How to Retire Early: What You Need to Do

Young professional plans how to retire early.

Early retirement may be more than an idle dream for Millennials.

Driving this early-retirement push, at least in part, is the desire to make personal choices and pursue passions or causes without worrying about money.

Rising healthcare costs and longer lifespans, among other factors, already require substantial assets for older generations retiring in their 60s and 70s to live comfortably. Millennials, facing uncertainty surrounding future Social Security benefits and a decline in old-fashioned company pensions, may need to amass greater wealth.

Millennials will need to expand their nest eggs even earlier in their careers if they want to leave the workforce a few years early, before they’re old enough to withdraw from retirement accounts without penalty or sign up for Medicare.

If you're pondering early retirement, keep in mind that you could need this money to last for 30 or 40 years, maybe longer, depending on when you take the big step.

So what moves can you make now to retire early — later?

The most important tip might be to start saving early and keep at it.

“The biggest benefit in any savings plan is time. If you start putting money away at a younger age and you're consistent with it, you've got a long runway and you're going to amass a fair amount of money," said Alan Wolberg, manager of wealth planning for City National Bank. “You've got the luxury of time."

But retirement savings alone likely won't be enough to retire early and maintain your current lifestyle. Fortunately, planning early can make it possible for you to optimize your retirement savings and also explore other ways to build the wealth you need to support you in early retirement.


Maximize Your Retirement Savings

Before you begin planning for early retirement, ensure you have built a budget and emergency fund. Wolberg recommends amassing enough funds to cover three to six months of expenses in case of emergency.

Once you have those things in place, she said, "then you can start thinking about retirement." In fact, your budget, along with rent, utilities, groceries and other expenses, should include a line for paying yourself, according to Wolberg, who advocates the "pay yourself first" concept and putting at least 10 percent of your income, if not more, away into retirement savings.

If your company offers a 401(k) retirement plan, opt in and start participating as soon as possible, making sure you are contributing enough to get the maximum employer match. 

"If you contribute nothing, your employer's going to contribute nothing, so you're leaving free money on the table," said Wolberg.

Contribute enough to get to the maximum match, but if possible, don't stop at the matching percent. Workers under age 50 may contribute up to $19,500 in an employer 401(k) in 2020.

Whether you stow money in a bank account or a retirement plan like a 401(k), time allows you to supercharge your savings through compounding — earning interest or investment returns on both the funds you deposited and the interest or gains themselves. It's very difficult to save a large amount of money later in life, when you are playing catch up, Wolberg noted. “It's really so important to start early."

Because your 401(k) contributions are considered pretax, they lower your taxable income, and by extension your income tax liability. You'll pay taxes on the funds later, when you withdraw them in retirement.

Beyond the workplace, you can turn to traditional or Roth IRAs, which place lower caps on annual contributions — $6,000 in 2020 for those younger than 50.

Similar to a 401(k), contributions to a traditional IRA may occur on a pretax basis, lowering your income tax liability in the current year and deferring taxes until you take distributions in retirement. This might be a good option if you don't have access to an employer's retirement plan, since you won't be able to make pretax contributions to both an IRA and a 401(k).

A Roth IRA, on the other hand, won't lower your tax bill now, but you won't have to pay taxes on your contributions when you tap them in retirement. Another advantage: should you build enough assets that you don't need to tap your Roth IRA in your own retirement, it's a useful tool for passing wealth tax-free, or mostly tax-free, to your heirs, Wolberg noted.

Of course, if you're looking at early retirement — before age 59 1/2, when you can start taking retirement funds without penalty — you'll want to put enough money into non-retirement accounts that you can use with ease, at earlier ages.

This will also allow you to explore other wealth-building options that will support you in retirement.


Additional Ways To Build Wealth for Early Retirement

To build wealth and retire early, consider ways to make money outside your primary income source.

Wolberg noted three possibilities for generating extra income: entrepreneurship, investing in rental or commercial property and investing in the stock market.

You might start a side business, perhaps switching to it full-time if it becomes lucrative enough. But entrepreneurship is challenging and may not be for everyone, especially if you have a career you love.

Another option is through investment properties. You might start small by buying a condo or house and renting it out, then continue to acquire residential or commercial properties, she said.

"If you select the right properties in the right areas, you can realize a good income from the net cash flow. Most people who do this self-manage the properties, which answers the question, 'What will I do tomorrow morning when I'm retired when I don't have to go to work?' But you can also engage a property manager if your investment property portfolio is large or if you don't want to manage them yourself," said Wolberg.

The risks are real, including vacancies, bad tenants, capital improvement expenses or a property that becomes undesirable due to a declining neighborhood or natural disaster.

"Real estate is a great investment but it is illiquid; if you need to sell a property, the timing may not be favorable," she added.

But, if you've built the right portfolio of properties, they can provide you with additional income in retirement.

The stock market presents a less labor-intensive and more liquid investment, with dividend-paying stocks a potentially good income source, she said, noting that the underlying stock itself presents the main risk.

Both options bring capital gains risk, that is, you'll pay up to 20 percent on the gain if you sell, but they also allow your heirs to inherit at current market value and potentially avoid paying any capital gains on the investment, according to Wolberg.



Like anyone planning retirement, you'll need to protect yourself and your family with proper estate planning, powers of attorney, trusts, and insurance that covers typical care and worst-case scenarios.

If you're contemplating retiring before you're old enough to sign up for Medicare at 65, your planning should include making sure you have adequate health coverage.

Life and disability insurance exist primarily to replace your work income, so if you're a Millennial with young children and another 20 years to work, make sure to have insurance in place to protect yourself and your family in case of your early death or disability.

Look into long-term care insurance at 50, or consider hybrid policies that allow you to access a whole-life insurance policy for long-term care needs if necessary, said Wolberg. Many people forgo LTC policies because they're so expensive, but should view them the same as auto or home insurance, she said.

While you have those policies in place, do what you can to stay healthy.

"There's no point in retiring early if you're going to be sick," said Wolberg.


Getting Started With Your Early Retirement Planning

The details for achieving the early-retirement dream are crucial, but it's also important to know why you're going that route and what you plan to do with your time. Does your partner want to retire early as well? Does he or she share your retirement plans and dreams? What do you want to do beyond relaxing on a beach or playing golf?

"That's an important part of this whole conversation," said Wolberg, who suggested Millennials start early to explore things they might be interested in and develop a plan.

If you're planning for retirement, consider working with a lawyer and an estate planner to make sure you're covering the bases. City National Bank's team offers the expertise to help you set out and stay on the right path.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.