Executive Summary
Balancing an active lifestyle with early retirement goals requires thoughtful planning to overcome challenges like inflation, healthcare costs, and market uncertainty. This guide breaks down key steps to create a financial plan that lets you retire early while living boldly.
Understand Your Starting Point: Conduct a financial inventory to assess your savings, spending, and obligations. Download our free checklist to get started.
Define Your Retirement Vision: Identify your ideal retirement age, lifestyle, and priorities to clarify your savings goals.
Maximize Tax-Efficient Strategies: Use tools like 401(k)s, Roth IRAs, and Roth conversions to minimize tax burdens and maximize savings.
Invest for Growth: Build a diversified portfolio that balances inflation risk and supports your lifestyle dreams.
Prepare for Healthcare and Long-Term Care: Plan for significant healthcare expenses with HSAs, insurance, and proactive savings.
Work With a Trusted Financial Guide: Gain confidence and clarity with a fiduciary advisor who aligns with your unique goals.
Getting a Jump on Early Retirement
Mia has a good life. As a 52-year-old professional pulling in $250,000 a year, she’s worked hard as an attorney to build a career she’s proud of and a lifestyle she loves. Although previously married, she now enjoys her single life and has saved well.
With $1.2 million tucked away in her 401(k), $500,000 in a brokerage account, and $200,000 in cash reserves, she’s got a solid foundation.
But there’s a nagging thought she can’t seem to shake: Will I really be able to retire early and still live the life I’ve dreamed of?
If you’re like Mia, balancing the desire for independence, adventure, and financial security can feel overwhelming. Especially if you have kids (or parents) dependent on your income and time.
Still, you’ve got big dreams like traveling the world, hiking around incredible national parks, and making the most of your hard-earned freedom.
But reality and uncertainty prevail to torture your mind. You worry if rising inflation, healthcare costs, and tax burdens will clip your wings before you even begin to fly.
To simply the process, let’s break down the key steps to creating a financial plan for early retirement that empowers you to live boldly and tackle uncertainty with confidence.
Step 1: Understand Where You Stand
Mia’s first step toward her adventurous retirement was gaining clarity on her financial starting point. With assets spread across a 401(k), brokerage accounts, and cash reserves, it was time to pull it all together to take an accurate picture.
Much like when you sweep a dirty floor, imagine this step as working your way around all the edges of the room until you gather all the objects in a compact, tidy pile.
What You Can Do:
Inventory all assets: retirement accounts, taxable investments, and cash savings.
Account for debts (if any) and future obligations like healthcare or long-term care needs.
Get a baseline of your monthly spending to understand what your ideal retirement lifestyle will cost.
Pro Tip: Start with a financial inventory checklist. It’s like mapping the trailhead before your hike. I created a free excel sheet that is a simple way to get started. Click here to download.
Step 2: Define Your Vision for Retirement
Mia’s version of retirement isn’t sitting at home watching TV reruns. It’s frequent travel, staying active outdoors, and allowing for plenty of flexibility to enjoy life on her terms. But lifestyle choices dictate savings needs, so it’s crucial to determine just how “adventurous” you plan to be!
Questions to Ask Yourself:
What’s my ideal retirement age? Will I stop working completely, or go part-time?
Do I want to downsize, maintain my current lifestyle, or level up?
How much will travel, leisure, or personal pursuits factor into my expenses?
How involved do I plan to be in my children's and grandchildren’s lives?
What support are my parents going to require?
Pro Tip: If you’re unsure where to start, ask yourself this, “What does my perfect day in retirement look like?”
Step 3: Maximize Tax-Efficient Savings
For Mia, tax efficiency was a game-changer. With a $250,000 income, every dollar saved in taxes meant more freedom to fund her dream adventures. You can’t avoid taxes, but you can pay as little as legally required.
Strategies to Consider:
Max out 401(k) contributions ($22,500 annually or $30,000 if over 50 in 2024).
Contribute to a Roth IRA or backdoor Roth if income limits apply.
Optimize your taxable accounts for growth and flexibility.
Advanced Tip: Explore Roth conversions while tax rates are historically low to create a tax-free income stream for retirement. Click to download my free 9 step guide to Roth conversions >>
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
Step 4: Balance Savings and Debt
Mia has no outstanding debt, but if you do, prioritize paying off high-interest loans while still investing for the future. High-interest loans create outgoing cash flow. To retire early, it's important to minimize as much cash outflow as possible.
