Unless you win the lottery or inherit a fat stack of cash, early retirement isn’t a possibility without some careful planning. When you’re trying to leave the rat race ahead of schedule, there are inevitably going to be some obstacles that stand in your way. Knowing how to navigate your way around them can improve the odds of reaching your goal. If retiring early is part of your plan, here are five things that can potentially slow you down.
Find out now: How much do I need to save for retirement?
Waiting to Save
The sooner you plan to stop working, the longer you’ll need your nest egg to last, and waiting until you’re close to your target retirement age to save isn’t a wise move. Typically, you have about 40 years in the workplace, which should be plenty of time to save, assuming you start when you’re in your 20s.
If you want to quit the 9 to 5 in your 50s and you wait until you’re in your 30s to start socking away cash, you’ve essentially cut your savings window in half. Getting an early start puts you in the best position to build up sufficient cash reserves.
Not Making the Most of an Employer’s Plan
If you’re fortunate enough to be able to save through an employer’s plan that offers matching contributions, it’s in your best interest to snag every extra dime you can. At the bare minimum, you need to be chipping in enough to the plan to qualify for the company match. Otherwise, you’re just leaving free money on the table that you could be using to accelerate your savings.
Workers over age 50 who are dreaming of retiring a few years early should also be taking advantage of catch-up contributions. For 2014, you could contribute up to $17,500 to your 401(k). Older savers can also put in an additional $5,500, for a total of $23,000 altogether. Throwing in those extra dollars can really add up as you get closer to your retirement deadline.
Carrying Around Debt
When you’re burdened with high-interest debt or you’re still paying off those annoying student loans, it limits the amount of money you have to devote to your retirement savings. Not only that, but the longer it takes you to dump the debt for good, the more you’re going to throw away in interest over time.
When you compare what the interest is costing you to the returns you could be earning in a retirement account, paying it off is a no-brainer. Once you free up some extra room in your budget, you can funnel any extra bucks into your 401(k) or IRA to boost your savings.
Part of your retirement strategy should involve making a careful calculation of what you expect your expenses to be in the future. That includes the basics, like your housing costs, utilities, transportation and food. One of the things that many retirees overlook, however, is the high price of healthcare.
If you decide to retire early, it may be several years before you qualify for Medicare, which means you’ll be on the hook for providing your own insurance in the interim. Should you get hurt or develop a serious illness, it can drain your savings seemingly overnight. Make a retirement budget and stick to it so your spending doesn’t outpace your savings and you have enough padding for unexpected expenses.
Forgetting About Tax Issues
Stashing away a huge chunk of change in a tax-advantaged account certainly makes sense, but what happens when you’re ready to start taking that money out? If you’ve got a 401(k) or traditional IRA, any money you withdraw is subject to your regular income tax rate.
On top of having to pay income taxes, you’ll also get hit with a 10-percent early withdrawal penalty if you make withdrawals before age 59 1/2. With a Roth IRA, your distributions are tax-free, but you may still have to cough up the penalty. Your tax situation is one of the most important things to consider when you’re planning an early retirement.
The Bottom Line
For some workers, retiring early may seem like a pipe dream, but it’s not impossible if you’re diligent with your savings. Being able to sidestep these hazards makes a significant difference when it comes to turning the fantasy into reality.
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