If you’re considering an early “retirement” or work-optional lifestyle, you’ll need to be able to support yourself in ways other than your retirement accounts.
In most cases, you can’t access your retirement accounts before 59.5 without incurring penalties. But as a tech employee, you’ve likely accumulated significant assets through competitive pay, stock options, and other pertinent benefits.
As you consider how to fund your new lifestyle, I’ve gathered up a few important considerations and tips to keep in mind.
Considerations Before Quitting
We’ve all considered quitting a job before (especially now in the era of the Great Resignation), whether it was because of being overworked, unsupportive leadership, or a more enticing offer. But if you’ve considered leaving your job to pursue a work-optional lifestyle, the stakes become a little higher.
To start, you must make sure your money will last for as long as you plan on being “retired,” or until your next planned work project. While you have access to some savings now, tapping into too much too early could leave you in a difficult position later down the line. The question to ask yourself becomes,
“Can I start living off my savings with confidence, knowing that my assets will support me through a long period of minimal income?”
Determining the answer to this question starts with analyzing your current and projected expenses, and that’s a challenging task to accomplish. You must be honest with yourself in terms of creating and managing a budget long-term. Take a look at what you’re actually spending on housing, food, entertainment, insurance, and other living costs—you may be surprised!
While it’s not realistic to know the total cost of your lifestyle down to the penny, giving yourself a close idea of what you need to maintain your standards of living in this next phase is possible.
7 Tips for Living a Work-Optional Life
Making the move to a work-optional lifestyle comes with several important considerations. Here are seven tips I’ve identified for those looking to make work a secondary piece of their lives.
Tip #1: Know the Distribution Rules for Your Accounts
I mentioned earlier, you may incur a penalty if you withdraw from your retirement accounts too early. But, in some cases, you may be eligible to take money out without facing penalties.
The Rule of 55
The IRS allows individuals to begin taking penalty-free withdrawals from their current employer’s plan after turning 55 and before 59.5. These distributions will still, however, be subject to income tax.
72(t) Withdrawals
Similarly, you may be able to take money out of your IRA account before turning 59.5. 72(t) withdrawals are also known as SEPP payments, which stands for Substantially Equal Periodic Payment.
72(t) withdrawals require that you select and stick to a payment schedule for either five years or until you turn 59.5, whichever comes sooner.
Your options for making 72(t) withdrawal schedules include:
- Required Minimum Distribution (RMD)
- Amortization
- Annuitization
Before pursuing this withdrawal method, it’s best to work with an advisor to discuss the ramifications of each option and which may be best for you.
Tip #2: Invest in Flexible Accounts
While a 401(k) is considered the gold standard of retirement investment accounts, a work-optional lifestyle may involve thinking outside of the box.
Consider investing in flexible accounts that you can tap into at any time, such as a brokerage account. There’s no limit to when you can access or how you can use the funds in your brokerage account. Remember, however, to account for potential capital gains tax if you pursue this route.
As another flexible investment option, real estate may be an attractive avenue to pursue. Renting out property to others, for example, can be an effective way to establish passive income.
Tip #3: Make the Most of Your Roth IRA
If you’ve been contributing diligently to a Roth IRA over the years, you may be able to make some withdrawals penalty-free. Users can withdraw contributions, but not earnings, from their Roth IRA without incurring the 10 percent penalty.
To access any of the gains your account may have earned over the years, however, you will need to wait until 59.5.
Withdrawing contributions from your Roth IRA will likely not be enough to serve as your primary source of income in a work-optional lifestyle. Still, it could be an excellent option to supplement expenses as needed.
Tip #4: Consider Your Equity
Before putting in your two weeks, you likely have some equity compensation to consider.
- Does leaving your job now mean you’ll forfeit part of your equity comp?
- If so, is it a significant amount?
- How can you maximize the options that are (or are about to) vest?
Working with an advisor may help determine if you should exercise some shares before leaving your company and what role that equity will play in your future cash flow plan. I know equity compensation can be complicated, and I want to make sure you’re not leaving cash on the table by quitting sooner than you should.
Tip #5: Keep a Cash Cushion
Nobody can predict the future, but we can prepare for the unexpected. Are you set to cover a medical emergency, unexpected home repair cost, or vehicle damage? Before leaving your job for good, ensure you’ve established a hefty emergency fund for these what-if scenarios.
Everyone’s emergency fund will look different, but many benefit from setting aside at least three to six months of living expenses. Should something happen, this fund can help cushion the blow in a way that the rest of your financial standings aren’t impacted significantly.
Tip #6: Don’t Stop Making Money
A work-optional lifestyle doesn’t mean you have to stop working—it just means you can if you want to.
Not relying on income from a job means you’ve opened up a whole new realm of possibility. If you’re happy with your full-time job, stay there as long as you like.
Or, leave it behind to start your own business, pursue a passion project, explore contract work, or work reduced hours. The money you’ll be making from your job is considered supplemental in a work-optional life because you no longer rely on it to cover your day-to-day expenses.
Tip #7: Create a Flexible Cash Flow Plan
Before going all-in on being work-optional, you must establish a cash flow plan to support yourself and your expenses. As I mentioned earlier, being realistic with the budget you set for yourself now can help better prepare you for the work-optional life to come.
If there are certain things you’d like to pursue after leaving your full-time job, like education, travel, a move, or starting a business, account for those elements as well.
How Can Brightview Help?
I specialize in empowering tech employees to manage their compensation options, grow their financial confidence, and pursue a work-optional lifestyle. If this is something you’re considering, I understand that there are plenty of considerations to make first.
Feel free to reach out to me anytime to see how I may be able to help. I’m more than happy to review your current cash flow, retirement accounts, and other financial factors to determine if making work optional may be a viable option for you.