Saving and Investing
Even if you're retiring at 50, the conventional wisdom of saving and investing still applies.
- Start saving early. The power of compounding interest means that a small deposit made today is almost certainly more valuable than a larger deposit made in 10 years. Compounding interest also helps alleviate the effects of inflation on the value of your savings.
- Invest in tax-deferred retirement accounts like 401ks and IRAs. Make sure your investment portfolio is diversified â€“ that is, comprised of a mix of stocks, bonds and other assets to offset their associated risks. Strike a balance between riskier high-return investments and safer, low-return investments. You also might consider an inflation-adjusted annuity, which pays out a designated sum annually for a set number of years.
- While you can save money up front by managing your own investments, hiring a financial advisor can pay off. ''People tend to do a very poor job of investing on their own. They tend to get emotional and get in at the peak of the market and sell at the bottom, '' says Robert Michaud, managing director of research and development at the investment advisory firm New Frontier Advisors. ''Advisor fees might be something like one percent of the value of your portfolio, but for a lot of people that's a good deal'' [source: Michaud].
During your first decade of retirement, you'll need to stay away from retirement accounts. With a few exceptions, any withdrawals from your 401k or IRA will incur a 10 percent penalty. That's on top of taxes on the income and the reduction of value of the accounts, which will generate less interest over time. Instead, rely on cashing out stocks, tapping into a bank savings account, or other sources of income like a rental property. You might even consider delaying a full retirement and working part-time at first.
So, how much money should you take out to finance your early retirement? Turn the page to find out.