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If you're one of those individuals that dread the thought of working until their 70 years old, then welcome to the club. If given the choice between working and retiring early, many of us would pick this second choice. But what options do we really have? Planning to invest for an early retirement is certainly one option.
We actually have other options such as hoping for gifts from relatives, inheriting money, or winning the lottery. But should we really count on luck, or the generosity of others, if our goal is early retirement? Probably not; so that means we need to have an investment plan that gets us where we want to be in retirement.
Retirement Investing Plans
The key to retiring early is to have a plan that provides you with the income that you need to sustain your lifestyle after you stop working. That's where investing plans become so important. Without a plan, you may just drift along, hoping to reach your goal. A real financial plan helps to ensure you reach a goal. The plan includes both targets and a strategy to achieve those goals.
The problem is that time is always working against our plan. Each day that goes by is another missed opportunity to get our money working for us. That being said, we have a choice. We can either fight against time or leverage it. It's a pay me now or pay me later choice. If you want time to be on your side, then you have to start your retirement plan early in your career. This is perhaps the single most effective way to ensure an early retirement.
Investment Options
So we know that we need to start our plan soon if our target is early retirement. But what are the practical investment options we have at our disposal? We can fund a 401k plan, we can invest in an Individual Retirement Account, and we might even be able to count on our company to provide us with a pension. Unfortunately, many companies have strict guidelines for retirement age and full pension eligibility.
We really cannot count on Social Security if we're planning to retire early. Most of us will not be able to collect Social Security until we're age 62 or older, which is an age bracket that probably falls outside of what many people would consider early retirement.
401k and 403b Plans
Your employer's 401k plan or 403b is probably one of the most important options you can leverage to help fund your early retirement plan. With the tax shelter they provide, and the match that employers usually give to participants, this almost becomes a no-brainer. As soon as you're eligible, sign up for this account and contribute as much as you can afford. In 2010 and 2011, you can contribute up to $16,500 to your account on a pretax basis.
IRA Plans
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. For individuals, you can contribute up to $5,000 in 2010 and 2011; if you're married, you can double that number.
Pensions and Social Security
Although pensions and Social Security should be part of your retirement investing plan, these are more passive accounts than the ones already mentioned. If your company offers you a pension, that's great. If you think Social Security will still be around when you're retired, then include it as part of your plan.
If you're looking to retire early, you may not be eligible for Social Security right away. You may also find yourself with a reduced pension if you decide to retire before a certain age or years of service.
It's also very difficult to accelerate your retirement plan by using pensions or Social Security, since these plans operate on a slower timeline that's associated with a more "normal" retirement age. That being said, there is nothing wrong with using either of these plans to supplement your retirement income in later years.
Investing Tools
There are many great investing tools that can help you with the mathematics needed to figure out how much you need to save to hit your retirement targets. We also have a retirement planning spreadsheet that you can download for free. This can help you get a "back of the envelope" feel for how much you need to save each year to reach your goal.
More recently, we've introduced around a dozen retirement calculators that can help you run through a wide variety of retirement scenarios. These calculators can help you 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 for retirement. This includes articles for 20 year olds planning for retirement, as well as 60 year olds doing some last minute retirement planning. If you take a look at those publications, you can get a better idea of how laying out a legitimate retirement plan can help you realize all of your retirement income goals.
Retirement Expenses
When you're doing your retirement planning, you need to keep in mind that your expenses should be lower when you stop working. That's because expenses like clothing and commuting to work are less demanding. The rule of thumb is that you'll need around 80% of your pre-retirement income during your retirement years.
You may also want to consider paying off your mortgage before you retire. This is a great way to get your money working for you; by investing in your home. In fact, many people eventually downsize their homes when they retire.
If you're married, then you may be able to save nearly $40,000 a year towards retirement. That's a lot of savings, and most couples stashing away that kind of money each year should be able to live comfortably even when retiring early, with a couple of final warnings.
Whether it's a pension plan or another one of the retirement funds we've mentioned, many of these have restrictions and limits. The IRS expects these plans to be used in retirement, and their opinion of early retirement may not align with yours.
Many of these retirement savings plans or qualified plans have penalties, or reduced benefits, if you start withdrawing the money before a certain age, generally 59 1/2. If your plans include retirement before that date, then you need to give serious consideration to using personal savings accounts, mutual funds, real estate investments, or other investment vehicles as part of your plan.
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