10 Ways to Unlock Your Wealth and Retire Early
Has your 401(k) or IRA trapped you until age 59 1/2? It’s time to get creative.
You can still retire early even if retirement accounts and home equity have tied up your wealth. Photo by Christin Hume on Unsplash.
You and your partner are in your mid-40s. You’ve worked hard and saved. You did it exactly as taught. Let’s get specific:
You saved inside your respective 401(k)s since the late 90s.
You bought a nice home in Portland in 2010.
You even got a little lucky with your Roth IRAs.
As a tech and gadget enthusiast, you bought Apple stock for two decades.
You’re environmentally conscious, so you bought a few shares of Telsa stock 15 years ago.
You’re shocked. Your accounts are worth a combined $2.2 million. Your home’s value has grown to net you $1.0 million. Combined, you are worth $3.2 million.
(Truth is, you’re a little embarrassed by your wealth. Your parents raised you middle class. “Absolutely no appetizers or dessert” was the rule for infrequent family trips to a restaurant.)
But you quickly start to dream. “I can retire early.” Your career has been rewarding. But there is so much more to life: travel, volunteering, and hobbies.
Using the 4% rule, your $3.2 Million net worth will cover $128,000 in living expenses each year. It’s plenty because you don’t live a lavish life.
You both start drafting your resignation letters.
You did everything conventional financial advisors teach: fully fund your 401(k), buy a home, and open a Roth.
But then it hits you. You’re not conventional.
Early retirement does not fit the mold. You’re not a conventional 65-year-old retiree. You’re a retiree in her mid-40s.
And you’re suddenly trapped. All your wealth, everything you own, is tied up in your house or sits in accounts you can’t access until age 59 1/2.
Karen and Rob are clients of mine. This is the situation they found themselves in.
A good problem to have, of course. But it’s quite the predicament…
Fortunately, if you find financial freedom at an early age important, and you’ve saved a lot as traditionally taught…
All is not lost. We only need to get creative.
Here are ten ways to unlock your wealth in three categories.
Access Savings for Early Retirement (four ideas)
Convert Equity into Cash Flow (four ideas)
Convert Skills & Experience into Cash Flow (two ideas)
I urge you to review all ideas on the list. Then investigate those that apply.
Access Money for Early Retirement
#1 Substantially Equal Periodic Payments (SEPP)
You can use SEPP to receive early, penalty-free distributions from your retirement accounts. These payments must continue for at least five years or until you reach age 59 1/2, whichever is longer. SEPP is IRS-approved, but please read the fine print as you put it in place.
#2 Roth Contributions
You can withdraw your Roth IRA contributions (not the earnings on your contributions) at any time without penalties or taxes. This is a great source of tax-free cash flow until age 59 1/2.
#3 Roth Conversion
Converting your traditional IRA to a Roth IRA is a taxable event. Take care to do this during years of low income. Once you do, you can access the converted amount (not the earnings after your conversion) penalty-free after five years. This strategy makes sense if you’re 54 years old or younger.
#4 Traditional and Roth IRAs or 529 Plans, with Penalty
It’s generally not advisable to tap into these accounts early. But it may still make sense for you despite penalties and taxes due immediately. Yes, a 10% penalty hurts. But if it buys you 5 or 10 more years of financial freedom, why not consider it?
Convert Equity into Cash Flow
#5 Home Sale or Refinance
Selling or refinancing your primary home can provide a large sum of money to support early retirement. But selling your home is a life decision, and not only a financial one. If you have already considered downsizing, this could be the perfect solution.
#6 Vacation Home into Vacation Rental
If you own a vacation home, converting it into a vacation rental can generate rental income. Consider this for the months you’re not vacationing. Look at platforms like Airbnb and Vrbo, among others.
#7 Business Sale with Seller Financing, Sale-Leaseback Transactions, or Other Equity Conversion Strategies
If you own a business, selling it with seller financing can provide regular income. You can also sell property and then lease it back from the buyer. Both provide immediate cash for you. Markets exist to turn almost any high-value asset into cash flow.
#8 Request Inheritance Early Using Gifts
If you are this lucky, talk to your parents about your financial needs for early retirement. They may choose to gift you some or all of your expected inheritance early. The 2023 gift tax limit is $17,000 per person. Assume you’re married with one set of parents alive. Your parents could gift you and your spouse a combined $68,000 each year, tax-free. (This equals four individual $17,000 tax-free gifts.)
Convert Skills & Experience into Cash Flow
#9 Coaching or Consulting
Leverage your expertise and experience to offer coaching or consulting services. Revive your network and use existing platforms to find clients and generate revenue. In time, establish authority and create online courses for a passive income stream.
#10 Monetize Hobbies Through Part-Time Work
If you have hobbies or creative talents, explore opportunities to monetize them. Perhaps you give walking tours in your native language when slow-traveling through foreign countries. Or you might sell artwork, crafts, or handmade products. Consider part-time or freelance work to generate supplemental income in early retirement.
So, what did Karen and Rob do? Nothing yet... But it’s only been two months, and these are big life changes. The most promising opportunities for accessing their savings early are Substantially Equal Periodic Payments/SEPP for 12 years (#1), equity capture by downsizing their home (#5), and consulting part-time in retirement (#9).
I look forward to watching their progress in the next year or two. Good luck to them, and good luck to you.
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Brian Herriot no longer funds his 401(k) from his home in Alameda, California, and cabin in Hazelhurst, Wisconsin. He prepares financial freedom plans for consultants and other mid-career professionals in one-week sprints. Check out his take on a new and different kind of retirement at choosyconsultant.com.