By Kevin Dufficy
For most Americans, the prospect of early retirement seems more remote than ever. The recent turbulent financial markets, falling real estate prices and low interest rates have combined to drastically reduce the number of people for whom this is a viable option. However, it's still not impossible to stop working early, for those who are willing to work harder during their younger years.
If you are one of the people who strive to retire earlier rather than later, there are a number of strategies that help you reach this objective:
Often one of the requirements to retiring early is to earn enough "extra" money to bridge the income gap until Social Security is taken. So, although the though of working a second job might not be appealing, the extra income can really make a difference. For example, someone age 40 who starts working two, three-hour shifts of evening work per week, plus four hours on the weekend at $12 an hour would about $5,000, after tax, per year. Letting this money grow at 5% in a Roth IRA would result in an extra $107,000 by age 55.
While retiring might apply to your primary career, it doesn't have to mean you stop working together. If the person above continued to work their part-time job after retiring from their primary vocation, then they could start spending their earnings each year and, thus, reduce the amount of money that must be drawn from their retirement savings. A total of $5,000 per year equals a 5% return on a $100,000 portfolio, which is not necessary to have, if a job is taken.
Employees who can retire or separate from service at age 55 are eligible to start drawing from their retirement plans immediately, without incurring an early withdrawal penalty. All qualified plans, including 401(k), 403(b) and 457 plans, permit this type of withdrawal, as long as the employee does not roll the plan over into an IRA. However, IRA owners can also begin taking early withdrawals from their IRAs, as a series of substantially equal periodic payments that are spread out over the life of the owner. Both types of withdrawals are permitted under Section 72(t) of the Internal Revenue Code. This option may be attractive for those who have seen their retirement portfolios grow substantially faster than they expected and have been fortunate enough to escape the volatility in the markets in recent years.
Budgeting for your retirement years balances how much money you have with how much you spend. This means that if you were willing to downscale your lifestyle in retirement that you could retire sooner, as it would in essence be stretching out your retirement budget. If you have no desire to keep up your current residence in retirement and would like to travel, then consider selling your house and moving into a smaller home, condominium, or even a travel trailer. This could substantially add to your retirement nest egg, particularly if you will be selling your house at a profit.
If you are not making the maximum possible contributions to your retirement plans and accounts now, then this is the time to start, if you wish to retire early. Take advantage of all possible matching employer contributions and put as much as possible into a Roth IRA. If you still have additional money that you wish to defer for retirement, consider purchasing a non-qualified annuity that grows tax-deferred, like a traditional IRA.
Taking an early retirement in today's world is no easy feat, but it can be done by those who are willing to plan ahead, make some sacrifices and put in the extra work today to have a nicer retirement tomorrow.
Kevin Dufficy is a seasoned financial expert having written articles and blogs on a wide range of financial, investment and retirement planning topics. He has an MBA from UC Berkeley, and a degree from H.E.C., the leading French business school in Paris, France.
