Some people want to retire early to escape stressful careers. Others simply want to know they've got a good amount of time to enjoy the freedom of not having to report to a job.
No matter your motivation for wanting to retire early, it's a goal that may be attainable through diligent saving and thorough planning. But if you're not careful, these mistakes could stop you from being able to retire when you want to.
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1. Playing it safe in your portfolio
Investing in stocks isn't for the faint of heart. The month of April was a doozy for investors, and periods of volatility like the one we're in the midst of are all too common.
But while investing in stocks carries risk, if you load your retirement portfolio with conservative assets, you run a different risk -- not being able to retire early because your money didn't grow as quickly as it needed to. So even though your inclination may be to run far from stocks, you need them to fuel your portfolio's growth and allow for an early retirement.
The good news, though, is that there are ways to mitigate the risk of investing in stocks. The first is to diversify so your holdings aren't too concentrated in any specific sector of the market. The other is to keep checking up on your asset allocation and adjust it accordingly.
Let's say your goal is to retire at 57. This means that by your early 50s, you should start shifting out of stocks and into assets that tend to be more stable, like bonds. But in your 20s, 30s, and 40s, it pays to go heavy on stocks so your portfolio is able to grow at a decent pace.
2. Only investing in a 401(k) or IRA
There's a reason it pays to save for retirement in a 401(k) or IRA. These accounts are loaded with tax benefits that can save you money on the road to building up a retirement nest egg.
But if you limit yourself to a 401(k) or IRA only, you may have a hard time pulling off an early retirement. That's because these accounts force you to wait until age 59 and 1/2 to take withdrawals -- and penalize you 10% if you don't.
Now there can be exceptions if you have a 401(k). In that case, you may be able to take penalty-free withdrawals at age 55 if you separate from your employer at that age or later.
But if you know that retiring early is something you want to do, aim to spread your savings across multiple accounts. And make sure at least a portion of your nest egg is in a taxable brokerage account that doesn't come with any restrictions.
3. Not saving enough
You might establish a savings goal that you feel is conducive to an early retirement. But if you don't run those numbers carefully, you might fall short.
Let's say you decide you feel comfortable retiring on $1.5 million at age 52. And let's say you're hoping to use the popular 4% rule to manage your withdrawals and enjoy the annual income that results in.
Unfortunately, retiring in your early 50s means you may need to stick to a much more conservative withdrawal rate. If that's 3% instead of 4%, it means your portfolio will only give you $45,000 per year instead of $60,000, not including adjustments for inflation.
Also remember that if you retire early, you'll be heavily reliant on your portfolio before Social Security kicks in. And you'll be looking at potentially hefty health insurance premiums due to being too young to sign up for Medicare. So if you're intent on retiring early, you may want to work with a financial advisor to come up with a savings goal that covers all of your bases.
You may be eager to end your career early and enjoy the freedom of retirement at a younger age than average. If so, take care to avoid these mistakes in the course of your financial planning. Instead, focus on building a portfolio that's conducive to growth, choosing the right accounts to house your nest egg, and coming up with a savings target that's spot-on.
