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 If you're one of those folks 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 really do have other options such as 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.
Retirement Investing Plans
The key to retiring early is to have a plan that provides you with the income 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 the goal because it has targets and a strategy behind it.
The problem for all of us 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. So we have a choice, we can either fight against time or leverage it. It's a pay me now or pay me later choice. That means if you want time to be on your side, you have to start your retirement plan early in your career - that is perhaps the single most affective way to ensure an early retirement.
Investment Options
So we know that we need to start our plan early 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 - although many companies have guidelines for retirement age.
We can't really count on Social Security if we're planning on retiring early since 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 out of what most 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 2007, you can contribute up to $15,500 to your account on a pretax basis.
IRA Plans
For many, IRA plans are another important source of retirement income and an integral part of their early retirement plan. There are lots of rules and restrictions, but generally most individuals should be able to contribute to either a traditional IRA or a Roth IRA. For individuals, you can contribute up to $4,000 in 2007, if you're married, you can double that number.
Pensions and Social Security
Although pensions and Social Security should be part of your investing plan for retirement, 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.
Just remember, 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 number of 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 lots of great investing tools that can help you with the mathematics to figure out how much you need to save to hit your retirement targets - Quicken and Microsoft Money to name a few. We've also got 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. These articles include both those 20 year olds planning on 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, just keep in mind that your expenses should be lower when you stop working. That's because expenses like clothing, 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 invest 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, 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.
About the Author - Investing for Early Retirement
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