Many people have the goal of retiring early. And while it can have its share of drawbacks, like having to make a limited nest egg last longer, it can also mean getting to do things like travel and pursue hobbies at a time when your body is more cooperative.
You should know that early retirement is, for many people, a truly attainable goal. But these habits might stop you from getting to wrap up your career on the early side.
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1. Waiting to fund your IRA or 401(k)
Some people aren't so motivated to save for retirement in their 20s. And it's hard to part with money for long-term savings at a time when your wages may be limited and your bills may be high.
But if you wait too long to start consistently contributing to an IRA or 401(k) plan, you might take early retirement off the table.
Let's say you're able to sock away $1,000 per month for retirement savings purposes, and that your IRA or 401(k) delivers an average annual 8% return, which is a bit below the stock market's average. If you wait until age 35 to start saving that money, by age 55, you'll have about $550,000. That may not be quite enough to make you feel comfortable with an early retirement.
On the other hand, let's say you start saving that $1,000 a month at age 25. In that case, you're looking at a nest egg worth over $1.35 million by age 55, assuming that same 8% return.
2. Only saving in an IRA or 401(k)
IRAs and 401(k)s come loaded with tax breaks, so it certainly makes sense to take advantage of one in the course of your savings efforts. But if you have the goal of retiring early, don't only keep your savings in one of these accounts. If you do, you might have to wait to wrap up your career.
IRAs and 401(k)s impose a 10% early withdrawal penalty for removing funds prior to age 59 1/2. There are a few limited exceptions to this rule, but if you know that early retirement is something you're aiming for, try to house at least some of your savings in a regular brokerage account. You'll forgo some tax breaks, but you'll get the benefit of being able to access your money whenever you want.
3. Investing too conservatively
Some people shy away from the stock market because they know it's very volatile. But if you don't invest your long-term savings in stocks, you may not be able to pull off retirement when you want to.
In the above example, we saw that investing $1,000 a month over 30 years at an average annual 8% return results in a nest egg worth upward of $1.35 million. If you were to invest more conservatively so as to only generate an average annual 5% return, you'd be looking at about $800,000 after 30 years instead. That's a nice amount of money, but it may not allow for an early retirement the same way $1.35 million does.
Early retirement is a great goal to strive for. But don't let the above habits stop you from achieving it. Instead, fund your IRA or 401(k) from an early age, have additional savings outside of one of these accounts, and stick with stocks so your money is able to grow at a rapid enough pace to make early retirement possible.
