Are You Planning to Retire Earlier?

retirementHave you ever asked the question, “can I retire early“? By retire early, most people mean before age 62. If one wants to retire early, the success of this comes down to a few different things.

Saving Enough Is Key

We hear it again and again. Save early and often. But that’s not enough. It must become something that is automatic. Saving should be like brushing your teeth every morning; it’s something we should do without even thinking twice about it.

Case Study In Saving

So how much to save? It is best to look at a case study for this. I ran some interesting scenarios for a 40 year old couple in our publicly available WealthTrace Retirement Planner. First, our assumptions:

1) I assumed they will spend $65,000 per year in retirement.

2) They have $250,000 in savings (75% stocks, 25% bonds) today, saving $20,000 a year.

The Results

I ran their retirement plan and found the following:

1) They will have $1.5 million at retirement. They will also have an 85% of never running out of money in retirement. I found this probability using Monte Carlo analysis, which runs 1,000 scenarios and calculates the number of times they never run out of money in retirement. To read more about how much money it takes to retire comfortably, you can take a look at our research on this here.

2) If they cut their savings by just $5,000 per year, their nest egg at retirement drops by $500,000! Their probability of never running out of money falls to less than 70%.

It goes without saying: saving is absolutely key. But it’s more than that. Saving consistently is very important to retiring when you want.

Which Accounts To Save To?

So you’re now in the habit of putting money away for retirement every single month. OK, that’s a good start. But which accounts should you save to? If you’re only saving to your taxable accounts, you are probably not maximizing your savings impact.

RetirementTaxes are an inevitability, but if you’re not using retirement accounts to defer (or with a Roth, completely eliminate) those taxes until retirement, then you’re putting a dent in your chance of an early retirement.

By first maxing out the $18,000 you can put in your 401(k), and then the $5,500 you can put in a traditional or Roth IRA — plus additional “catch-up” contributions for the 50-and-older club — before contributing to a taxable account, you’ll defer the tax impact until you retire.

Roth IRAs will allow you to withdraw your money tax-free in retirement, at the cost of paying taxes on that savings today. You can use our free IRA calculator to help you figure out which type of IRA is best for you.

Saving combined with good tax planning can lead to not paying any more in taxes than you have to. The differences add up and compound over time. If you want to retire early, it makes sense to develop smart tax management strategies. These tools will give you more money to work with and help to stretch your retirement funds even further.

Create Strong, Stable Income

Treasury bonds do not generate enough income for most people in retirement these days. That is why I recommend using dividend-growth stocks that have a long history of increasing their dividends. Dividend-growth stocks, such as Johnson & Johnson (JNJ), Coca-Cola (KO), Procter & Gamble (PG), and Exxon (XOM), will provide stable income in retirement and will ensure that the principal value of your investments becomes less and less important. This is so important for your retirement years and is one of the best alternatives to bonds in retirement today.

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