Although the idea of retiring early may be appealing, ensure that early retirement makes financial sense before going through with it. Risks involved with early retirement include tax penalties, loss of health benefits and debt collections. Save as early as possible and keep your debts low to make early retirement a reality.
Calculate Your Financial Need
Determine how much money you need to live comfortably during retirement. Retirement funds need to cover your day to day bills along with any extra expenses. For instance, if you are not old enough for Medicare, you may need to pay for your own health coverage upon retirement.
Large amounts of debt accumulated over the years can get in the way of your early retirement plans. Don’t purchase more than you can afford, and do not rack up large credit card bills than you are unable to pay off. Pay the balance of your credit cards off each month. Put any extra money you make into an account where you cannot access it easily.
If you want to retire early, planning should start as soon as the idea enters your mind. Investments take a long time to become profitable, and the earlier you start saving, the sooner you will be able to retire. If you plan for early retirement in your 20s instead of your 30s or 40s, you can stash away less money and still make it happen.
Find Out Your Investment Options
According to Charles Schwab, your main retirement savings fund will likely be an IRA and a qualified employer plan such as a 401(k), 403(b) or 457. For employer sponsored plans, employers typically match your contributions up to a certain percentage of your salary. A traditional IRA allows contributions to be tax deducible while a Roth IRA allows for tax-free withdrawals.
Be aware that investment schemes for early retirement may not always pan out. Investments depend on the market, and a down market will hurt your ability to retire early. The NASDAQ website warns of free seminars sponsored by brokerage firms that suggest an investment in high-risk securities as a way to retire early.
Know the Penalties
When you cash in your retirement savings plans early, you put yourself at risk of tax penalties. According to Section 72(t) of the Internal Revenue Code, you are imposed a 10 percent tax penalty on withdrawals taken from a qualified retirement plan made before the age of 59 ½.
Consult a Financial Advisor
Although early retirement may make sense on paper, speak to a financial adviser before taking any steps to stop working. Advisers can review tax penalties, your estimated annual earnings and risks involved with early retirement. For instance, if you owe child support, alimony or any unpaid debt, your retirement earnings may be garnished.