Aiming for an early retirement
If you’re dreaming of retiring early, “you need to start planning early,” said Jillian Harding in CBSNews.com. The average retirement now costs more than $700,000, but folks hoping to hang up their spurs ahead of schedule are probably going to need a lot more. The number of Americans living to the age of 100 has nearly doubled in the past 20 years, and is expected to double again by 2020. “So how can you reach your goal?” The first step is to be honest with yourself about what it will take to make early retirement happen. A 30-year-old making $75,000 per year, for example, would need to save an estimated 65 percent of his or her income to retire at age 50 and have enough to live comfortably during a 40-year retirement. “Early retirement also means considering what you’ll do for insurance coverage until Medicare is available in your 60s.”
“Anyone who has managed to retire early knows the magic formula means having enough saved up so that you can live off your investment returns each year, without actually touching your savings,” said Lauren Lyons Cole in BusinessInsider.com. To calculate your magic number, “take your desired annual retirement income and divide it by 4 percent (.04),” which is the maximum you should withdraw from savings each year. By this calculation, to live on $50,000 a year, you’d need savings of $1.25 million. But keep in mind that this assumes you’re earning at least a 5 percent return on your investments (after taxes and inflation). Needless to say, “keeping all your savings in cash won’t do the trick.” Saving piecemeal won’t cut it, either. “If you only save 6 percent—the average savings rate in the U.S.—you’ll have to put in 62 years before you’ll have enough saved to match your current income in retirement.”
If you’re one of the lucky ones who’ve saved enough money to “leave the rat race early,” you still need “a retirement strategy that minimizes taxes and penalties,” said Tom Anderson in CNBC.com. Early retirees face a 10 percent penalty if they take money out of a traditional IRA before age 59½, and before age 55 for traditional 401(k) plans. Early retirees should consider Roth IRAs, which are funded with after-tax dollars, meaning you can withdraw contributions (but not earnings) penalty free. “Earning more and saving more will help you retire early, but where you stash that money matters, too,” said Jeff Rose in USNews.com. You’ll want to diversify your investments to avoid dipping into those tax-advantaged accounts until the time is right, for example, by investing in a taxable brokerage account, certificates of deposit, or rent-earning real estate. “The more streams of income you have coming in, the better off you’ll be.”