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Dos and don’ts for young workers planning an early retirement

July 17, 2015

By Dan Rafter | Money Rates Columnist

Young professional

Retiring before you're 65 seems unlikely, but not impossible. Lawrence Pon's client got lucky and retired early and comfortably after the value of her employer's stock suddenly soared. Pon's client - a single 40-year-old - owned enough so that it provided her, even after taxes, with enough income for the rest of her life.

Pon, a certified public accountant and owner of Pon & Associates in Redwood City, California, says that his client paid off her mortgage and debts. She also invested her money, converted a traditional IRA to a Roth IRA to save taxes and moved to Australia, renting out her previous home for extra cash.

That's an unusual way to retire early. But you shouldn't expect this kind of luck. If you plan to retire early - say before your 60th birthday - you'll need to make the smartest of financial decisions and avoid the biggest potential money pitfalls.

"We have seen many clients retire early," Pon says. "Sometimes this is voluntary and sometimes not. We have to take into consideration health care, Social Security and where their assets are located."

In other words: If you want to retire early, you need to plan.

Here are the most important steps to take, and mistakes to avoid, if you want to leave the working world and enjoy your golden years sooner than many of your peers. 

Don't: Start too late

You might think you're too young to worry about saving for retirement. That's not true, and it's especially untrue if you want to retire early. Sarah Elliott, personal finance and credit expert with Salt Lake City's Lexington Law, says that there's a reason why retiring at age 80 is becoming more common: People aren't saving early enough to fund their retirements.

Elliott says that typical retirees need about 80 percent of their final year's pre-retirement income to live comfortably each year once they leave the workforce. If you retire at 65 and are earning $100,000 a year, you'll need at least $1.6 million to live comfortably until age 85.

That's an intimidating figure. But the sooner you begin saving, the easier it will be to attain.

"If you are thinking, 'But I'm only 27,' think again," Elliott says. "It's never too soon to start thinking about long-term financial security, especially when time is on your side."

Do: Take advantage of the magic of compound interest

Do you know how powerful compound interest can be? Joseph Jennings Jr., wealth director and senior vice president at Pittsburgh-based PNC Wealth Management, certainly does. As he says, $10,000 saved at age 25 has 40 years of growth potential if you plan to retire at 65 while the same amount saved at age 60 only has five.

That makes a big difference: $10,000 compounded at a conservative rate of return of 8 percent will grow to more than $217,000 when you reach 65 even if you never save another penny. But $10,000 saved at age 60 will only grow to just more than $14,600 by the time you reach 65.

"Due to the power of compounding, the first dollar saved is the most important," Jennings says. "It has the most growth potential over time."

Don't: Spend recklessly

Eric Sommer, wealth director for the central Florida region for PNC Bank, says that the best way to retire early is to "save 'till it hurts."

In other words, if you spend everything you make, you won't be able to stow away enough for a happy retirement, let alone an early one.

Sommer recommends that those who want to retire early maximize their allowable contributions to Individual Retirement Accounts and employer-offered 401(k) accounts. Those who spend too freely won't be able to take this important step.

Do: Look for opportunities for free money

Many employers match the contributions - or at least a percentage of them - that their workers make to 401(k) plans. Elliott says that this is basically free money, and you should always make sure to contribute the amount you need to earn your company's match. This is especially true if you want to retire early.

Don't: Forget to make frequent investments

Jennings recommends that you don't just start saving early. He says that you should invest your money in retirement accounts often, too.

"Rome wasn't built in a day," he says. "Your retirement porftolio won't be, either."

Don't put off setting up a monthly investment program into a mutual fund, Jennings says. By investing at regular intervals set according to your cash flow and other financial factors, you'll develop the habit of regularly saving money, whether you are depositing that money into a retirement account or a mutual fund.

Do: Take into account the life you want to lead

It's easier to retire early if your goal is to spend time with your grandchildren and catch up on your reading. But if you want to travel the globe or take up sailing? Then you'll need to be more aggressive in your savings.

If you don't plan for the life you want to lead, you might find that you haven't saved nearly enough to retire early.

"It's critically important to know how much you will need to maintain your desired lifestyle in retirement," Sommer says.

Don't: Rent too long

You might enjoy renting an apartment. But if you want to retire early, doing so might scuttle your plans. Rob Seltzer, vice president and wealth consultant with Womack Wealth Management in Beverly Hills, California, says that when you rent, you get nothing in return for your money. Rents are rising quickly today, especially in the center of urban areas. Renting an apartment is becoming an expensive move.

Do: Buy a home and build equity

But when you buy a home? You build equity. And the hope is that you'll make a profit when it's time to sell.

"The combination of building equity and having a fixed housing payment are critical," Seltzer says.

What are you doing in your plan for an early retirement? Let us know in the comments.

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