Maximizing Wealth for Early Retirement: Essential Strategies and Key Milestones

In this episode of The Retire Early Retire Now podcast, host Hunter Kelly, certified financial planner, delves into strategies for high-income earners to achieve early retirement in their fifties comfortably and confidently. Key topics include the three essential retirement accounts (employer retirement plans, Roth IRAs, and taxable brokerage accounts), investment strategies balancing growth and stability, diversification, and liquidity. Hunter also discusses tax planning tactics and milestones for those in their thirties, forties, and fifties to stay on track for early retirement. This detailed guide emphasizes the importance of early and aggressive saving, avoiding lifestyle creep, and the need for continuous financial education and planning.

00:00 Welcome to The Retire Early Retire Now Podcast

00:18 Introduction to Early Retirement Planning

01:19 Key Retirement Accounts for Early Retirement

07:13 Investment Strategies for Early Retirement

13:11 Avoiding Common Investment Traps

16:04 Tax Planning for Early Retirement

20:47 Laying the Foundation for Early Retirement

26:57 Milestones for Your 30s, 40s, and 50s

31:07 Conclusion and Next Steps

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Transcript

0:00

And welcome back to The Retire Early Retire Now podcast. I'm your host, hunter Kelly, certified financial planner, and I do this podcast every Tuesday to help high income earning professionals maximize their wealth. And if you're one of those professionals and you're wanting to retire in your fifties, today is the episode that you're wanting to listen to. In today's episode, we're going to talk about. How to make an early retirement happen, but not just happen, happen comfortably and with confidence. We'll cover everything from key investment accounts. She should leverage investing strategies for an early retirement success, and laying that foundation for that early retirement, and then some key milestones that you should be hitting. In your thirties, forties, and fifties, to understand, Hey, where am I at? Am I on the right track? What adjustments do I need to make? So grab a coffee, sit back, relax, enjoy your drive to work, wherever you're listening from, and let's plan out the next 20 to 25 years so that you can retire early. But before we dive into the nitty gritty, go ahead and. Believe this podcast, a five star review on your favorite podcasting app, and share this with a friend that you think would want to retire early. And let's jump in. What are the three key retirement accounts that you should be leveraging if you want to retire early? So let's start with the basics. Most of you that have been listening for a while will understand. How these accounts work. So I don't wanna spend too much time on them. there's plenty of, podcast episodes that I've done previously that talk, in great detail about each of these, but I do wanna cover them because there are some nuances that relate to using them for an early retirement. The first one is the most common. It is the one most people think about, and that is your employer retirement plan. Most of the time it'll be a 401k. It could be a 4 0 3 B, a step IRA if you're a business owner, maybe a solo K if you're a business owner, a simple IRA, depending on the type of business you work with. And so this employer retirement plan, should be a no brainer for high income earners. You can put up to 23,500 as of 2025, and if you're over the age of 50, you get a catch up of about$7,000. So this allows you to put a lot of money away. And if you're putting that on a pre-tax basis and you're a high tax bracket, now you're deferring lots of taxes for later on down the road, which. If you're in an early retirement, can be to your advantage. And we'll talk about that here later. So many employers also include a match, which is free money on the table. Why would you not take that? So the big win is that your investments are, going to be tax deductible, right? And you're gonna deduct that income and then that, growth is going to be tax deferred, meaning you don't pay taxes on gains each year, only when you withdraw later on down the road. this can be really good for planning for that later stage retirement, avoiding some taxes along the way, and if it also makes sense, there also is a Roth option. I. maybe you get some of that money into, your 401k, via the Roth method where you're paying a little bit taxes now. but that'll grow tax free, and be tax free when you take those distributions. And that is actually the, the number two account that I think, would be most important to you, early retirees. And that is a Roth IRA. Again, it's a mirror image of how a traditional 401k. Plan works. You pay the taxes. Now it grows completely tax free, and then it remains tax free when you would withdraw in retirement. But the bonus here is that it's a great strategy. It can be a great strategy for retiring early in your fifties for two reasons. First, you have a pot of money that will be tax free and give