Investing for an Early Retirement
If given the choice between working until the age of 70 and retiring early, many of us would pick this second option. But what choices do we really have? Planning to invest for an early retirement is certainly one smart option.
If given the choice between working until the age of 70 and retiring early, many of us would pick this second option. But what choices do we really have? Setting money aside for an early retirement is certainly one smart option.
There are other options such as hoping for gifts from relatives, inheriting money, or winning the lottery. But it's not a great idea to count on luck, or the generosity of others, if the goal is early retirement. That means it's important to create an investment plan that provides for a financially secure future.
Retirement Investing Plans
The key to retiring early is to have a plan that fills the income gap needed to sustain the desired lifestyle after leaving the working world. Without a plan, individuals will drift along, hoping to reach their goal. A real financial plan helps to ensure a goal is reached. A sound plan also includes both targets and a strategy to achieve those goals.
The problem is that time is the enemy. Each day that goes by is another missed opportunity to put money to work. That being said, investors have a choice. They can either fight against time or leverage it. It's a pay me now or pay me later choice. Starting a plan early in a career is perhaps the single most effective way to ensure an early retirement.
We know that it's important to start a plan as soon as possible if the goal is early retirement. Generally, investment options are limited to:
- Employer sponsored retirement savings plans such as a 401(k) or 403(b)
- Individual Retirement Accounts (IRAs)
- Pension plans, including both defined benefit and defined contribution plans
- Social Security
Unfortunately, companies often have strict rules with respect to pension eligibility age. The same applies to Social Security if the plan is to retire early, since most individuals are not eligible for this benefit until age 62 or older.
401(k) and 403(b) Plans
An employer's 401(k) plan or 403(b) is probably the most important option available to fund an early retirement plan. With the tax shelter they provide, and the match that employers usually give to participants, this almost becomes a no-brainer. In 2019, it's possible to contribute up to $19,000 to an account on a pre-tax basis, while in 2020 this value increased to $19,500. Money can be withdrawn from an account starting at age 59 1/2 without incurring a penalty.
For many individuals, IRA plans are another important source of retirement income and an integral part of their early retirement plan. There are many rules and restrictions, but most families should be able to contribute to either a Traditional IRA or a Roth IRA. Individuals can contribute up to $6,000 in 2019 and 2020; married taxpayers can double that number. Once again, money can be withdrawn from an account starting at age 59 1/2 without incurring a penalty.
Pensions and Social Security
Although pensions and Social Security may be part of a retirement income plan, these are more passive accounts than the ones previously mentioned. If a company offers a pension, that's great. If Social Security is still going to be around in 20 years, then include it as part of a plan.
Keep in mind that retiring early may mean a delay until reaching the Social Security eligibility age. Pensions are oftentimes reduced when employees decide to retire before a certain age or years of service.
With these warnings and reminders behind us; there is nothing wrong with using either of these plans to supplement retirement income in later years.
There are many great investing tools that can help individuals with the calculations needed to figure out how much they need to save to achieve their retirement targets. We have a retirement planning spreadsheet that can be downloaded for free. This spreadsheet helps the end user to get a "back of the envelope" feel for how much money needs to be saved each year to reach a goal.
More recently, we've introduced around a dozen retirement calculators that can help with a wide variety of retirement planning scenarios. These tools can help figure out:
Retirement Planning Tools
We've also added a complete series of publications that can help workers of any age to start a realistic plan. This includes articles for 20 year olds, as well as 60 year olds doing some last minute retirement planning.
When running through retirement planning scenarios, keep in mind that expenses like clothing and commuting to work are less demanding. The rule of thumb is that around 80% of pre-retirement income is needed once retired. Individuals may also want to consider paying off their mortgage before retiring. Many people eventually downsize their homes, pulling the equity out of their homes too.
Whether it's a pension plan or another one of the funds mentioned above, many of these plans have restrictions and limits. Most retirement savings plans or qualified plans have penalties, or reduced benefits, if the accountholder withdraws money before a certain age, generally 59 1/2. If early retirement means leaving the workplace before that age, then it's time to consider using personal savings accounts, mutual funds, real estate investments, or other securities as part of the plan.
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