Early Retirement Tips for High-Net-Worth Individuals
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Table of Contents
Early Retirement Tips
The Psychology Behind Early Retirement
What is FIRE (Financial Independence, Retire Early)?
Early Retirement Frequently Asked Questions
Implementing Early Retirement Strategies
High-net-worth individuals work hard to maximize their income and net worth, and for some, this makes early retirement a realistic option. While some HNWI want to work until a more standard retirement age for the social and intellectual benefits of employment, others look forward to retiring as soon as possible to spend more time with loved ones or pursue other meaningful activities.
These early retirement tips will help high-net-worth individuals navigate aspects such as health insurance, passive income, and mortgage debt to ensure a successful transition.
Early Retirement Tips
Early retirement requires a plan that covers elements such as asset allocation, a drawdown strategy, a rebalance strategy, budgeting, and healthcare coverage. Working with a financial advisor or wealth manager can also help when considering early retirement options.
Here are some early retirement tips to begin the process:
Plan for Healthcare Costs
Early retirement insurance options are a top concern for those retiring before 65, the age when Medicare eligibility kicks in. The costs and complexities of health insurance options vary widely, often depending on one’s state of residence.
There are two main health insurance options: the ACA or COBRA.
COBRA is a federal program that offers broader network coverage, but it tends to be more expensive compared to ACA plans. With COBRA, coverage often carries over from the most recent job, so benefits will stay fairly consistent.
With the ACA, coverage will change, but participants have the option to choose a plan from either HealthCare.gov or a state plan. Keep in mind the limitations of state-based health insurance; these plans might only offer in-state coverage, potentially leading to unexpected out-of-pocket expenses while traveling.
COBRA generally only lasts for 18 months (although there is the option to extend it up to 36 months), so one strategy is to utilize COBRA initially, if it offers better coverage, then transition to the ACA when appropriate.
When budgeting for healthcare, consider the full scope of potential costs. For a family of four, monthly premiums can range from $2,000 to $2,500, with total out-of-pocket costs potentially reaching $20,000 to $40,000 per year. These figures can vary significantly based on the chosen plan and individual health needs.
In addition to ACA and COBRA, some retirees explore private health insurance plans, which can sometimes be more affordable depending on the state. Others consider part-time enrollment at universities to access cost-effective health coverage through university health plans.
Establish Bridge Accounts
Individuals contemplating early retirement need to know how to manage finances before they can access retirement accounts like IRAs and 401(k)s without penalty.
Bridge accounts play a crucial role here, providing liquidity to cover living expenses during the interim years. This can include savings in brokerage accounts, income from real estate, or other passive income streams.
In addition to traditional bridge accounts, some early retirees utilize strategies like Roth conversion ladders or 72(t) distributions to access retirement funds early without penalties. These approaches require careful planning and execution but can provide additional flexibility in accessing funds before age 59½.
Maximize Passive Income
With consistent passive income, high-net-worth investors can rely mostly or completely on these returns to support their lifestyle.
Many people favor directly owned or syndicated real estate as a source of passive income. Real estate can provide steady cash flow, potential appreciation, and tax benefits, making it a popular choice among those looking to retire early. Others focus on interest, dividends, and rental income.
Private credit investments are another avenue worth exploring, with some offerings yielding 7-15% for investors willing to be flexible with collateral and structures while maintaining solid underwriting. Additionally, specific public REITs like NNN and BNL, as well as income-focused mutual funds such as NHMAX and EAFAX, can provide steady income streams.
Short-term investments can also be good options due to their stability and relatively high yields in the current interest rate environment.
Have a Withdrawal Strategy
Those wanting to retire early need to accurately estimate living expenses and spending habits to establish a safe withdrawal rate and avoid depleting their principal too quickly. The standard recommended safe withdrawal rate is 3% to 4% of a portfolio per year.
To optimize withdrawals, consider implementing tax-loss harvesting and strategic rebacash flow streamslancing. It is also crucial to plan which accounts to draw from first (i.e. taxable vs. tax-advantaged) to minimize tax implications over time.
Diversify income sources to include dividends, interest, and rental income, providing multiple cash flow streams.
For those with significant equity holdings, strategically selling long-term equities can be a tax-efficient method of generating cash flow. Equity capital gains, especially long-term ones, are often taxed at lower rates compared to dividend income, making this a highly efficient strategy for early retirees.
