mind when is the right time to withdraw funds without paying penalties.