When you’re planning for retirement or simply financial independence, you likely have a specific age in mind. However, there are ways to achieve financial independence even sooner than you may have planned. While there are a few approaches, each one requires proactive planning. Keep reading to learn how you can reach financial independence sooner and the key element of making that happen!
1. Decide When You Want to Retire
First off, it’s pretty simple. You want to think through when you want to retire and how much longer you want to work. When you’re planning for retirement or financial independence, having an idea of your retirement age is crucial for planning. Not just so you can build up your assets to the level you want, but also so you can accumulate enough to maintain the lifestyle you want in retirement.
The interesting thing about working into your sixties is that, in general, every year you work buys you two years in retirement if you’re saving. In short, one year working buys you two years in retirement.
2. Make a List of Financial Priorities & Pay Off Liabilities
The second thing to do is to make a list of financial priorities, starting with your liabilities. You’ll want to prioritize paying off expensive debts, trying to pay off all of your debts. Ideally, we like to see our clients at REAP Financial pay off even their mortgages before retirement, since a mortgage payment is often one of the biggest expenses for families every month.
3. Plan in Advance for Taxes
This is also when you should start considering taxes. While you’re a regular W-2 employee, there are few things you can do to control your taxes. However, in retirement, you can have more control over taxes than in any other moment of your lifetime, if you plan correctly. As you retire, taxes tend to get more complicated, so planning in advance for this complexity, to make sure you get the most out of your hard-earned retirement, is crucial. Taxes become more complicated, since you’re getting your income from a variety of accounts with different tax rates and from several places that might have tax triggers. By planning proactively for taxes in retirement, you can save and invest wisely to have influence over your taxes.
For example, the average American doesn’t realize they’ll pay taxes on their Social Security benefits. In fact, under today’s law, up to 85% of your Social Security benefit is eligible for taxation under your usual income tax rate. Another tax that tends to surprise retirees is called the Stealth Tax. We call this the “Stealth Tax” because it’s sneaky; the more income you have, the larger premium you’ll pay for Medicare coverage. Although it’s not technically a tax, we refer to it that way because you’re paying more for the same medical coverage. This is an important thing to budget for, since your Medicare payments will be quite high, if you’ve saved and invested successfully for your retirement.
Roth conversions can also create tax implications, since every dollar you convert counts in the given year. Taking out too much may push you into a higher tax bracket or drive higher Medicare costs. This can get especially complicated as you get into the age of taking required minimum distributions, since those who saved a lot will likely have larger required distributions that can drive tax complications. For this reason, you have to coordinate where you’re pulling your money, how much you pull from each account, and how that pairs with your required minimum distributions and Social Security benefits.
It can get quite complicated! Lots of our clients at REAP Financial utilize our vetted CPAs to handle their taxes throughout the year, so they can optimize their taxes over the years. For more information optimizing your taxes in retirement, check out our other articles at reapfinancial.com.
Also see: Four Hidden Tax Traps That Could Derail Your Retirement
4. Coordinate Your Retirement with Your Social Security Benefits
When you’re planning to retire early, you’ll want to consider Social Security. Specifically, the date that you claim is very important to a successful retirement. For the vast majority of Americans, Social Security benefits are one of the greatest gains in retirement. However, the value of that benefit will vary depending on when you start claiming. If you take it too early, you may get a significant loss on your checks, since you’re getting a smaller check for a longer period of time. However, if you wait to take it, you may be leaving less money on the table.
In recent years, since most of the lucrative strategies have gone away, many families with $2MM or more in assets benefit from taking Social Security early. This isn’t because they need it, but because with the net effect of taxes it comes out better to take it early. We have plenty of other resources on our website if you want to learn more.
Your Social Security claiming strategy also needs to be considered alongside your retirement date. If you take Social Security and you’re still working before your retirement age (normally 67), you’ll face an earnings cap of $20,000. This means if you make more than $20,000 a year, they’ll reduce your Social Security benefit by one dollar for every two dollars you make over that $20,000 limit. You want to keep this in mind if you plan to continue to work, so you don’t get blindsided by the earnings cap.
On the other hand, you could also wait until age 70 to claim. Generally, your benefits grow by more than 30% between age 62 and 70, without even considering cost of living adjustments. All this to say, you must coordinate your Social Security claims with your early retirement to maximize your benefits.
5. Make a Retirement Income Plan
If you determine you’ve saved enough to retire early, 62 or 62 say, we then need to put together a retirement income plan. Although this may sound simple, it isn’t for most people. Likely, you have money spread across many different types of accounts with different tax implications. That’s why we want you to save in diverse ways, so when you’re in retirement you’ll be able to consider where your earnings are coming from. A well-coordinated plan is crucial so you maintain this control throughout your retirement years.
Since it is so complicated, we recommend that all retirees work with a qualified CPA or working with a fiduciary advisor. To learn more about Fiduciary Advisors, we recommend you check out another REAP Financial article on why you should hire a fiduciary advisor in 2024. In the end, coordinating your retirement earnings plan is an incredibly crucial piece of the puzzle, so make sure you’re arming yourself with the knowledge and advisors you need to be successful.
Achieve Optimal Retirement Success with REAP Financial
Planning for retirement requires a comprehensive approach that considers a wide range of investment opportunities. At REAP Financial, we recognize the risks associated with placing all your funds into a single account type, such as tax inefficiencies and diminished returns. This understanding drives our advocacy for diversifying your retirement accounts to optimize your financial outcomes. For more advanced strategies, including innovative ways to use your IRA to fund an HSA, visit our website or explore our YouTube channel for additional valuable insights.
If you’re in the Austin, Texas area and seeking expert retirement planning advice, look no further than the skilled team at REAP Financial. We specialize in crafting personalized retirement strategies tailored to your unique financial goals and lifestyle aspirations. Our expertise will help you navigate the complexities of retirement planning, ensuring a secure and fulfilling future. Contact us today for a consultation and embark on your journey toward a comfortable retirement.
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Give us a call: (512) 249-7300
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REAP Financial
9414 Anderson Mill Rd #100
Austin, TX 78729
