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Retirement
Roadmap to retire early
August 28, 2000: 7:27 a.m. ET

High-octane strategies to help you reach early retirement by age 55
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - You're not usually one to jump on the bandwagon and follow the crowd, but man, more and more people you know are talking about retiring early, and doing it: your neighbor, the mailman, even your massage therapist.

But how can YOU retire at 55 and take advantage of your youthfulness: travel, dive into untapped interests, do charity work?

Like any goal, you need a roadmap to help get you there. But retiring early is no delicate matter. It assumes you've already done some investing and that you have a little while to grow that nest egg. In addition, you've got to take some aggressive steps to get there.

But the journey can be riddled with detours, bad weather, rest stops and wrong turns. To make early retirement a reality, you'll need to put together a high-octane plan that's speeds like a sports car on an autobahn rather than a minivan rolling along on a relaxed Sunday drive.

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"Retiring early is not uncommon these days," said Cathy Pareto, a financial planner based in Miami, Fla. "We get quite a few of those in our office," she said, adding, "early retirement sounds like a nifty idea, but preparation during the early years is essential. Time is on your side when you're young."




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You CAN drive 55!


Retiring at 55 is a lofty goal, especially if you haven't even started saving for the big day. As more Americans are living longer and in better health, baby boomers and even Generation Xers are considering getting out of the rat race early.

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"For many people, retirement is finding a sense of passion and purpose on which to build your life," said Joel Savishinsky, an anthropology professor at Ithaca College in Ithaca, N.Y. "For some, it means continuing some form of work they did in the past, maybe doing it differently, full time or part time."

Let's say a 30-year-old investor who makes $50,000 wants to retire at 55 and have the same level of lifestyle then as he has today. Using a 3 percent inflation rate, he will need $104,689 per year when he retires 25 years from now, which means by retirement day, he'll have to have a nest egg of about $2 million!

But consider this, a person retiring at 55 has probably worked only 30 years or so. That means they've got another 30 years to protect and grow their capital. They'll be in retirement about as long as the time they worked. 

So, experts say you'll have to turbo charge your investment strategy to get there.

Turbo charge your portfolio!


The time is now to max out your 401(k). The maximum contribution to an employer sponsored plan is $10,500 a year, or typically 15 percent of your salary. Also, load up on aggressive growth funds, which may be more volatile in the short term but increase your chances of besting the historical 10 to 12 percent annual return for stocks.

And while you're supercharging your savings, know that relying on Social Security for a large part of your retirement income is a no-no.

Depending on the year you were born, you won't be eligible to receive Social Security benefits until you're in your 60s, so if you plan on retiring at 55, you'll have to rely on your company retirement plan and your own personal investments in mutual funds, stocks and IRAs. (Click here to determine when you're eligible for Social Security benefits.)

And if you sincerely want to retire at 55, you'll have to dip into your own savings. Why? Taking early withdrawals from your 401(k) or IRA plan before age 59-1/2 will subject you to hefty penalties and taxes.

"If you're serious about retiring prior to age 591/2, it's critical you accumulate savings outside of your 401(k) plan," said CFP Barbara Saunders in Dallas, Texas.

That means opening a separate mutual fund account and contributing regularly to take advantage of compounding -- when your investments earn interest and then you earn interest on the interest.

How powerful is compounding? Let's say you saved $2,000 a year starting at 20 until you're 30, you'll still have more money at retirement than a person who saved the same amount between ages 30 and 60.

Set priorities


You're working long hard hours, maxing out your 401(k), saving into an IRA and other mutual funds, but your life is more than just about saving, right?

What about that fancy dinner with your best friends you take once a month, or the trip to the ballet every fall, or that pottery class you've been meaning to take? And surely the gourmet coffee you suck down every morning is straining your budget.

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You need to prioritize where today's dollars are going if you're going to retire early, advisers say.

Take, for example, dinner on the town where you spend about $80 a month. That may not sound like big bucks today, but if you invest that money in a mutual fund that gains about 12 percent over the long haul, your dinner fund will be worth $146,000.

There are other tradeoffs you can make today to get you to that comfortable dream retirement.

Consider renting movies instead of going to the theatre (that's $11 a month which translates to more than $20,000 in 30 years, assuming a nine percent annual rate of return compounded at the same rate of contributions), or buy home exercise equipment instead of a gym membership (that's $300 a year which translates to almost $45,000 in 30 years.)

How much will I need?


To retire early means having enough money to live on starting in your mid-50s. But how much is enough?

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Many planners use the rule of thumb that you'll need between 60 and 70 percent of your current salary during retirement, according to Pareto of Managed Account Services. But with Americans living longer and baby boomers envisioning active days of travel and entertainment, a more realistic estimate is planning to spend 100 percent of your current salary during retirement.

Let's say your salary is $100,000 today at age 40. You'll probably need the same amount during retirement at 55 to stay at the same comfort level of living. As your salary increases through the years, so should your retirement estimate, Pareto said.

Unless you want to scale back your existing lifestyle, you'll probably need the same yearly amount in retirement. "Most people maintain, if not improve, their lifestyle. They usually plan to be more active at that age," Pareto said.

So once you've had the goodbye parties at work and officially retired from the daily grind, you should expect to withdraw only 6 percent from your retirement accounts to stay on course.

If you retired this year at age 55 with a $2 million nest egg, Pareto says you should expect to withdraw no more than 6 percent, or $120,000, a year from that retirement bin to live comfortably and have adequate growth in your portfolio for the future.

"If you go beyond 6 percent, you'll not have enough money assuming you have good asset allocation and equities working for you," she said. Also, your retirement portfolio should include a mix of short-term bond funds to preserve your capital.

Take from your plan without penalty


If you plan on retiring early and living on your retirement savings you've worked hard to build up, you'll probably need to dip into your IRA and 401(k) plans prior to the magic age of 59-1/2. The IRS imposes penalties and taxes if you take money out of your plans for retirement before that age.

But an exception to the early withdrawal law - an IRS ruling known as code 72t -- can help you. It allows you to take money out of your 401(k) or IRA plan without penalty or taxes.

Typically when you take withdrawals out of a retirement plan before 59-1/2, you pay a 10 percent tax penalty. But you can avoid the tax by taking what are called "substantially equal withdrawals" from your retirement assets by following code 72t. (Click here to read more about IRS rule 72t.)

Under the rule, you take distributions from your retirement plan over a minimum of five years, or until you reach age 59-1/2. So if you began 72t distributions at, say, age 48, you would need to continue the distributions until age 59-1/2, which is 11-1/2 years.

Planners suggest you carefully consider your options before you get started, because you must stay with the same method once distributions begin. If for some reason you halt your 72t distributions in the future, penalties plus interest could result.

For Vicki and Scott Baker, a Dallas, Texas couple in their mid-40s, it's not about sitting back and fishing or just putting their feet up. They're considering their options now because they plan to retire in the next ten years.

Vicki, a registered nurse, and Scott, a chief investment officer for an advertising firm, are aggressive savers putting away $3,500 a month for retirement. They don't have children and they keep an eye on credit card debt, but they made a commitment to early retirement years ago.

"It wasn't retire and sit in front of the TV and read a book," said Vicki, who plans on doing charity work during retirement. "Our goal was early retirement, but we didn't have a set age. We just knew we didn't want to wait until 65." Back to top

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.