you. flexibility with your taxes later on down the road. And then secondly, and the most important thing from that age, call it 50 to 60, is that you can withdraw your contributions without any penalties or taxes because one, you've already paid taxes on it and the government, says that you can pull from it, right? And so now you don't have to take from that growth and potentially. get income taxes on that growth if you take before 59 and a half, and then the penalties and all that. So it gives you a little bit of wiggle room if you get in a pinch of some sort where, you can take these contributions out. So make sure that you're tracking your contributions, whether you're 54, 90 eights and things of that nature. So over time, if you've been putting in for 10, 20 years, you may have. A, a significant chunk of change that you can pull from, to potentially help in a pinch or fill a gap between, the time that you retire and 59 and a half. And then the last one we've talked about quite a bit, here in the last few months. I. But, it is the unsung hero of early retirement planning, and that is your taxable brokerage account. There's no special tax breaks on contributions or withdrawals. So why is it important? Because complete, it's completely flexible. It gives you the most flexibility. Out of all of these tax or all of these investment accounts, you can put unlimited amounts so you're not, at the. Helm of whatever the government says you can put in. If you have a billion dollars, you can put a billion dollars in there. Right? If you have$10, you can put$10 in there. there's unlimited amounts. You can invest in whatever you want, essentially. and it's, You can withdraw at any time. So the flexibility is the most key part to this. So for someone that's wanting to retire, early, before 59 and a half, this can be that bridge account to let you, let you access the cash and investments, create that cash flow that you need before 59 and a half So unlike retirement accounts, withdrawals from this will be taxable, but you'll not incur fees. So generally it's capital gains tax. So if you've hold, held it, that investment for longer than a year, then it would be at a favorable rate, generally lower than ordinary income rates, things of that nature. and then you can do some, some things along the way, like tax logs, harvesting. in positioning your investments, to minimize those taxes along the way. But a taxable brokerage account is gonna give you that ultimate flexibility from the time that you retire till you're age 59 and a half. And along the way, if again, you get in a pension and you need that extra cash, you don't have to dip into retirement, things of that nature, again, the flexibility is there. And so now we've kind of discussed, the three types of accounts we'll want to, to u utilize and invest in creating those buckets for. Different needs and things of that nature, so that we can start planning for retirement. And so how do we start investing in this, these accounts over time? So now that you know where to put your money, let's talk about how to invest your money. Retiring in your fifties means you have to straddle two worlds. You have to put enough into growth to build a big next egg, relatively quickly. to a normal retirement age of 65, but you also have to manage risk so that your assets last potentially 30 to 40, potentially even 50 years, with how people are living now. so the balancing act between growth and safety, definitely shifts over time. So in your early years. of saving in your thirties and forties, growth is going to be your best friend. You want a higher allocation of stocks and equity investments because these often offer stronger growth potential with a longer timeline. until retirement. You want, you can weather the markets up and downs. So if you're anywhere from 30 to 40 years old right now and you're experiencing this market pullback that we've had the last six or seven weeks, um, then, then you have time to recover and likely there's going to be another downturn. before you retire as well. And so this gives you one, some buying opportunity. two, because of your time horizon, you have plenty of time to recover. So continue doing that dollar call averaging or whatever your plan is. stay the course, right? risk is your friend when you're in the accumulation phase, when you're saving and investing. It is, is risk is your front because that gives you the most potential for growth, right? More risk, potentially more reward. but as you start to get into the decumulation phase or distribution phase, then we want to start. Toning that down a bit, and we'll talk about that here in a little bit. So what it means early on, don't be afraid to be stock heavy in your portfolios. Don't worry about the volatility or the ups and downs every day in the, in the market, especially in times like this, you had time to recover from most bear markets. If not all bear markets. Those higher returns will help you achieve your goals faster, and give you more. Room for error. However, as retirement nears, especially within five to 10 