What does early retirement mean to you? Does it mean leaving your career behind in your mid-50s? Late 50s? Early 60s?
No matter what retirement age you're targeting, you should know that it is possible to meet your goal, even if you're an average earner. But retiring early also requires a lot of careful planning, as well as knowing what pitfalls to avoid. Here are three dangerous ones that could ruin your plans if you're not careful.
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The more debt you take on, the more difficult it will be to consistently fund a retirement plan. But without a decent pile of savings, you might struggle to leave the workforce when you want to.
If you're set on retiring early, keep what could be your single largest debt -- your mortgage -- to a reasonable level. That means not necessarily borrowing the full amount you qualify for.
You should also do your best to steer clear of credit card debt as a matter of course. Credit cards are notorious for charging high interest rates, and too much of this type of debt could eat up a large chunk of your income and prevent you from meeting your savings goals.
The money in your IRA or 401(k) plan shouldn't sit there doing nothing. Rather, you'll want to fuel your contributions' growth by investing your retirement savings.
But be careful not to play it too safe. Though bonds are far less volatile than stocks, their returns don't tend to be as generous. And if you don't grow your money aggressively enough, you may not manage to retire when you want to.
Imagine you do a good job of socking away $500 a month in your retirement plan starting at age 22 with the goal of retiring at age 62. That's the earliest age you can sign up to collect Social Security.
If you invest conservatively, you might generate a 4% average annual return during that window, leaving you with a total savings balance of $570,000. That's a decent sum of money, but possibly not enough to allow for an early retirement.
On the other hand, if you load up on stocks, you might manage to generate an 8% average annual return in your retirement plan, which is just below the stock market's historical average. And in that case, you'll be sitting on an ending balance of a little over $1.5 million.
If you're a parent, it's natural to want to help your children as much as possible -- even once they've grown. But if you divert too much of your earnings to helping your adult children cover their bills, you might struggle to meet your savings goal and retire when you want to.
A better bet? Encourage financial independence among your children, and try to find ways to provide nonmonetary support.
If your kids have kids, you can offer to watch them as your schedule allows for so your children can spend less on child care. But don't take money earmarked for your retirement savings and give it to your grown kids to help them pay their basic expenses -- not unless they've encountered an emergency of their own, like an illness or layoff.
Early retirement is something a lot of people strive for. If it's a goal of yours, be sure to avoid these traps that could wreck your chances of leaving the workforce on your own terms.
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3 Things That Could Get in the Way of an Early Retirement - The Motley Fool
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