The average American retires at about age 63, according to data from the U.S. Census Bureau. If you enjoy your work, of course, you may want to go well beyond that age. But what if you don’t want to wait until 63 or so? Can you afford to retire early?
Possibly, if you follow these suggestions:
Research the costs involved. What will you do during your retirement years? Will you travel the world or stay close to home, pursuing your hobbies? Will you downsize from your current home? How will you pay for health care until you’re old enough for Medicare? You will need to answer these and other questions to determine how much you will need to sustain a comfortable lifestyle as an early retiree.
Invest more – and invest for growth. One big advantage in retiring at the usual age, or even later, is that it gives you more time to invest. But if you’re determined to retire early, you will almost certainly need to accelerate your investment rate – which, in practical terms, means you’ll likely have to contribute more each year to your IRA and 401(k) or similar employer-sponsored retirement plan than if you were going to retire later on. Plus, you may have to “ratchet up” the growth potential of your investment portfolio. However, because growth-oriented investments typically are more volatile than other investments, you will be taking on more risk than you might otherwise. If you are truly uncomfortable with this risk level, you may need to re-evaluate your plans for retiring early.
Cut down your debt load. It’s always a good idea to enter retirement with as few debts as possible – but if you want to retire early, you may need to be even more diligent in controlling your debt load.
Know the rules governing retirement plan withdrawals. If you want to retire before age 59½ and begin taking distributions from your IRA or 401(k) plan, you will generally be subject to a 10% early distribution penalty, plus normal income taxes. (To withdraw your earnings from a Roth IRA tax and penalty free, you generally must have owned the account for at least five years and have reached age 59½. You can withdraw your contributions at any time tax and penalty free.) However, you may be able to avoid the 10% penalty if you take “substantially equal periodic payments,” which are calculated based upon your age and other factors. Once these distributions begin, they must continue for five years or until you reach age 59½, whichever is longer. Other rules apply to these distributions, so before taking any, you will want to consult with your tax and financial professionals. And keep in mind that if your withdrawal rate is too high, you risk seriously depleting your retirement accounts, especially if your investments decline in value during the years you’re taking these payments.
Most importantly, do everything early: Plan early, invest early (and don’t stop), and lower your debt load early. Getting a jump on all these activities can go a long way toward turning your early retirement dreams into reality.
FINANCIAL FOCUS: Vote for Smart Investment Moves
T
he presidential election is little more than a month away. Like all elections, this one has generated considerable interest, and, as a citizen, you may well be following it closely. But as an investor, how much should you be concerned about the outcome?
Probably not as much as you might think. Historically, the financial markets have done well – and done poorly – under both Democratic and Republican administrations. Also, many factors affecting investment performance have little or nothing to do with the occupant of the White House. Consequently, no one can claim, with any certainty, that one candidate is going to be “better for the markets” than another one.
Still, this isn’t to say that any given presidential administration will have no effect at all on investors. For example, a president could propose changes to the laws governing investments, and if Congress passes those laws, investors could be affected.
But in looking at the broader picture, there’s not much evidence that a particular president is going to affect the overall return of your investment portfolio. As mentioned above, many factors – corporate earnings, interest rates, foreign affairs, even natural disasters – can and will influence the financial markets. But in evaluating a president’s potential effect on your investments, you also need to consider something else: Our political system does not readily accommodate radical restructuring of any kind. So it’s difficult for any president to implement huge policy shifts – and that’s actually good for the financial markets, which, by their nature, dislike uncertainty, chaos and big changes.
The bottom line? From your viewpoint as an investor, don’t worry too much about what happens in November.
Instead, follow these investment strategies:
Stay invested. If you stop investing when the market is down in an effort to cut your losses, you may miss the opportunity to participate in the next rally – and the early stages of a rally are typically when the biggest gains occur.
Diversify. By spreading your dollars among an array of investments, such as stocks, bonds and other investments, you can help reduce the possibility of your portfolio taking a big hit if a market downturn primarily affected just one type of financial asset. Keep in mind though, that diversification can’t guarantee profits or protect against all losses.
Stay within your risk tolerance. Investing always involves risk, but you’ll probably be more successful (and less stressed out) if you don’t stray beyond your individual risk tolerance. At the same time, if you invest too conservatively, you might not achieve the growth potential you need to reach your goals. So you will need to strike an appropriate balance.
Forget about chasing “hot” stocks. Many so-called “experts” encourage people to invest in today’s “hot” stocks. But by the time you hear about them, these stocks – if they were ever “hot” to begin with – have probably already cooled off. More importantly, they might not have been suitable for your needs, anyway. In any case, there’s really no “short cut” to investment success.
Elections – and even presidents – come and go. But when you “vote” for solid investment moves, you can help yourself make progress toward your financial goals.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