years, you'll gradually start to pivot to be more balanced or conservative allocation. You don't want, a market crash when you turn 54 and you plan on retiring at 55. Generally, once retirement comes into view, you'll shift your focus to, from growth to preservation. Dialing up the percentage of bonds and cash and other stable assets, can help you tremendously with this. So. This doesn't mean pulling all of your stocks and going entirely in cash or, or bonds or anything like that. It just means taking, maybe a hundred percent equity or a 90% equity portfolio at age 40 and towing that back down to, let's say, 70 or 60% stocks, by the time that you're 55. So now we can start taking some of that volatility. Off the table, but you're still having that growth potential, especially for, the money in your Roth IRA and your 4 0 1 Ks, that are still gonna have another 5, 10, 15, potentially 20 years before you're needing to take distributions off of them. So the key is to gradually rebalance your portfolio as you age. High growth focus when you're far from retirement and more stability focused as you approach the finish line or retirement In practice, this might look like adding more bonds in your fifties than you had in your forties, or keeping a couple years worth of expenses and cash, which is generally what I would recommend. for short term or short term bonds, t-bills, things of that nature that are less volatile, and mature. Have a short. maturity duration, so that you're not focused on, the volatility in the portion of your portfolio that has stock. So when you see a downturn, it's not as scary. When you have a se significant amount of cash on hand or, some more investments that are less volatile. So the goal is to protect against major losses, as you start to near retirement. The next thing to consider is diversity of your investments. So up until, about six or seven weeks ago. It's been all us baby, all us for the last 10, 15 years. And, when I first got in the business, a lot of these money managers were telling me, Hey, we need to be heavy, international, heavy, international. Diversification is key. And they were wrong all up until about seven or eight weeks ago. Where, where now Europe and other international companies are outperforming us for the first time in a long time. so this is why we want to have diversity, especially as you start nearing retirement, is we can start to dole out, in times of volatility, and, spread that risk over more out. different asset allocation classes, sectors and even, countries for that matter. So another fundamental strategy is that diversification. Don't pull, put all your eggs in one basket. All right? And that everybody, I. I've heard that one before. This means spreading your investments across different asset classes, sox, bonds, maybe in a little, a little bit of, uh, real estate if you like, that sort of thing. And within each class we have a broad mix of different industries, companies, geographic locations, things of that nature. So diversification helps reduce that risk because, when one investment is down, another may be up. So. Again, we're not, we're not getting too concentrated in one area or the other. If you're super heavy in tech and tech is going down, you're gonna experience more volatility than someone that has more broadly diversified. The next investing trap you want to avoid is liquidity trap, This one is especially crucial for an early retirement and liquidity trap in this context is when your wealth is all tied up in places that are hard to sell or get rid of, or it's costly to get to them. So when you need money, imagining having a few million, So in your 4 0 1 Ks Roth IRAs, things of that nature. All of those types of retirement accounts and realizing you can't use it until you're 60 without a huge penalty. ordinary income and the extra 10% penalty. the other side of that is what if you're in illiquid assets like real estate, that can't be sold quickly. If you have a bunch of rental real estates and it's not producing enough income, well then you may have to sell that. And if you need that money. In a quicker manner than what you can sell it. now I have to sell that at a fire sale. Take a big discount, take a hit on that investment, things of that nature. And so we want to have at least some amount of liquidity. so to retire in your fifties, liquidity is king in. You want to be sure that you can convert enough of your investments into cash, cash flow to live on. So that doesn't mean real estate is bad. That doesn't mean 4 0 1 ks are bad or anything of that nature. That just means you need to have the right mix. And we've already touched on one aspect of having a taxable brokerage account to bridge the gap between 59 and a half. So if so, that you're not handcuffed on an early retirement. Again, this is why that brokerage account is. Key to an early retirement. Early retirees often plan to lean on, more brokerage accounts early on, cash reserves, for the first four or five years of retirement to avoid tapping into retirement accounts again, because you don't