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3 Key Steps to Take for Early Retirement

Taking these steps will put you in the fast lane towards early retirement

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If you were born in 1960 or later, you don’t quality for full social security until age 67. So, if you’re considering early retirement, in your 50s or 60s … well, let’s just say you’re going to have to look elsewhere for retirement income.

In order to properly retire early, you need to have a couple basic conditions in place first. To start, I’d strongly recommend being completely out of debt. And I’m not only talking credit cards here. I’d recommend that you have your house and cars paid off, as well as any lingering medical or student debts you might have for yourself or your kids or grandkids.

You don’t want to carry any of this into retirement.

Secondly, you need to have reliable income streams in place. Sure, it’s nice that you saved your whole life and amassed a respectable nest egg. But if that nest egg isn’t producing income for you, it’s not likely to last you through your golden years.

And finally — to the greatest extent possible — try to make sure your investments are optimized to pay as little in taxes as possible. This is particularly important in a low-yield world. A dollar saved in taxes is effectively a dollar extra in “return.”

Three Steps to Take for Early Retirement

Let’s start with debt. One of the quickest ways to wipe the debt slate clean and take a step closer to early retirement is to buy a less expensive home. If your children have already left the house — or if, as a retiree, you no longer need to live close to the office — moving to a smaller home in a less expensive neighborhood will potentially free up a lot of cash to eliminate your mortgage or any other debt you might have outstanding. It can also lower your property tax bill going forward.

Otherwise, eliminating debt is really just a matter of discipline. Make accelerated payments if you can, and throw as much of your disposable income as possible at debt reduction.

Once your debts are paid, you need to find ways to generate current income … or you’re going to burn through your savings in a hurry. Unfortunately, this is a lot harder than it used to be with bond yields and dividend yields still near historic lows.

Don’t fret. There are still plenty of traded real estate investment trusts, MLPs, business development companies and other high-dividend-paying stocks paying 5%-7%. Just be careful not to reach too aggressively for yield, as a payout that looks too high to be true probably is.

Of course, no one ever said you had to limit your investment options to the traded stock market. More intrepid investors might also consider trying their luck with a rental property, with micro lending, or any number of other options. Just make sure that, whatever direction you go, you keep your position sizes reasonable and don’t depend too heavily on any single investment for your retirement income.

As a general rule, I wouldn’t want more than around 3%-5% of my retirement income coming from any single stock and no more than around 10% coming from any single rental property or other alternative investment.

And finally, when seeking early retirement, don’t forget tax optimization. This is an important element of your real, after-tax returns, but it’s something that few investors understand.

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Article printed from InvestorPlace Media,

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