At 44 years old, there are still 11 years to go until 55. If you want to retire 10 years earlier than the average person, how should you save money now?
Recently, certified financial planner Matt Frankel shared his retirement savings plan for 55 years of age. He doesn’t necessarily intend to quit working on the day he turns 55, but rather hopes that by that age, he will have enough money to either continue working if he wishes or not work at all.
On September 23, the American financial website “Motley Fool” published an article by Frankel. He mentioned that he enjoys his current job and hopes to continue working for many more years, but as a financial planner, he aims to achieve financial freedom by the age of 55.
For many years, Frankel has been saving about 20% of his income annually for retirement and plans to continue this practice.
The general recommendation is to set aside 10% of income for retirement savings, excluding employer contributions. However, if one desires to retire early without compromising their post-retirement lifestyle, they need to save more.
Despite having only 11 years left until he turns 55, Frankel is not rushing to transfer a large sum of money into bonds.
Following the allocation method he learned in certified financial planner qualification courses (CFP), he should currently hold around 30% in bonds. However, in reality, his fixed income investments are limited, with the majority of his investment assets still in stocks and stock-based funds.
His investment portfolio consists largely of low-cost index funds. Some of his significant ETF holdings include Vanguard S&P 500 ETF (VOO), Vanguard Real Estate ETF (VNQ), and Vanguard Russell 2000 ETF (VTWO).
He also holds various real estate investment trusts (REITs) and dividend-paying stocks such as Realty Income and IBM. In addition, he usually holds around 20 non-dividend-paying stocks, with a focus on growth, including MercadoLibre and SoFi.
For Frankel, a realistic issue with retiring at 55 is that having money in retirement accounts does not necessarily mean it can be easily accessed for expenses when needed.
Typically, withdrawing from a 401(k) or IRA before the age of 59 and a half incurs a 10% early withdrawal penalty. However, there are exceptions, such as being able to withdraw the principal contribution from a Roth IRA or using the “55 rule” if leaving work at or after 55 to access the employer’s 401(k) without the penalty. This rule does not apply to IRAs or previous employer’s 401(k).
Frankel’s solution is to also maintain a separate taxable investment account.
His goal is to gradually build this account over the next 10 years to cover 4.5 years of living expenses. This fund could then be used for day-to-day expenses between the ages of 55 and 59 and a half if he retires at 55.
He also has a small Roth IRA that can be used when needed for additional funds.
Currently, Frankel primarily invests in stocks, but as he approaches actual retirement, he plans to keep a cash reserve on hand.
Over the next 11 years, he will accumulate cash equivalent to 1 to 2 years of living expenses.
This is a practical approach: if the stock market experiences a significant decline right after his retirement, he wants to avoid having to sell stocks at low prices to cover basic expenses like rent, utilities, and groceries. With this cash cushion, he can rely on it for daily expenses without having to sell stocks hastily.
Retiring at 55 also presents a challenge with health insurance.
Medicare in the United States usually starts at age 65. Retiring at 55 means there will be approximately 10 years where one needs to arrange for their own healthcare coverage. During the years before beginning to receive Social Security benefits, one will mainly rely on their own savings for daily expenses.