want to be hit with that 10% penalty. So as you build your portfolio, be mindful. To say it's okay to invest in some illiquid assets like real estate or to have, most of your money in 401k, but make sure you have enough set aside, that is accessible forms of cash, taxable investments, or even Roth contributions to cover those living expenses. from the time that you retire till you reach age 59 and a half another angle, avoid overinvesting in anything you can't easily sell. For instance, your own real estate properties, right? That can provide a nice income, but recognize that if you subtly need a large sum of money selling, this takes time and fees, right? So closing costs, realtor fees, all those sorts of things. So we need to balance, what we have in illiquid assets and liquid assets. So in short, plan your withdrawal strategy ahead of time and this will help you build your portfolio over time. The next thing is something I talk about all the time, but we need to keep eye on taxes. Especially if you're a high income earner, it'll be your largest expense over your lifetime. And given that you're going to retire early, you're gonna have a lot of flexibility on what you can do to help you save on taxes over the long term, especially if you are contributing to, a brokerage account. Things of that nature, you're gonna have the ability to have some flexibility to save on taxes. So this is, a more advanced point, but as high income earners and future retirees, early retirees, taxes will play a big role in your investing strategy. So. Different accounts have different tax treatments. For example, withdrawals from a, a traditional 401k will be taxes, ordinary income. Whereas selling the investments in a taxable might, a taxable account might incur capital gains, which is often lower than ordinary income wa. Roth withdrawals will be tax free. The order in which you withdraw and. Even how you ins, invest in inside each account, which is what we call, asset location in the business, can impact how much tax you pay over time. So again, we want to be mindful about where we're investing and what we're investing in, and where those investments are located, which accounts are located in so that we can maximize or minimize, taxes over time. Right. So a typical approach in retirement is to withdrawal from taxable accounts first, then tax deferred 4 0 1 Ks, traditional IRAs, and then lastly Roth IRAs. That's a general rule of thumb. Each individual situation's gonna be a little bit different, but, So we like this approach because it lets your tax advantage money grow longer and can keep your taxable income lower in retirement. You don't need to be a tax expert, but you do need to be aware of a big part of an early retirement plan in managing taxes so that. Your money lasts longer. This might involve Roth conversions, which we'll talk about in a few episodes, in a few weeks. but if you're retiring in your early fifties, Roth conversions can be a huge tax savings. I. strategy for you, as you move forward? I have a client that I've been working with for, almost the duration of my career. She recently retired about three years ago. She was, at the time she retired, I think she was 51 or 52. and we've been doing Roth conversions. since then because her income dropped dramatically right, and she saved properly into a brokerage account, were able to keep her income low on paper and do these Roth conversions, which, which hopefully will result in saving her six figure in taxes over her lifetime, which leaves more money to grow. Her net worth will be higher and it will give her the ability to one, keep her lifestyle. The way she wants it or even increase her lifestyle, or be able to leave more money to her heirs and some charities that, that she enjoys. having a plan for taxes, again, you don't have to be an expert, but you have to be aware of it. maybe working with an expert so that you can, minimize these taxes. And so then you can strategically realize cap capital gain gains or losses through tax loss harvesting or harvesting gains wouldn't make when necessary. and so the key takeaway is to think long term. Tax planning is the key, not tax preparation, not what your CPA or your accountant or your, enrolled agent does at the end of the year. some of them do do tax planning, but you should be thinking 5, 10, 15 years down the road and not. what can I do this year to save me on taxes? So, um, two, two investors with the same pre-tax return can end up with a completely different outcome if one pays a lot more to Uncle Sam versus not. Right. So you can use, Roth and 4 0 1 K's account 401k account wisely. Uh, work with your financial planner and your tax professionals, to help minimize those taxes over time. So. Let's talk about a game plan. All right? Maybe you're still in your early thirties or your early forties and you're like, Hey, retiring early has been a thing that I want to do. I haven't really thought about it. Or maybe I've thought about a plan, but I'm unsure about where to start. So starting out, let's lay the foundation for an early