How to Retire Early

         You may be in your 30s and retirement may seem like a lifetime away. Sure, if you’re thinking 65, but who says you have to wait that long. Why not set a 20 year deadline and go out early? It’s doable — if you choose to do the right things.

         Here’s how to say hello to the retired life sooner rather than later.

        Define retirement

         How do you plan to spend your golden years? “Are you going to be jetting all over the world first class, or are you going to live a low key, laid back lifestyle on beach of Costa Rica or some other Caribbean island?” asks Tony Keena, partner and financial advisor with Estate & Business Planning Group. Answers to this question will help you set goals and determine how much money you will need to get there.

          Have a plan

          Evaluate your current and anticipated spending habits to understand how much you’ll spend each year during retirement, which will give you an idea of how much you need to have saved before you retire. There are online retirement calculators that can help with this, but visiting a financial planner for help will be money well spent. Then revisit this plan every three or four years to make sure you’re staying on track. Not understanding where you need to be financially to retire early makes it all the more likely that you won’t achieve your objective, says David Walters, a certified public accountant and certified financial planner with Palisades Hudson Financial Group.

Make leaving the 9-5 early a priority

            Commit to early retirement as your number one financial priority. You have different choices of what to do with your money. Retiring early is like buying time and freedom – you are putting your money toward a goal of having to spend fewer years of your life working. “This means you may not be able to spend your money on other things your peers have. You may have to drive a modest car or live in a smaller house,” says Richard Barrington, personal finance expert for www.MoneyRates.com.

          Simply put, “Live right-sized today – way too many people live large and don’t save and invest enough to retire,” adds Thomas Casey, a certified financial planner with Casey, Thomas & Associates.

          Sacrifice now will pay off later, “If  you have ample leisure time at age 50, your peers will be envying you,” says Barrington.

          Get your family on board

          You won’t be the only one who will have to make sacrifices in order to realize the goal of retiring early. Make sure your family understands the goal and is on board with it, or you will find yourself in a continual state of conflict, advises Barrington. A big part of early retirement will depend on your ability to stick to a budget, you’ll need the entire household to buy-in to the concept.

            Save, save, save

            The biggest key to early retirement is simple – start saving early. Compound growth is a powerful tool. Further, investors who start saving early not only give themselves a longer time horizon for their investments to compound and grow, but developing these good habits early in one’s career makes it easier to continue you throughout, says Walters.

            Take the work out of saving by having contributions to retirement and investment accounts automatically withdrawn from your paycheck. “There’s no opportunity to spend money that never gets deposited into your checking account,” he adds.

          Consider too, having different savings/investment accounts for different goals, says Casey.  

          Match your asset allocation to your time horizon

          For investors in their 20s or early 30s, an aggressive asset allocation is appropriate if you won’t be withdrawing any assets from the portfolio for 20 years or so. Once you determine the right mix, stick with it until your time horizon or other factors dictate a shift, explains Walters. Don’t think however, that you can set it and forget it. Consistently rebalance your portfolio when it has deviated materially from your asset allocation. By being disciplined and selling asset classes that have appreciated and buying asset classes that have performed poorly, you will methodically be buying securities at a lower price and selling others at a high price, adds Walters.

           Be mindful too of keeping your portfolio costs to a minimum. While mutual fund expense ratios and trading commissions may not seem like much, they add up over time. “Ignoring costs can easily cost you 1-2 percent of your portfolio return annually. Compounded over a number of years, this can have a significant drag on the value of  your retirement portfolio,” says Walters.

            Don’t give in to impulses

            Just because you want to retire sooner, doesn’t mean that you should take a short-term view of investing. Impulsively chasing returns is usually a recipe for failure, so work toward a long-term investment program, advises Barrington.

            Be realistic about inflation

            Even over the course of a shortened career, prices can double due to inflation. Then, as you spend a longer portion of your life in retirement, they can double again. Make sure you account for rising prices in your financial plan, so you aren’t caught short in the future, says Barrington.

            Think creative

            Not only do you need traditional ways to save and invest, but be open to temporarily working a second job to pay down debt or come up with extra cash to stash. Or check out a Health Savings Account (HAS), a tax-advantaged savings account used in conjunction with an HAS-eligible health insurance plan. HSA-eligible plans are major medical health insurance plans that often come with a higher deductible and lower monthly premiums than many other plans, says Keith Mendonsa, consumer specialist with www.eHealthInsurance.com.

           HSA health insurance plans offer the following benefits for aspiring retirees – health coverage you can take with you from job to job and keep after you retire; the ability to deposit a portion of your pre-tax income into a savings or investment account at your discretion, and unused money accrues tax-free from year to year and can serve as an additional retirement fund.

            Be flexible

            Don’t consider retirement an absolute. One way to make the finances of early retirement work is to not consider it an all-or-nothing situation, says Barrington. A change in careers or downshifting to less stressful or time-consuming work can give you the break you are looking for, while still keeping some money and possibly even benefits coming in.

            In other words, shoot for the moon — early retirement, but know too that it’s okay if you land among the stars.