For most Americans, the prospect of early retirement seems more remote than ever. Recent market volatility, falling real estate prices and low interest rates have combined to drastically reduce the number of people for whom this is a viable option. However, it's still not impossible to stop working early, for those who are willing to work harder during their younger years. (For more, check out Early Out: A Realistic Plan To Retire Younger.)
TUTORIAL: Retirement Planning Basics
There are a couple of strategies that can help you accomplish this:
Work a Second Job
Although the thought of working a second job may not be very appealing, there are many part-time positions that pay $10 to $15 an hour and still allow you to work a day job. Two three-hour shifts of evening work per week, plus four hours on the weekend at $12 an hour, comes to an extra $100 or so per week after taxes, or $5,000 per year. Someone who starts doing this at age 40 and lets his or her money grow at 5% in a Roth IRA, would accumulate an extra $107,000 or so by age 55. If he or she were to retire then, then this could be used to bridge the income gap until Social Security is taken.
Work a Part-Time Job
Of course, retiring early from your primary career doesn't mean that you must stop working altogether. If the person above continued to work their part-time job after retiring from their primary vocation, then they could start spending their earnings each year and, thus, reduce the amount of money that must be drawn from their retirement savings. A total of $5,000 per year equals a 5% return on a $100,000 portfolio, which is not necessary to have, if a job is taken.
Early Retirement Distributions
Many workers who can retire or separate from service at age 55 are eligible to start drawing from their retirement plans at that time, without incurring an early withdrawal penalty. All qualified plans, including 401(k), 403(b) and 457 plans, permit this type of withdrawal, as long as the employee does not roll the plan over into an IRA. However, IRA owners can also begin taking early withdrawals from their IRAs, as a series of substantially equal periodic payments that are spread out over the life of the owner. Both types of withdrawals are permitted under Section 72(t) of the Internal Revenue Code. This option may be attractive for those who have seen their retirement portfolios grow substantially faster than they expected and have been fortunate enough to escape the volatility in the markets in recent years. (To learn more about early retirement, see 5 Benefits Of Retiring Early.)
Of course, those who wish to downscale their lifestyles in retirement may be able to retire sooner than others. If you have no desire to keep up your current residence in retirement and would like to travel, then consider selling your house and moving into a mobile home or even a travel trailer. This could substantially add to your nest egg, particularly if you will be selling your house at a profit. If you desire to live in a warmer climate, the cost of living in the Caribbean is considerably lower than in the U.S. Although, there are a number of logistical factors, such as limited medical care, that can substantially impact the quality of your life if you move there.
Increase Your Retirement Contributions
If you are not making the maximum possible contributions to your retirement plans and accounts now, then this is the time to start, if you wish to retire early. Take advantage of all possible matching employer contributions and put as much as possible into a Roth IRA. If you still have additional money that you wish to defer for retirement, consider purchasing a non-qualified annuity that grows tax-deferred, like a traditional IRA.
The Bottom Line
Taking an early retirement in today's world is no easy feat, but it can be done by those who are willing to go the extra mile. For more information on how to retire early consult your financial advisor. (To learn more about early retirement, read Retiring Early: How Long Should You Wait?)