Early retirement is a goal many workers dream of achieving one day, but it's not easy. Retirement is becoming more and more expensive, and it's challenging enough to retire at all, let alone early.
However, with the right strategy, it is possible. The difference between retiring early and being forced to wait can come down to seemingly minor financial moves, and there are a few simple mistakes that could be holding you back.
Image source: Getty Images.
Mistake No. 1: Withdrawing money from your retirement fund
In some cases, pulling money from your savings before retirement is unavoidable. If you don't have an emergency fund or face a catastrophic expense, you may have no choice but to tap your nest egg.
If at all possible, though, it's wise to avoid touching your retirement savings. Withdrawing from a 401(k) or traditional IRA before age 59 1/2 can result in hefty penalties and taxes on the amount you take out, and it will also make it harder for your money to grow over time.
For example, say you have $100,000 in your retirement fund and you're earning an 8% average annual return on your investments. Let's also say that you withdraw $5,000 to cover an unexpected expense. Assuming you made no additional contributions or withdrawals, here's what your account balance would look like over time in both scenarios:
| Number of Years | Total Savings Without Withdrawal | Total Savings After Withdrawal |
|---|---|---|
| 0 (Today) | $100,000 | $95,000 |
| 10 | $216,000 | $205,000 |
| 20 | $466,000 | $443,000 |
| 30 | $1,006,000 | $956,000 |
Data source: Author's calculations via Investor.gov.
In the short term, that withdrawal may not seem to make much of a difference. But over a lifetime, that $5,000 could cost you roughly $50,000 in lost potential earnings. And if you're making repeated withdrawals over time, it could be even more costly.
Mistake No. 2: Investing too conservatively
Investing in the stock market can be daunting, especially during periods of volatility. It's nerve-racking to watch your portfolio drop in value, and it can be tempting to invest as conservatively as possible to limit your risk.
However, if you're investing too conservatively, it will make it extremely difficult to save enough to retire early. Lower-risk investments like bonds are less susceptible to market volatility, but they also generally experience lower average returns over time. While stocks carry more short-term risk, they're far more lucrative than more conservative investments.
When investing for retirement, it's wise to strike a balance between stocks and bonds. When you're younger and still have decades left to save, allocating more of your portfolio toward stocks can be smart. Even if your investments take a hit in the short term, you have plenty of time for your portfolio to recover.
Then, as you get closer to retirement, you can gradually shift your portfolio to be more conservative. But if you're still decades from retirement and investing primarily in bonds, you could be missing out on hundreds of thousands of dollars in potential earnings.
Mistake No. 3: Waiting too long to get started
Time is your most valuable resource when it comes to saving for retirement, especially if you want to retire early. The earlier you begin investing, the less you'll need to save each month.
For example, say you have a goal of saving $1 million by age 60, and you're currently earning an 8% average annual return on your investments. If you had started saving at age 30, you'd need to invest just over $700 per month to reach that goal. But if you waited just five years, that number would jump to roughly $1,200 per month, all other factors remaining the same.
Of course, if you're off to a late start, you can't go back in time. But it's never too late to begin investing. No matter your age, it's better to invest even a little now than to put it off.
Retiring early is tough, but the right approach can make it easier. By avoiding these common mistakes, you'll be on your way to a more comfortable and financially secure retirement.
