Small Investments, Big Retirement: Navigating Early Financial Freedom

If you're retiring early, you'll need to make some changes to how you earn and spend money. This includes cutting your budget to a minimum, wiping out debt, and finding ways to bring in extra income.

- High-yield savings accounts: These accounts allow you to earn more interest than traditional savings accounts, and your money is FDIC-insured for up to $250,000 per account type per bank.

- Low-risk investments: As you approach retirement, it's important to pay attention to less risky options. Short-term bonds are a good option because they aren't as influenced by future volatility. Treasury Inflation-Protected Securities (TIPS) are also a safe investment that helps you diversify your future retirement income.

- Regular investment accounts: If you're retiring early, you won't be able to withdraw from tax-advantaged retirement plans like IRAs and 401(k)s without incurring a penalty. A regular, taxable investment account is a good option if you're looking to withdraw money early.

- Roth IRA: This offers tax-deferred growth of your investments, and you can withdraw your contributions tax-free at any time. However, you can't withdraw earnings without a penalty until you're 59 1/2.

- Municipal bonds: These are a good option for accumulating tax-free income, especially if you're in a high tax bracket.

- Real estate: This can provide both capital appreciation and passive income through rental properties. It can also offer tax benefits.

- Stock index funds: These are a good option for growing your money without taking undue risk.

Regular investment accounts

With a regular investment account, you have access to a broad range of investments, including stocks, mutual funds, bonds, and exchange-traded funds. Any interest or dividends earned on investments, as well as any gains on investments that you sell, are subject to taxes in the year that the money is received.

There are two types of taxable brokerage accounts: cash accounts and margin accounts. A cash account is the standard type of investment account where you deposit money and then use the funds to buy securities. Margin accounts, on the other hand, allow you to borrow money from your bank or broker to buy securities and engage in short selling, a risky form of investing where you bet on stocks and funds losing value.

When opening a brokerage account, you will likely be asked to choose between a cash account and a margin account. A cash account is appropriate for most investors, while a margin account is better suited for advanced traders.

There are no limits on how much money you can contribute to a taxable brokerage account, and you can withdraw money at any time. However, you may owe taxes if the investments you sell have increased in value.

While regular investment accounts offer more flexibility than tax-advantaged accounts, they do not provide any tax benefits. This means that any interest or dividends earned will be taxed at the applicable rate.

High-yield savings accounts

Marcus by Goldman Sachs High-Yield Online Savings Account

Marcus by Goldman Sachs offers a strong APY with no fees, no minimum deposit requirement, and easy mobile access. This account is a straightforward option for those who want to grow their money without any conditions.

American Express High-Yield Savings Account

The American Express High-Yield Savings Account offers a higher-than-average APY, no fees, and 24/7 customer service. While this account doesn't offer a checking account, it is a good choice for those who prefer a well-known, big-name bank.

UFB Secure Savings

UFB Secure Savings provides a competitive APY with no monthly fees, no minimum deposit requirement, and no minimum balance requirement. This account also offers an ATM card for convenient cash withdrawals at over 91,000 fee-free ATMs.

Bask Interest Savings Account

The Bask Interest Savings Account offers a high APY with no monthly fee, no minimum deposit requirement, and no balance requirement. While this account doesn't offer a checking account, it stands out for its low fees. You won't be charged for overdrafts, incoming wire transfers, returned items, or early account closure.

LendingClub High-Yield Savings Account

The LendingClub High-Yield Savings Account offers a competitive APY, low minimum balance to earn interest, and no monthly maintenance fee. This account also provides a free ATM card and live chat customer support. However, watch out for hidden fees, as LendingClub charges high fees for inactivity, wire transfers, and stop payments.

Municipal bonds

The biggest benefit of investing in municipal bonds is the associated tax advantage. The interest earned on a municipal bond is generally exempt from federal taxes, and if you live in the state where the bond was issued, you may also be exempt from state taxes. This makes municipal bonds a great way to accumulate tax-free income both before and after retirement. The tax-exempt status of municipal bonds is especially beneficial for those in high-tax brackets, as it effectively increases their after-tax yield.

There are two main types of municipal bonds: general obligation bonds (GOs) and revenue bonds. States, cities, or counties issue general obligation bonds, which are backed by dedicated taxes on property or general funds, and are thus considered lower risk. Revenue bonds, on the other hand, are tied to income generated from a specific project or source, such as tolls or hotel occupancy taxes, and carry more risk.

When considering municipal bonds, it is important to keep in mind that they tend to pay lower interest rates than other types of bonds, which can lead to inflation risks. Additionally, the bond issuer may have the option to redeem the bond prior to the maturity date through a "call provision". Municipal bonds also carry interest rate risk, especially for longer maturities, as they are more susceptible to rate fluctuations.

Real estate

One of the main advantages of investing in real estate is the opportunity for capital appreciation. Over time, property values tend to increase, especially in desirable locations. This means that even with a small investment, you can build wealth by buying and holding properties. Additionally, with strategic improvements and renovations, you can further increase the value of your real estate holdings.

There are various strategies you can employ when investing in real estate. One approach is to purchase and manage rental properties directly. This involves finding suitable properties, such as those with rentable garage apartments or the potential for conversion into boarding houses, and renting them out to tenants. Another strategy is to invest in real estate syndications, where you partner with other investors to pool money and buy property, entitling you to a share of the profits, including rental income and capital gains.

When investing in real estate, it's important to consider your risk tolerance and financial goals. While real estate can provide strong returns, there are also potential downsides, such as the time and effort required to manage properties or the risk of market downturns affecting property values.

Additionally, when planning for early retirement, it's crucial to ensure you have a comprehensive financial plan in place. This includes considering your expected expenses during retirement, diversifying your investment portfolio, and seeking professional advice to ensure your investments align with your goals and risk profile.

In conclusion, real estate can be a powerful tool for those seeking early retirement. By investing wisely and strategically, you can build wealth, generate passive income, and achieve financial independence, allowing you to retire on your terms.

Brokerage accounts

• Opening an account: You can open a brokerage account quickly online, and many firms don't require an upfront deposit. However, you will need to fund the account before investing.
• Account ownership: Brokerage accounts can be individual or joint. Individual accounts are owned and controlled by a single person, while joint accounts are shared by two or more people, typically spouses.
• Investment options: Brokerage accounts offer access to a broad range of investments, including stocks, mutual funds, bonds, and ETFs.
• Tax considerations: Any interest, dividends, or gains from investments in a brokerage account are subject to taxes in the year they are received. This is why brokerage accounts are also called "taxable accounts."
• Risk factors: While brokerage accounts offer flexibility, they do not have the tax advantages of retirement accounts. It's important to consider the tax implications and risks associated with investing in a brokerage account.
• Withdrawing money: There are a few steps to withdrawing money from a brokerage account. You'll need to sell your assets, wait for the sale to go through, and then wait an additional day for the trade to settle before you can access your funds.
• Brokerage account types: There are two main types of brokerage accounts: individual brokerage accounts and joint brokerage accounts. Choose the type that aligns with your financial goals and situation.

Frequently asked questions