retirement. We want to define. Your goal. So get a rough idea of what early retirement looks like for you financially. This means figuring out how much annual income you'll want to utilize in retirement, translating to a target nest egg. many people use the 25 x rule. So for example, if you think you'll need a hundred thousand dollars per year to live the desired lifestyle that you want, you'll aim to have$2.5 million in investments. And this is utilizing. The generic 4% rule. Now I think most people can do better than that if they use certain strategies, But the, the 4% rule is a good rule of thumb. Some early retirees plan to be a bit more conservative, aiming for 30 x. Um, whatever you think is more, Your style, if you wanna be more conservative and uh, use of 30 x by all means, it gives you a number to work toward, right? And so, especially if you're in your early thirties, this number is probably going to change wildly over that time because your income's gonna change. Your saving habits are gonna change. Um, so the thing is just get a number on paper, have a target, and start working toward that target, right? So this isn't hard science. We just want to have a bar ballpark number that will motivate and guide you to get you to where you want to go. So do you wanna travel in retirement? Do you wanna support. Uh, a child's college, pay off a home, all these things will factor in. Um, the idea is to begin with the end mind so that you know, Hey, I need 3 million, or I need 2 million, or I need five or 10 million, whatever that number is, so that you can start working toward that. And as you get closer, you'll be able to refine it a little bit more. Maybe your, your lifestyle isn't as extra as extravagant as you thought it would be. Right. Um, and I, I didn't need to save as much. So the next thing would be to save aggressively. Here's the not so secret sauce. To retiring early, you have to save a significant part of your portion of your income. A common guideline for traditional retirement is to save about 15% of your income. For retiring a decade or more earlier, you'll need to save often 20% or even more, For retiring a decade or more early, The good news is that high income earning professionals, I. You'll have the means to do this. The pie is bigger, your income pie is bigger, so you'll have the ability to save more if you can live within your means, and that means avoiding lifestyle creep. We've talked about this before, I've made a whole episode on it. As you start making more money, especially in your late thirties, early forties, where you're starting to peak at your earning potential, you do not want to start creeping that lifestyle up. Faster than what your paycheck is. So when you're thinking about saving for retirement, we always want to think in percentages so that if we have a hard dollar number that we need to save, let's say$15,000 a year, and I get this big bonus and I'm still, or a the big raise and I'm making 15 or 20% more in income, five years down the road. And I'm still saving$15,000 a year. Well, I'm not keeping up with my lifestyle in that sense. So, uh, we wanna make sure that we're doing a percentage of our income each year so that we are staying on track and saving the proper amount, each year, and not letting that lifestyle creep, start to creep in, because it is the, the silent killer of wealth, uh, as I've talked about before. and so making sure that we're saving. The right amount. You can still enjoy life now, but it, it doesn't mean, going out and buying fancy cars before we need to, or, or upgrading your house and, and things of that nature, pools and all this. and then not saving what you need to do now if you have different priorities and you want to push back and you see that trade off as, Hey, I can get this pulled now, or I can get this. This new car now, and I'm gonna, I'm gonna retire maybe two or three years later. And you're okay with that, that's a different conversation. But if you're doing things like this and you're not considering that you want to retire early, and then you get to age 50 or 55, you're like, oh man, I don't have enough because my lifestyle's too big now. Um, those are the things that you want to avoid, right? The last thing, educate yourself, right? Educate yourself and plan. Starting out. I, it's important to get. financially literate, come up with a plan, whether that's working with a financial advisor or coming up with your plan yourself. But don't, let analysis create paralysis. Create a plan, but start action. The biggest thing here is action, action, action. Start saving, even if it's less than what you think you need to save. If you get to the habit of saving, you'll likely be able to increase that over time and meet your goals. and so the action is key here. Create a plan and start, even if the plan isn't the best plan. Creating action on the plan and executing a plan is better than having a plan and not executing. And so I. Last thing. This, this podcast episode is running long, but I think it's a good one. and that is what are some milestones that