retiring early (or planning to, as we are) comes with some added complications. of course it’s a given that this plan requires some serious attention to spending, as well as diligent saving and investing. u.s. laws provide tax advantages for retirement savings, but only if you retire at the so-called “retirement age,” meaning after age 60. who wants to wait that long?! we’d rather retire when we’re still able bodied, mentally sharp and have many, many years ahead of us. the reality is that retiring before age 60 in the u.s. requires some more complicated math and planning.
we touched on this briefly in our post on the cost of time, and outlined that we have a two-part system: the money that’s growing tax-free right now, but that we can’t touch until age 59 1/2 (our 401(k) savings), and the taxable investments that will get us from retirement day to the day we can access our 401(k) without penalty.
in our case, we both got serious about investing in our 401(k)s way before we got serious about other saving and investing, so we actually have a nice bit socked away in those retirement-age retirement funds. we’ll keep contributing to them until we quit our jobs in a few years, and then they should continue to grow along with the markets for nearly 20 years. on the other hand, our taxable investments are currently smaller than our 401(k)s, though we’re focused on adding to them pretty aggressively, and their balance is increasing nicely. but as soon as we quit our jobs, those funds will be what we draw most of our income from. so though we hope that the market will support continued growth of those taxable funds, we know that the balance will decrease because we’ll be drawing off more each year than the fund can grow, even in a good year.
in our case, what all of this means is essentially this: we’re going to live like cheapskates for the first 18 years of our retirement, and then if the markets cooperate, we’ll live a little larger in our later years, once we can tap our 401(k)s. but we actually think this plan is perfect. when would you rather travel on the cheap versus be able to splurge a little more? live cheaply when you’re young and resilient, right? it’s hard to imagine us ever getting into, say, cruises, and they for sure won’t be in the budget for retirement part 1, but who knows? maybe we’ll be into that kinda thing when we’re older, and retirement part 2 has a good chance of being able to fund some extravagances. and for now, we don’t mind camping for extended periods, sleeping on crummy mattresses, or taking overnight trains.
another potential benefit: by having more funds to look forward to in the future, it may take the sting out of getting older. we’re building in something to get excited about as we age, instead of looking at nothing but downside.
are you thinking about early retirement, or even just thinking about saving more? how are you structuring your savings to work for you down the road?
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