Top Priorities When Planning an Early Retirement

What starts as a simple goal of debt elimination can turn into a pursuit of long-term financial welfare, expanding to include wealth accumulation and investment strategies. As you achieve small successes, you may be able to set a new goal: retiring early. With a growing focus on your future, make tactical use of your time and resources to plan for early retirement. Knowing your top priorities and annuity options can help you establish a stable foundation to tide you over once paychecks from an employer no longer show up in your bank account.

Making Early Retirement Your Goal

But you should also know this: reaching this ambitious goal won't be easy. Many people recovering from the economic lows of the past 10 years have already worked beyond retirement age – and continue to do so.

Meanwhile, younger pre-retirees are evaluating where they are in life and deciding to retire as early as possible. If this describes you, just know that the pursuit will require changing your mindset and making sacrifices. Shift your priorities from today's wants to tomorrow's needs. This can look different for every person. One example of shifting priorities is taking extra money reserved for vacations, luxuries or upgrading your car and using it for a tax-advantaged retirement account.

Estimating Needs

Knowing where to start begins with looking at how you now spend your money. Think about managing these expenses 10 to 20 years down the line – each increased by inflation. Use these expenses to create your budget.

Evaluate your expected pension savings and Social Security earnings to estimate your future income. Compare this to your current costs for housing, food, utilities, insurance, medical bills and other needs. Inflation will drive these costs higher over time. (The average rate of inflation increases from 2 to 4 percent every year.)

If your pension and Social Security don’t cover these costs, you need to determine how much more you’ll need every month. Accounting for this disparity depends on how much you can save between now and retirement as well as how much you expect any investments to earn.

Substituting Your Paycheck with an Annuity

One way to supplement your pension and Social security is to buy an annuity that provides bi-monthly or monthly payments, similar to a paycheck. This financial product adds security to any portfolio because an insurance company guarantees the underlying investment. You also defer taxes until the time of distribution.

Similar to an insurance policy, you establish an annuity by paying one large premium or series of them. When you reach a specified date (determined by the type of annuity and individual contract put together by the issuer) you start receiving payments from the account.

Depending on the makeup of your investment portfolio, you can choose the type of annuity that best suits you. You should evaluate the various options – variable annuities, fixed annuities and longevity riders. In a variable annuity, your money has the greatest potential for growth. It will adjust upward with market increases.

Similar to the security offered by a certificate of deposit (CD), a fixed can annuity provide stability to a portfolio of other risky investments. With CDs, you pay taxes the year of purchase. With an annuity, you defer taxes until you begin accepting contributions. Determining how long you expect retirement to last is difficult. Purchasing a longevity rider can allow you to guarantee you won't outlive your savings.

Pay attention to maintenance fees and the cost of making any early withdrawals, as these can drastically reduce the value of the investment. Whether you choose an annuity or other types of retirement account, taking funds prior to age 59 ½ can result in a 10-percent IRS penalty.

Portfolio Priorities

Pensions, Social Security payments, and annuities are only a few of the options available for retirement preparation. Building a large, long-lasting nest egg demands pre-retirees to create dynamic portfolios able to meet a variety of needs.

You can combine resources from 401(k)s, IRAs, annuities, CDs, mutual funds and stocks and bonds to build up a diverse set of assets. Pick and choose between investments with tax savings in mind. Even though the more you preserve now the more you will pay in taxes later, you have to think about the bigger picture. That is, the more you save now, the larger the balance your portfolio will have later – even after taxes.

Factors to consider while saving for early retirement:

• Minimizing tax liability
• Accounting for contribution limits
• Growing principle
• Protecting savings
• Accounting for risk
• Adjusting for inflation

Take advantage of advice from financial professionals. Certified financial planners, certified public accountants, and brokers have valuable experience which can help you get the most out of your resources.

Alanna Ritchie has spent years studying, writing and learning to love the intricacies of the English language. Today, she works as a content writer for, where her primary focus is personal wealth management.

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