Can Your Financial Plan Handle an Early Retirement?

financial planning for early retirement


By John Odell, CFP®

Early retirement is a goal that many people would love to achieve. It’s not always an easy one, though, especially in today’s economic climate.  With high stock prices, low interest rates and rising inflation, there is significant uncertainty to navigate.

So clearly, this decision must be made with care.  However, it’s certainly not impossible.  As wealth managers to individuals for over three decades, we’ve helped many people plan for and retire early with great success.  It just requires more effort upfront to do it right.

Here are action steps that can help increase your chances of success.

Step 1.  Double down on planning

Your first step should be to do a lot more planning.  As with a complex skyscraper, more time goes into planning and stress-testing than the actual construction.  That is the same approach you want to take with your retirement.  Your goal should be to identify potential obstacles and blinds spots now, while you still have a chance to do something about them.

You’ll probably need professional guidance to do this right.  Yes, you could do this yourself, but what if you leave something out of your calculations?  Best to find a very experienced financial advisor to help you identify and correct any potential issues.

But make sure you seek qualified advice.  There are few requirements to being a financial planner, so it’s best to look for the proper credentials.  Currently, the gold standard in the industry is to work with a CERTIFIED FINANCIAL PLANNER™ professional.  That credential requires completion of 18 to 24 months of college-level coursework, specific field experience requirements, and passing of a comprehensive exam.  Once the certification is earned, these professionals have to stay up to date with continuing education requirements.

Working with a CFP® professional is recommended for anyone, but if you’re trying to accelerate your retirement plans, it’s even more critical:  you simply can’t afford big mistakes.

Ensure the financial planner will stress test your plan to uncover the potential impact of various events such as severe market volatility.  It’s much better to be prepared than to be surprised.

Step 2.  Manage your investments with precision

Once you decide to aim for early retirement, you need to shift your thinking about investing.  Risk-taking needs to be carefully controlled.  A significant setback before you retire can mean your plan is delayed.  A big setback afterward can be far worse since you may not have any easy way to make up financial losses.

So that means investing needs to be handled with additional care.

If you manage your own investments, you need to avoid the emotional mistakes that harm too many individual investors.  Also, you should employ a disciplined system that addresses both buying and selling to help you stay on track with your goals.

The most practical way for most people to do this is to hire a financial advisor to manage their investments.  But you must choose carefully, as some financial advisors don’t necessarily work in your best interest.  Others may not have the skills, training, or experience to manage your money effectively.

So who can you trust?  One strategy is to look for GIPS® compliant financial advisors. GIPS®, short for Global Investment Performance Standards, is a set of worldwide standards for reporting investment results.  Firms who comply with GIPS® agree to measure investment performance according to specific rules and have their results reviewed by independent third parties.

In a nutshell, these firms agree to voluntarily be transparent about the returns they have generated for their clients over time.  This gives you the information you need to compare and evaluate how good they are at managing money.

Think of it this way:  if you were looking for a surgeon for a necessary medical procedure, wouldn’t you want to see the actual number of surgeries they have done and how often those surgeries were successful? Of course you would.  Why would your money deserve any less?

Firms that agree to comply with GIPS® standards are likely confident of their performance since compliance is voluntary and involves considerable effort and expense.

Step 3.  Practice self-control in all spending

When you’re preparing for retirement, careful spending is a must.  You don’t want to make an emotional purchase of a second or third home, for example, without carefully being assured it doesn’t negatively impact your retirement goals.

When you’re aiming for early retirement, this is even more important.  That means taking emotions out of the equation and instead practicing discipline with spending.

If you have a trusted financial advisor, you can enlist them in this effort. You can simply require yourself to bounce any large purchase off them first to make sure you’re not making an expensive mistake that will derail or delay your plans.

That also means sticking to a budget.  It can help to frequently review your financial plan to keep that accelerated goal in mind, which can help minimize urges to overspend today.

Step 4.  Find ways to minimize your taxes

“A penny saved is a penny earned.”  This adage reminds us that if we can reduce our taxes (or any other expense), the savings goes straight to our bottom line.

While we can’t rewrite the tax code, there are many strategies available to minimize your taxes.  This is an aspect of wealth management that is often ignored, but can help you achieve your goals faster.

So along with getting your taxes done every year, be sure to schedule an annual tax planning meeting, too, with your tax professional.  Be proactive here; many tax accountants don’t routinely devote time for planning unless you ask.  At our firm, we proactively reach out to our clients’ accountants to offer help and be available for tax planning meetings, which can make the accountant’s work easier.

You can do your own research as well to get started. For example, you may want to investigate Roth IRAs and Health Savings Accounts as potential ways to shelter more of your income in the future.  As always, be sure to consult your tax professional.

Step 5.  Hold more reserves in cash

Finally, when you retire early, you are going to have to plan on bouts of uncertainty.  It’s not a question of if the stock market will get volatile; it is a matter of when.  When you realize that the stock market will naturally drop at times, sometimes sharply, you can build that reality into your retirement plan.

One effective strategy that can help is maintaining a more significant cash position when you eventually do retire.  While three to six months is often mentioned as the amount to hold in cash reserves, it can be wise to increase that amount.  That way, you can feel safe knowing that the bills are already funded during stressful times.

That may mean holding one or even two or three years in living expenses in a money market fund or savings account.  With that cushion in place, you can be prepared for whatever life throws your way.

Along with supporting your financial plan, this can help preserve your peace of mind as well.

Wrapping Up

Bottom line, you need to take preparation seriously when you want to retire early.  High-quality, comprehensive financial planning can help you avoid problems and set you up for a successful future.

If you’re looking for help planning for retirement, the team at Arroyo Investment Group offers GIPS® compliant investment results combined with support from CERTIFIED FINANCIAL PLANNER™ professionals. 

Contact us today for a complimentary consultation to see if we can help you achieve your goals.