What You Can Do:
Focus on eliminating credit card debt first.
Consolidate or refinance student loans for lower rates.
Use low-interest debt strategically, balancing repayments with investments.
Remember, it’s about managing debt smartly, not eliminating it at the cost of your retirement.
Step 5: Build a Portfolio That Keeps Pace With Inflation
Frequent travelers like Mia often underestimate how inflation can erode their purchasing power. Here, we can use the Rule of 72 to understand how tough inflation can be.
Take 72 and divide it by a rate of return. In this example, we will use 3% as our inflation rate (that is, the historical average of US inflation since 1914).
72 divided by 3 = 24
This means, in 24 years, whatever expenses Mia has today will double. If Mia needs $150,000 per year to retire at age 60, she will need about $300,000 per year at age 84 just to maintain her lifestyle. And, if she lives a crazy long time to age 108, she will need about $600,000 per year…
Pretty wild, right!?
Steps to Take:
Diversify your investments across stocks, bonds, and alternatives. Do not get too conservative too early.
Include low-cost ETFs to reduce fees and keep more of your returns.
Review your asset allocation annually to align with your evolving goals.
Pro Tip: Between annual reviews, revisit your asset allocation whenever you have a major life change or receive an inheritance.
Step 6a: Prepare for Healthcare and Long-Term Care Costs
Mia’s active lifestyle doesn’t shield her from the reality of healthcare costs, which can derail even the best retirement plans. Although I wouldn’t classify these expenses as fun to think about, they present one of the biggest challenges to retirees in retirement.
Your Checklist:
Estimate future healthcare expenses (According to Fidelity, the average couple needs $315,000 as of 2023).
Open and fund a Health Savings Account (HSA) for tax-advantaged savings. HSAs allow you to take a tax-deduction when you contribute, grow the funds tax-free, and withdrawal tax-free if used for qualified health care expenses. Thus, they earn the coveted triple-tax-free moniker.
Consider long-term care insurance or hybrid life insurance with built-in benefits. Insurance often allows you to buy dollars of coverage tomorrow for pennies today. Although it’s not right for everyone, it's worthwhile investigating.
Extended health care insurance (i.e. long-term care) often allows you to buy dollars of coverage tomorrow for pennies today. Although it’s not right for everyone, it's worthwhile investigating through a trusted advisor.
Step 6b: Address Obstacles and Challenges
Even the best-laid plans can hit unexpected roadblocks, such as job loss, economic downturns, or unexpected medical expenses. Preparing for these possibilities ensures you can weather life’s uncertainties without compromising your goals.
What You Can Do:
Build an Emergency Fund: Keep 6-12 months of living expenses in liquid savings to cover unexpected costs or gaps in income.
Consider Disability Insurance: Protect your income in case of an injury or illness that prevents you from working.
Add Flexibility to Your Plan: Include contingency strategies, such as delaying retirement a year or reducing discretionary spending temporarily.
Review Your Insurance Coverage: Ensure you’re covered for major medical emergencies, large housing repairs, and other high-cost scenarios.
Regularly revisit your plan with your advisor to adjust for changing circumstances and stay on track toward your goals.
Step 7: Partner With a Trusted Financial Guide
For Mia, the final and arguably most important, step was finding an advisor who understood her unique goals and values. She wanted someone to provide clarity on tax strategies, healthcare planning, and sustainable investments that aligned with her values so she could focus on living her best life.
Why It Matters:
A trusted advisor helps you stay on track as life evolves. They turn your questions of can I do this? into answers of here’s how…
Professional guidance simplifies complex decisions, from tax laws to portfolio optimization. If you are in an unfamiliar place, it’s often best to consult with a guide who knows the terrain well. Financial planning is no different.
You gain confidence knowing someone has your back and, if a fiduciary, always acts in your best interest. No matter what life throws at you, a relationship with a reliable and competent professional can help set you on the right path.
Don’t wait until financial planning feels urgent! Proactive advice is the key to stress-free adventures.
Your Next Step: Make the Most of Your High-Earning Years
Mia’s story is a reminder that early retirement doesn’t mean sacrificing your lifestyle. It’s about having a flexible plan that adapts to your dreams, whether it’s hiking Machu Picchu or enjoying downtime your kids and grandkids.
Start taking control of your financial future today by downloading my free, seven step guide to a stress free retirement by clicking here.
Disclosures:
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset allocation does not ensure a profit or protect against a loss.
This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing.
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