Mortgage Management
Deciding whether to pay off a high-net-worth mortgage can be tricky. Paying off a mortgage can provide peace of mind in retirement, but by holding off on this, the funds could be more profitably invested in higher-yielding securities.
Mortgage arbitrage is an approach where investors take advantage of the low cost of borrowing against higher investment returns. Such strategies are particularly appealing in an environment where risk-free rates exceed mortgage rates, allowing individuals to earn a spread on their investments.
Consider maintaining mortgage debt with low fixed rates while investing the equivalent amount in higher-yielding assets, such as treasury bills. Evaluate your portfolio for potential rebalancing towards income-generating assets if stability and cash flow are priorities.
Invest Wisely
Most high-net-worth individuals already have a strong investment strategy in place, and maintaining a diverse portfolio will go a long way in reaching early retirement. While traditional investments such as stocks and bonds are never a bad idea, also consider alternative investments with the potential for higher returns.
This might include private equity, private real estate, collectibles, or hedge funds. These investments tend to come with higher risk and lower liquidity, but for those with a higher risk tolerance and an interest in long-term rewards, these non-traditional assets can be an excellent way to bolster a portfolio.
As retirement approaches, consider gradually shifting to a more conservative asset allocation strategy. Balance growth assets with income-producing assets to ensure both long-term appreciation and steady cash flow. Utilizing retirement planning tools like BigERN, Portfolio Charts, or Portfolio Visualizer can help with modeling various scenarios and fine-tuning an investment strategy.
High-Net-Worth Asset Allocation Report
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The Psychology Behind Early Retirement
Transitioning to retirement isn’t just a financial shift; it’s a psychological one. Many early retirees find the transition from a saving mindset to a spending one particularly challenging. It is crucial to develop a detailed spending plan and become comfortable with the idea of drawing down assets. Some find it helpful to start with a more conservative withdrawal rate and gradually increase it as they become more comfortable with their new financial reality.
While the idea of retiring early sounds appealing, many also find a void in their lives after quitting their jobs. A career provides more than money; it also gives us purpose, intellectual stimulation, and a social community. This is why early retirees should explore passion projects and meaningful hobbies—such as travel, art, fitness, or spending time with family—to stay engaged after retirement. For some, it may also make sense to continue exploring career-related activities in some way, perhaps through part-time work, consulting, mentoring, or speaking at events.
What is FIRE (Financial Independence, Retire Early)?
FIRE is a popular movement devoted to stringent budgeting, savings, and investing strategies with the goal of achieving early retirement. According to the FIRE methodology, a comfortable early retirement requires one to save and invest about 25 times their annual expenses—known as a FIRE number. Once this amount is set aside, individuals should withdraw about 4% of savings per year of retirement.
There are a few different subsets within the FIRE movement, including:
Lean FIRE: Implementing a strict budgeting system with a focus on frugality and living a modest lifestyle.
Fat FIRE: Growing enough wealth for a more comfortable—even luxurious—retirement.
Barista FIRE: Retiring while also working part-time, enjoyable jobs.
Coast FIRE: Achieving financial independence without particularly strict saving habits, which typically takes longer.
The FIRE community is very active, especially on Reddit, and is one school of thought HNWIs might choose to follow to achieve early retirement.
Early Retirement Frequently Asked Questions
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While 62 is the age at which Social Security benefits become available, there are no specific early retirement requirements; high-net-worth individuals can retire at any age, as long as they have sufficient wealth to support their lifestyle. The general rule of thumb is to accrue 25 times your annual expenses before officially retiring.
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Withdrawals from an IRA or other retirement account before the age of 59 ½ are considered early or premature distributions, so individuals have to pay an early retirement tax penalty fee of 10%. Social Security benefits are also reduced for those who claim before reaching the traditional retirement age.
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No, early retirees have to wait to collect their state pension, typically until they are 65-68 years old. Workplace and personal pensions vary, and it might be possible to collect these early.
Implementing Early Retirement Strategies
Early retirement is an achievable goal with careful planning and consideration of the financial, psychological, and emotional factors involved. By exploring various options and early retirement tips, individuals can pave the way for a successful and fulfilling retirement.
Engaging in thoughtful discussions with other high-net-worth individuals provides valuable insights and support on the journey to early retirement. Join Long Angle to access a welcoming community of like-minded peers, plus curated investments and educational events.
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