Retiring early, or at least achieving some form of financial independence, is a worthy goal for many Americans. To get there, however, you'll need to be deliberate about your financial planning and even more careful about how much you save and invest.
Here are five silly mistakes that could throw a wrench into your early retirement plan.
1. Making contributions, but not investing them
It might seem like an obvious mistake, but many investors make contributions to their 401(k)s and Roth IRAs without remembering to invest the money! Successful investing comprises two important steps: contributing money to your tax-advantaged accounts, and then investing the money according to your broader asset allocation. If you're leaving your retirement money in cash, you're foregoing the potential for substantial long-run returns, and you're also missing out on valuable time for compound returns to take hold.
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2. Not planning for contingencies
While financial planning aims to make retirement a bit easier, there's really no telling what life will throw at you five, 10, or 15 years from now. Since interest rates have been on the rise, holding a sizable cash reserve is substantially more attractive now than it has been over the past decade. Some high-yield savings accounts pay as much as 4% to 4.5% annually. You don't necessarily need to be aggressive with your investments if you can receive a reasonably attractive risk-free return at a local or online savings institution.
With all of that said, be sure to have a reasonable cash reserve in the event you run into any unexpected occurrences calling for a bit of cash.
3. Investing haphazardly
When it comes to successful long-term investing, much of the research suggests that broad-market mutual funds or exchange-traded funds (ETFs) tend to be a safer choice than picking individual stocks at random. To determine which funds to hold, consider developing an asset allocation that covers all the money you want to invest, and then assign certain percentages of the total to different asset classes. For example, you might end up with a portfolio that's 40% U.S. stocks, 40% international stocks, and 20% bonds. Then it's up to you to choose the mutual funds that contain the specific exposure you need.
No matter what your asset allocation ultimately looks like, be sure that you give it some thought and remain super deliberate about where each dollar goes.
4. Not paying attention to expenses
Those who retire early pay ultra-high attention to their investment expenses. Fees, trading commissions, advisor costs, and above-market expense ratios can really cost the small investor, especially when these charges are applied over long periods of time. As compound interest on the investment side works to investors' favor, compounding fees work in the opposite direction and at an accelerating rate.
Be sure you can name all of the expenses associated with your investment accounts, and try to get a strong sense of the value you're receiving in return for said expenses. If you can't pinpoint the value for a particular charge, it might be time to make a change.
5. Not creating a written plan
It's easy to assume that it'll all work out, and it very well might. But you'll need to be unusually careful with planning your early retirement, ultimately to be prepared for known issues that may arise. There are a variety of scenarios (a new baby, a layoff, or a family emergency, to name a few) that might require you to make changes to your retirement plan.
While of course you can't plan for everything, having a written document can help provide both logistical and psychological comfort -- especially if things were to change drastically in the future. Sit down with an online budgeting and investing tool or create your own spreadsheet that covers investments, taxes, and more.
Avoid the easy mistakes
Much about retirement and investing is quite simple, but it's also about getting the basics right. If you can manage to be deliberate about investing and creating a written plan, you can safely let the stock market -- and a healthy dose of time -- run their respective courses. Regardless of the path you choose in your search for early retirement, be sure you have given it some thought and planned for the unexpected.
