The average American retires at about age 63, according to data from the U.S. Census Bureau. If you enjoy your work, of course, you may want to go well beyond that age. But what if you don’t want to wait until 63 or so? Can you afford to retire early?
Maybe – if you follow these suggestions:
Research the costs involved. What will you do during your retirement years? Will you travel the world or stay close to home, pursuing your hobbies? Will you downsize from your current home? How will you pay for health care until you’re old enough for Medicare? You will need to answer these and other questions to determine how much you will need to sustain a comfortable lifestyle as an early retiree.
Invest more – and invest for growth. One big advantage in retiring at the usual age, or even later, is that it gives you more time to invest. But if you’re determined to retire early, you will almost certainly need to accelerate your investment rate – which, in practical terms, means you’ll likely have to contribute more each year to your IRA and 401(k) or similar employer-sponsored retirement plan than if you were going to retire later on. Plus, you may have to “ratchet up” the growth potential of your investment portfolio. However, because growth-oriented investments typically are more volatile than other investments, you will be taking on more risk than you might otherwise. If you are truly uncomfortable with this risk level, you may need to re-evaluate your plans for retiring early.
Cut down your debt. It’s always a good idea to enter retirement with as few debts as possible. But if you want to retire early, you may need to be even more diligent in controlling your debt.
Know the rules governing retirement plan withdrawals. If you want to retire before age 59 1⁄2 and begin taking money from your IRA or 401(k) plan, you will generally be subject to a 10% early withdrawal penalty, plus what you would pay in normal income taxes. As a side note, to withdraw your earnings from a Roth IRA tax and penalty free, you generally must have owned the account for at least five years and be at least 59 1⁄2. You can take out your contributions at any time, tax and penalty free. However, you may be able to avoid the 10% penalty if you take “substantially equal periodic payments,” which are calculated based upon your age and other factors. Once these distributions begin, they must continue for five years or until you reach age 591⁄2, whichever is longer. Other rules apply to these distributions, so before taking any, you will want to consult with your tax and financial professionals. And keep in mind that if your withdrawal rate is too high, you risk seriously depleting your retirement accounts, especially if your investments decline in value during the years you’re taking these payments.
But most importantly, do everything early: Plan early, invest early (and don’t stop), and lower your debt early. Getting a jump on all these activities can go a long way toward turning your early retirement dreams into reality. See you on the golf course!