Many people dream of retiring early. And if you have a notably stressful job, you may be especially eager to leave the workforce behind and embark on a life of freedom.
You're no doubt aware that to pull off an early retirement, you'll need to accumulate a sizable nest egg. But you'll also need to be careful about where you put your money.
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Don't cut off access to your cash
Many people choose accounts like IRAs and 401(k) plans for retirement savings purposes. And that makes a lot of sense since these accounts come loaded with tax breaks.
The problem with IRAs and 401(k)s, though, is that you'll face an early-withdrawal penalty for removing funds prior to age 59 1/2. If you're not going to be retiring until your 60s, that's not an issue. But if you're planning for an early retirement, then you may end up in a position where you want to leave the workforce in your early 50s, or even sooner. And in that case, having all of your savings tied up in an IRA or 401(k) could be disastrous.
Other options to look at
It's nice to snag a tax break in the course of saving for retirement. But if you want the flexibility to access your cash whenever you please, you'll need to save for an early retirement outside of an IRA or 401(k). (To be clear, you can keep some funds in a tax-advantaged plan, but you don't want all of your funds locked up in one.)
One option to consider is a regular old brokerage account. While your gains in that account will be subject to capital gains taxes year after year, you'll have easy access to that money whenever you please.
If you're hoping to retire early, a good bet is to try to invest in assets that will serve as an ongoing income stream. Dividend stocks are a good bet in this regard. Just make sure the companies you're choosing are solid businesses with decent growth potential. You don't want to get lured in by a higher dividend and wind up putting money into a company that's on a downward spiral.
Another option to consider? Real estate. If you purchase an income property, you can look forward to a steady stream of rent payments. And once you're ready to kick off early retirement, you'll have the option to either continue collecting those rent payments or otherwise sell that property and walk away with the proceeds.
Speaking of real estate, if owning an income property isn't something you're comfortable with, you can look at REITs, or real estate investment trusts, instead. Like dividend stocks, these allow you to look forward to a steady income stream.
Be careful with your savings
Retiring early is a goal that may be more attainable than you'd think -- if you're really willing to save aggressively. But don't make the mistake of putting all of your savings into an IRA or 401(k) plan.
It's natural to want to benefit from the tax breaks involved. But you don't want to land in a position where you have millions of dollars in your nest egg, only you can't touch any of it without risking steep penalties.
