When Do You Plan To Retire? That was the question our financial advisor asked the very first time we met together. Since my wife and I were both in our early 20’s, we said 50. We figured 50 is really old and if we waited much longer we would probably need to do all of our traveling in wheel chairs. Now that I’m in my 30’s, 50 doesn’t seem quite so old.
Retirement planning for young people is difficult because there are so many variables. Who really knows when they want to retire and how much is enough for retirement? If you want to retire early you will need to determine your retirement needs.
Photo by the the_tahoe_guy via Flickr.
Still…within a week or two, we had a few investments set up including a Roth IRA. Interestingly, if you withdraw funds from your IRA before you are 59 1/2, you’ll pay a 10% penalty. I didn’t realize it at the time, but how can I say I want to retire at 50 and be set up for a retirement savings plan that penalizes me if I get the money before 59 1/2?
Obviously, our financial advisor either didn’t think that was possible, or just didn’t pay attention.
So what if I do want to retire early?
Then I should not be investing exclusively in a Roth IRA — and neither should you.
Honestly, I’ve never even considered using something other than a retirement vehicle (like a Roth) to save for retirement. But, what I’ve done unintentionally is I’ve let the government dictate when I should retire.
Do I want them to penalize me for my money if I get it before I’m 59 1/2?
Should You Use A Retirement Plan If You Want To Retire Early?
Since the Roth and Traditional IRA have different tax consequences, the answer depends on the investment vehicle you are using and the combination of retirement plans you use.
If you are using a Traditional IRA, then you should remember you are going to pay your taxes to the government when you withdraw your money. Personally, I prefer Roth IRA, because you pay the taxes now and all of your savings and investments will be accessible to you when reach the eligible retire age — without any rules are restrictions.
The only exception would be if the deduction from your IRA decreased your income tax bracket.
The Roth IRA is a difficult choice. The reason is that your gains grow tax free so it does provide a significant advantage for you to have funds in the Roth. Well, if you are considering the possibility of retiring early, then you should keep at least a portion of your income outside of a government retirement vehicle — enough to get you from your early retirement until you are 59 1/2.
A 401(k) is similar to a Traditional IRA in term of tax characteristics. However, if you are getting a match on a 401(k) or similar, then go ahead and max out these funds. It might take longer to save up for an early retirement, but you’ll only need enough savings to get you to retirement age when you know there will be a 401(k) nest egg waiting for you.
Early Retirement Conclusion
I’m not advocating that anyone stop saving for retirement in a retirement vehicle unless those plans conflict with your personal financial goals.
In my case, I don’t really think I’m going to retire in 5 years. In fact, I’m not sure I’m retirement material. Some folks think early retirement is a bad idea. Either way, the sooner I plan to retire, the more money I need to save outside a retirement vehicle.
What investing tips do you have for those who might wish to retire early? Would you stop using a traditional retirement savings vehicle if you were considering early retirement?
Craig Ford is a fulltime missionary in Papua New Guinea who writes Money Help For Christians and Help Me Travel Cheap, a frugal family travel blog. He is the author of Money Wisdom From Proverbs, has a Masters of Divinity degree, and (most importantly) eats homemade pizza with his family every Friday night.