By and large, Americans want to retire earlier than later.
Retiring early and living for 40 years will require a lot of cash, and most Americans don’t have it. A recent AARP report notes that 20% of U.S. workers 50 or older have no retirement savings. And 61% say they’re worried they won’t have enough money to live on in their golden years.
To decelerate after your working years, you’re first going to have to accelerate savings and find creative ways to retire early. These seven early retirement strategies can help.
— Maximize your 401(k) employee match.
— Set up automatic savings deductions.
— Take advantage of your tax bracket with a Roth IRA.
— Take a second job.
— Pay off big debt.
— Adjust your insurance.
— Restructure your investment portfolio.
Maximize Your 401(k) Employee Match
If you’re not doing so already, squeeze every last dollar out of your 401(k) plan by taking advantage of employee matching contributions.
A common 401(k) match is when an employer matches a percentage or a dollar-to-dollar amount of a worker’s plan contribution. For instance, an employer could provide a 50% match up to the first 6% of an employer’s annual salary. If an employee earns $75,000 a year, a 50% employer match would amount to $2,250 annually.
“If your employer offers a matching contribution to their retirement plan, you absolutely should be contributing at least the maximum amount they will match,” said Chris Urban, founder at Discover Wealth Planning in Vienna, Virginia, in an email. “This is free money. If you can make additional contributions on top of the employee match to your workplace retirement plan, you should do so right away.”
Urban advises increasing your 401(k) or IRA contribution amount as your income increases rather than focusing on your age. “Having said that, once you reach age 50, you can make additional catch-up contributions to your retirement plan,” he said.
Set Up Automatic Savings Deductions
Another money-saving strategy is setting up an automatic savings program for accounts outside your employer plan.
“If possible, create links and set up automatic transfers directly to various retirement, investment and savings accounts and only have a ‘spendable’ amount of cash hit a spending account,” Urban said. “If you never see the money hit this account, you won’t miss it. Over time, you’ll become accustomed to spending only what you have while accumulating funds in savings and investing accounts for retirement.”
Take Advantage of Your Tax Bracket With a Roth IRA
If you’re in your 30s or 40s, your family’s income will hopefully increase as you get closer to retirement. Consequently, those years may be the lowest tax bracket you’ll be in for a while.
“Plus, tax rates are slated to increase after 2025 unless Congress acts to extend the lower rates enacted under the Tax Cuts and Jobs Act of 2017,” said Michael Nemes, a financial advisor at Nemes Rush Family Wealth Management in Novi, Michigan, in an email. “Take advantage of the lower tax bracket now by utilizing the Roth feature of your 401(k) if your plan offers one. The Roth feature means you pay tax on the contributions now, so your investment earnings are tax-deferred, and any qualified distributions are tax-free.”
Roth accounts are also not subject to the required minimum distributions in 2024. “That means you have more control over taking the funds out of your retirement account,” Nemes noted.
[Related:10 Years to Retirement? Invest in a Roth IRA Now]
Take a Second Job
Adding a second job to your schedule can chew into your free time, but if you’re serious about retiring a few years sooner, the added cash you’ll earn moonlighting can expedite that retirement timeline.
“This is a question that each person has to answer for themselves,” said Ralph Ferraro, president of retirement plan services at Philadelphia-based Lincoln Financial Group, in an email. “Before deciding on taking on a second job, meet with a financial professional or retirement consultant to discuss your unique circumstances, as there’s no one-size-fits-all approach to saving for retirement.”
Before you opt to take a second job, especially as you near retirement, consider your current budget. “There may be places where you can cut expenses and see the same savings you might get with a second job,” Ferraro said. Savers should also honestly assess their capacity to take on additional work. “That may make your time better used elsewhere,” Ferraro added.
[See: 19 Part-Time Retirement Jobs That Pay Well]
Pay Off Big Debt
To expedite your retirement, you also need to clear all major household debt, excluding your home mortgage, although that would certainly help, too.
“Pay off high-interest debt quickly and only pay minimums on low-interest debt, then maximize contributions to retirement accounts and invest any extra in a taxable brokerage account,” said David Hegarty, co-founder of Playbook, a financial app for millennials, in an email. “Use a diversified mix of low-cost exchange-traded funds, wait until age 60 to withdraw from retirement accounts to avoid penalties and take advantage of tax strategies like tax-loss harvesting and asset location for long-term value.”
Adjust Your Insurance
Look into leveraging affordable group benefits to defray the costs of unforeseen events.
“Many workers have access to affordable group benefits through their employer, such as accident or critical illness coverage or hospital indemnity insurance,” Ferraro said. “These affordable plans can provide a cash benefit in case of emergency, helping workers avoid taking a hardship withdrawal from their retirement savings and thereby delaying their retirement plans.”
Restructure Your Investment Portfolio
When speed becomes a mitigating factor in retirement savings, it’s time to reevaluate your investment portfolio, keeping long-term income generation in mind.
“If you want to retire earlier than planned, you’ll want your investment portfolio to combine the best combination of income, growth and safety,” said Nilus Mattive, an investment analyst at Weiss Ratings in North Palm Beach, Florida, in an email. “The goal now is having a solid, well-diversified portfolio that provides regular income to support the lifestyle you want in a great, tax-friendly place to live.”
With interest rates stabilizing, focus on creative ways to generate long-term income as you approach retirement.
“In this scenario, it makes sense to construct a ladder of high-quality fixed-income investments like Treasurys and certificates of deposit, which provide solid income rate returns right now,” he advised.
Look to stocks for reliable income generation, too. “For money that you want to keep growing, stocks with long histories of dividend payments — especially increasing dividend payments — are a must and the perfect complement to the fixed-income portion of your portfolio,” Mattive said.
It’s OK to make a little investment risk, but set limits. “Allocate very small amounts of money to ‘riskier’ assets,” Mattive added. “Despite their high volatility, they can also offer outsized returns that juice a bigger portfolio’s performance.”
As always, it’s highly advisable to make investment decisions with the help of a trusted financial advisor who can help you build a safe, secure and profitable long-term investment portfolio for retirement.
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Update 06/25/24: This story was published at an earlier date and has been updated with new information.
