If you want to retire early, then you have to plan accordingly. Unless you happen to strike it super rich when you’re young, early retirement means that you have to take a long view of your financial future. One of the things that people often forget is to plan for the bridge period.
What is The Bridge Period?
One of the things that you do when planning for retirement is to place money into a retirement account, right? Well, the thing about retirement accounts is that you can only withdraw from them when you retire. Moreover, you have to reach a certain retirement age to be able to withdraw that money.
If you retire early, then you’re not at the age when you’re allowed to withdraw those funds. If you do withdraw them, you’ll face a big penalty. Certainly, that isn’t good for your future.
The bridge period is the time after you’ve retired early but before you’re allowed to withdraw from your IRA and other retirement funds. If you want to retire early, it’s critical to plan how you’ll pay for life during that bridge period.
Calculate Your Future Financial Needs
First of all, make sure that you know the terms of your work-sponsored 401(k) retirement plan, your IRA, and any other retirement accounts that you’ve already set up. Most importantly, find out when you’re allowed to start cashing those out. Make sure you also find out what the penalty fees will be if you cash them out early. And remember that you’ll also pay taxes on some of that money when you do withdraw it, so you have to plan for that as well.
Once you know that information, you’ll have a better sense of how long your bridge period will be. For example, let’s say that you want to retire early at age 45. You’ve checked, and you can start withdrawing from your retirement at age 55. You have a ten-year bridge period during which you need to have money from another source.
Notably, you might be able to transfer your money to a retirement account such as a Roth IRA that has few or no penalties for early withdrawal. Make sure you read all of the terms before doing that. You don’t want to get penalized for moving your money around. Moreover, you likely need to have the money in the new account for at least five years before you can withdraw it. Look into setting up a Roth IRA conversion ladder.
How to Invest Money for The Bridge Period
Since your retirement money might be tied up for years, you’ll want to start investing in ways that will allow you to withdraw those funds during the bridge period without any penalty. Short-term CDs are one option, although they don’t have the best investment returns. The best option is mutual funds. You want to go for a low-risk but worthy investment, which mutual funds provide.
In addition to investing your money outside of retirement funds, remember to look for passive income opportunities. If you can continue to make money after taking early retirement then you’re in a much better position to sail through the bridge period.
Even Millionaires Have to Plan for the Bridge Period
Business Insider shared insights about this from the book Everyday Millionaires by Chris Hogan. He surveyed 10,000 millionaires about their money habits. Unfortunately, he found that forgetting about the bridge period was among their most common mistakes. Those who didn’t plan for that time weren’t necessarily able to retire early, even though they were worth at least one million dollars.
Read More:
- What Does Early Retirement Really Mean?
- Early Retirement Facts vs Fiction
- Here Are the Best Early Retirement Blogs
Kathryn Vercillo is a professional writer who loves to live a balanced life. She appreciates a good work-life balance. She enjoys balance in her relationships and has worked hard to learn how to balance her finances to allow for a balanced life overall. Although she’s only blonde some of the time, she’s always striving for total balance. She’s excited to share what she’s learned with you and to discover more together along the way.