Retire Before Your Boss

As kids, we were taught some basic rules to keep us on the straight and narrow: Don't chew gum in class. Don't put the cat in the dryer. And, of course, don't cut in line.

That last rule is perpetuated in the corporate ladder. You start at the bottom and work your way up -- no skipping rungs. And no retiring early -- retirement comes only after three or four decades of service.

But more and more, the rule is being broken. Corporations themselves are agents of change: Highly profitable companies such as Motorola (NYSE:MOT) and NCR Corp. (NYSE:NCR) are freezing or scaling back pensions, reducing the incentive for long-timers.

But many people are freeing themselves from the 9-to-5 grind, refusing to wait in line to be granted leave at 62. No, they're making their own rules.

Getting from point A to point B
The best early retirement lesson I've learned came not too long ago, when I said farewell to a co-worker. My friend (I'll call him Pete) was in his early 40s and had been with the company for about 15 years. But rather than moving to a new job, Pete was retiring.

Even more amazingly, at his farewell party, his longtime boss half-joked about Pete being the second employee he had lost to early retirement. Only a few years before, another of his underlings -- this one only in his late 30s -- had retired to Hawaii (not exactly the land of low-cost living).

Obviously, this turned a lot of heads, especially with the company's longtime employees. How could these guys save enough money on their modest corporate salaries to leave their poor boss behind? Did they win the lottery? Inherit the rich aunt's estate?

Nope. No spectacular stock picks or financial windfalls, either -- just a little creativity and a little planning.

These guys were creative in that they didn't just use the conventional retirement tools such as a 401(k) or IRA. Pete turned his hobby of fixing houses into a second stream of income. By the time he retired, he owned several properties that brought in substantial cash flow from renters. The other closet retiree also had a second hobby-turned-business that he could operate with his spouse outside of their 9-to-5 lives.

But the more -- no, most -- important aspect in both cases was planning, which started the two men down alternate paths early in their careers.

Being early beats being good
To drive home the point, we need an example: Let's imagine you've worked for 10 years and want to retire in 2016, only a decade from now. In one scenario, let's say you were like Pete and started planning early, socking money away regularly as soon as you started working. In the other scenario, you're more like Pete's boss, who delayed planning for retirement.

If you were like Pete, you stowed away $5,000 of your worker-bee salary each year from the get-go. Let's say someone like Pete's boss delayed saving a portion of his larger salary -- $6,000 a year -- until five years later.

To add a little twist, we'll include another variable -- investments that yield different results. In the first scenario, you plunk your money into an exchange-traded fund (ETF) like the iSharesRussell 2000 Index (AMEX:IWM), a popular fund that tracks U.S. small-cap stocks. This fund has been on a tear the past three years, earning around 18% annually (before taxes). But when planning for the future, it pays to be conservative, so we'll pretend it moderates to return an average of 10% annually going forward.

In the second scenario, you work for a large company that offers employee stock option programs: a company such as Bank of America (NYSE:BAC), Caterpillar (NYSE:CAT), or Amgen (NASDAQ:AMGN). For the sake of the illustration, let's assume your company stock slightly lags the Russell 2000 index, returning 8.5% annually. (Yes, this is hypothetical -- Bank of America, Caterpillar, and Amgen have actually yielded exceptional compound annual returns of 13.1%, 18.8%, and 17.2%, respectively, over the past 10 years. But these are bigger companies now, and remember that it pays to be conservative.)

In the last scenario, you play a little more conservative and invest in a fund such as the Utilities Select Sector SPDR (AMEX:XLU), an ETF that holds large energy and materials companies. Let's assume a more conservative investment like this will yield 7% annually over the long haul.

Without further ado, here's how our two characters would make out after 20 years of corporate drudgery:

In this scenario, an early Pete can pick the worst investment but still make out better than a procrastinating boss, even when his boss lands the best returns. Stalling on saving for retirement because you don't know where best to invest is a foolish excuse that will cost you. Regardless of whether you aim to retire in 14 years or 40 years, saving now often trumps market prowess.

Get an early jump
Want more ideas? How about working part-time in retirement making fishing poles and selling them on eBay? Or teaching classes aboard Carnival cruise ships on tropical stints? Whether you invest in real estate and retire on rental income or work two jobs now to sock away enough money to retire in Hawaii is up to you.

Regardless of your individual path to retirement, the most important thing is that you get on that path right now. Nifty tools to help you get started are included in the Motley Fool Rule Your Retirement service. There's even an online DirectAdvice Planning Tool. Chief retirement guru Robert Brokamp focuses not only on ideas to help you find high-yield investments, but also on resources to ensure your retirement fits both your finances and your lifestyle. Click here to learn more with a 30-day free trial. And don't forget to tell your boss!

This article was originally published on Jan. 30, 2006. It has been updated.

Fool contributor Dave Mock follows all the rules, including disclosure . He owns shares of Motorola. A longtime Fool, Dave is also author of The Qualcomm Equation . eBay is a Stock Advisor pick. Bank of America is an Income Investor pick.