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Have you ever found yourself driving to work on a sunny spring day and catch yourself thinking, “Man, I could SO just turn this thing around and head to the ________ (insert: beach/park/golf course/trails) right now!” Then you say to yourself: I need to get my ducks in a row so I can afford to retire early or scale back so I can enjoy way more of these mornings? I know I do!
But for most employees, the reality is more like a marsh with no ducks! Our employee research shows that for employees under age 55, only 19% say they’re on track to retire on time, with the rest lacking confidence in their retirement planning. It’s not like people don’t WANT to retire. Studies that TIAA did in 2014 and EBRI did in 2015 showed 36-37% of employees want out by age 65.
But how can they? If you’re motivated to retire early or scale back sooner, there are actions you can take to give your early retirement the fighting chance it needs. It’s going to take some sacrifice now for an early exit, but let’s see how you can make it happen.
First, run a retirement calculator. It’s tough to build anything without a tape measure, and a retirement estimator calculator is like a ruler for your retirement. Without a plan supported by a reasonable estimate, your early retirement isn’t a plan but likely just a bad guess. Set it with your preferred asset mix (these AAII models are one option) and add in your Social Security from your personal account benefit amounts. Get the rest from your workplace and personal financial provider sites.
Say this is your calculation. (View all tabs.) You find out it’s going to be at least age 68 before you can retire with close to 80% of your current income. It’s not the news you wanted, but KNOWING the truth can motivate you to make changes, and now you have a way to measure how some tweaks to your plan can help you shave some years off!
Imagine you save $200/month in budget blubber by setting a more disciplined spending plan, and you contribute it to a Roth IRA. If you run the same calculation with this update, you just knocked about 2 years off! Let’s keep going!
Max out your pre-tax employer retirement savings plan. Every financial planner and employer will tell you that getting your employer matching contribution is the best investment you can make, but it isn’t always enough. Saving there (up to $18,000/yr if you’re under 50 and $24,000 if you’re over) is likely the least expensive place to sock away for an early retirement, especially when you factor in the tax benefits. And as long as you stay employed even part-time, you can keep contributing past age 70 ½ to the extent of the lower of your income or $24,000. If you run your own business, it’s all on you but you can defer much more of your earnings - up to $53,000 in 2016 - between you and the company.
Assume you bump up your contribution to 6% (and you get a 4% match) from the prior example. Now you’re retiring another year earlier at age 65. We can still do better though…
Use the contribution rate escalator. If you really want to retire early, plan on turning it on, the sooner the better. Bumping your contribution 1% a year is the easiest path toward increasing your chances of an early retirement. This calculator can help you see for yourself. Using the prior example, starting at 6% and letting it work until 15% funding, your savings can be increased over 50%, which in our example can shave at least another year off of work.
You get the idea. Each action step helps you save more for your retirement. But what other moves can help you KEEP more?
Put extra savings in after-tax employer plans. If your employer offers an after-tax contribution option, take advantage of this great retirement booster. Some retirement plans offer the ability to make after-tax contributions beyond the $18/$24 K limits, up to the IRS total annual contribution limit. Those contributions can eventually be rolled into a Roth IRA when the plan allows in-service or termination distributions. So heavy savers can build tax-free savings, especially in the “stretch run” toward retirement when their earnings are typically at their highest and expenses fall at home as children leave the household.
Max out your health savings account. With the majority of employers now offering high deductible CDHP’s health plans, employees should dig into an aspect of these plans that can really work in their favor - the HSA. Funding an HSA is pre-tax, so it’s another way to cut your tax bill during your “stretch run” years when you’ve maxed out your employer plan. Most HSAs can be invested, and unused balances can grow and pay out benefits tax-free for qualified health care expenses so it’s a great tool to grow possibly “triple tax-free” cash. It can also be used penalty-free for any purpose after age 65.
Take advantage of workplace life insurance. Lots of employees don’t give this benefit much respect, but they should. With more employees carrying mortgage debt into retirement (many by choice given today’s very low interest rates), it’s a good idea to have enough life insurance to cover your mortgage (vacation home, too) and other debts should you pass away unexpectedly.
But many employees let term coverage lapse once their kids are grown up. If health issues make insurance impossible to get later, employer life insurance comes to the rescue. Many plans offer guaranteed issue coverage and the ability to “port” or convert the coverage after retirement to a permanent policy. Double check your coverage before you retire. After that, it will be too late.
How about that post-retirement “fun job”? Keep funding your Roth IRA. Once you retire or scale back, one tool stays with you as long as you feel like working even part-time - the Roth IRA. Not only does it keep growing tax-free, but you can continue to add to it from that post-retirement hiking guide job. Putting even $6,500/year away over time keeps your taxes in retirement from exploding as your required minimum distributions begin from your pre-tax savings.
Almost everyone can afford to retire. But the trick is: can you afford to STAY retired? Retiring early is possible with determination and a little help from the right savings tools. See you on the __________ (beach/park/golf course/trails) while we can both still enjoy them!
