Many people dream of leaving the workforce at an earlier age than most. And retiring early certainly has its benefits. If you go that route, you may get the opportunity to travel at a point in life when you have more energy to sightsee. Plus, there's something to be said for living life on your own terms, without having a boss to answer to all the time.
But in order to retire early, you'll need money to live on. And that's why you'll need to plan very carefully to achieve that goal, which includes avoiding one key mistake.
Keep your savings accessible
You'll often hear that it's smart to save for retirement in an IRA or 401(k) plan. And that actually is good advice. With a traditional IRA or 401(k), your contributions go in tax-free so that you lower your tax burden from year to year. Plus, all investment gains in your plan are tax-deferred until you take withdrawals.
With a Roth IRA or 401(k), your contributions aren't tax-free, but investment gains and withdrawals are. That buys you a lot of freedom down the line.
There's just one problem with housing all of your savings in a tax-advantaged retirement plan -- you can't take withdrawals before the age of 59 1/2. In fact, if you remove funds from your retirement plan early, you'll be hit with a 10% penalty on the sum you take out.
That's why if your goal is to retire early, you can't afford to lock up all of your savings in a traditional retirement plan alone (with a Roth, you can technically withdraw your principal contributions early without penalty -- just not your gains). Rather, you'll need to spread out your savings across a tax-advantaged retirement plan and other accounts or investments.
Now in this regard, you have some options. You could always open a traditional brokerage account and invest your money there. These accounts don't offer any tax benefits, but they're also not restrictive -- you can cash out investments at any time and use that money to cover your living costs (keeping in mind, of course, that if you sell stocks for more than what you paid for them, you will be liable for capital gains taxes).
Another option is to fund your early retirement with an income property. If you buy a home to rent out, that rental income could help you cover your bills if you're too young to access your retirement plan penalty-free.
Of course, these are just a couple of options, but the point is that if you're planning to retire at some point in your 40s or 50s, you'll need savings outside of a traditional IRA or 401(k) to pull that off -- and so your best bet is to strategize and figure out how you'll spread out your wealth. The sooner you come up with a plan, the more likely you'll be to pull off an early retirement -- and enjoy the many benefits of getting to leave the workforce when you decide you're ready.