we should be thinking about? So we're just gonna go thirties, forties, and fifties. in your thirties. This timeline or this time is to establish good habits. So if you're in your thirties, you're finally making some income where you feel that you can save a significant part of your, your income. get on that. Automate that, make that a habit where you don't even think about it. Consider it a bill, right? maximizing your contributions to your IRAs, your 4 0 1 Ks. Getting into a habit. Open up yourself, a brokerage account, even if it's$50 a week or something like that. Start contributing. don't worry about the investments. We're gonna talk about that next week in a different episode. But don't worry about the investment so much as getting the money into those accounts. If you have student loans, work on paying them down, or at least have a plan. Don't neglect, your debt, fine balance in investing versus paying off that debt. Create a plan, right, and also invest in yourself your earning. Is power, right? The more you earn, the bigger that pie of income that you have and the more that you'll be able to save, pay down debt, and live the lifestyle that you wanna live. So these are your career building years in your thirties, increase your income as much as you can through skill development. Asking for raises, switching jobs if you need to, whatever that may be, so that you can maximize your income. And we're gonna spend a whole episode next week on that as well. So by the, by your late thirties, you should have a solid emergency fund, and generally speaking, you should have somewhere between two to three times your annual salary by age 40. for an early retirement, again, you wanna be closer to that three times your salary.'cause again, your time horizon is crunched down, potentially 10 to 15 years. But don't be discouraged if you're not there yet. Often your forties is when you're making your most money, so you can make up some in that savings. But start saving in your thirties. Start investing in your thirties, in your forties. We want to accelerate. That savings, again, you're gonna be making more money. Your kids are gonna be outta daycare, they're gonna be doing their own thing. They're gonna, they're not, you're, you're potentially have less debt and things of that nature. So you should have more cash flow. So if you get a big raise or a bonus, you increase your savings, not just your spending. And so by now, you should definitely have a taxable brokerage account that you're contributing to on a regular basis. and then starting to worry about your, investments, more so than your contributions, because again, you've had, I. Probably five to 10 years of, accumulation through those accounts, through your contributions. And so now we want to get a little bit more heavy on, hey, what am I actually investing in? Is my asset location correct? Do I have the correct investments in my Roth versus my brokerage account versus my 401k? and then in your fifties, this is the final stretch. You should be shifting to a more conservative mode, especially, in your brokerage account. On the assets here, you're going to be using. And then take advantage of the Catchup Catchup contribution. So in your 4 0 1 Ks in your fifties, you have a$7,000 catchup in your IRAs. You have a thousand dollars catch up each year. take advantage of that and, accumulate a little bit more money before. You decide to actually retire. This might, uh, also be a time to pay off any other major debts, mortgages, finalize your student loans, things of that nature. Get rid of those car payments that linger around, and then start to think about your healthcare. Right. So the biggest, deterrent to retiring early is always healthcare and what that costs look like. Start to research, a CH plans, in your mid fifties so that you know kind of what to expect from a premium standpoint. also consider long-term care insurance if it makes sense for your situation, and then start to come up with a withdrawal plan from your accounts. Ooh. That was a long one. That was a long one. And so hopefully, this is a good overview on what to start thinking about if you are in your thirties or forties and, and wanting to retire early. I want to dive a little bit deeper into these, specific topics, over the next few. Episodes. this was kind of the first, I wouldn't call it a series, but a first, uh, podcast of us starting with retiring early and then diving into each specific, subset topic here. I. And so again, I appreciate everyone listening, to this podcast. Share this with a friend if you think it would be valuable to'em. Leave a five star review if you like this podcast. if you wanna retire early, start now. Right? Start investing now. Now you'll think your older self later. whatever that means. So again, thanks for listening and. This podcast is for educational purposes. It's not meant to be financial or investing advice. Do not make decisions solely based on this podcast. Please seek professional help, if you're make, if you, if you're considering making some decisions about your situation.