by Isabelle Esteves

Created on: July 26, 2010   Last Updated: May 07, 2012

In order to retire early, it is a wise idea to start planning for it early. What is your definition of early retirement? Is it 64 or is it 50?  With the possibility of living longer and prices constantly rising, it will cost the average person much more than they expect to not only maintain their current lifestyle but to be able to enjoy all the things that a lifetime of working is suppose to provide. Here are some tips to help you to plan for that early retirement.

IRA

Individual retirement accounts are a way to put aside some of your current earnings and defer the tax until you take the money out of the account. If you are under 50 you can contribute up to $5000 into an IRA account per year, over 50 it goes up to $6000.  If you plan to retire earlier, the money you contribute to your account in your 20’s is the most important. It is the most important because it has the longest time to compound. The longer it has,  the more you will have and the earlier you will be able to retire.

Roth IRA

When you start to save early,  it is very important to mix your tax deferred and your retirement savings that you pay the taxes on now. This is where your Roth IRA comes in. The Roth IRA can be part of your $5000 yearly savings. There are other advantages of a Roth IRA, since the taxes are already paid, if an emergency comes up it is much easier and penalty free to remove money.

401K/403B

A 401K is a retirement plan set up for you by your employer. If your employer is a nonprofit then it becomes a 403B. You will be contributing to this plan and in some cases your employer may match all or part of your contributions. The terms of a 401K/403B are much more generous and you are allowed to contribute much more than to an IRA, about 3 times more. Your employer will determine what your choices for investing your money will be, you will be able to make the individual choices from the plan that they chose. You are not as free to chose investments as you are in your IRA.

Pension

There are still some employers who provide a pension. If you are one of the lucky ones who will have a pension that you don't need to contribute to, it doesn't mean that you shouldn't still have an IRA, you should, especially to retire earlier.  Also keep in mind that people are living longer which requires more money to cover even a regular retirement date. Most pensions are available at age 55 at a reduced rate.

Social Security

You can collect a reduced benefit from SSI at age 62 if you are eligible. This is only 3 or 4 years early and if it isn't early enough, at least you will have it to look forward to when you get to the correct age. Of course, that is assuming that Social Security will be around when you want to retire early, that is not a given at this time. Many people are figuring that it may ne insolvent by then and planning their retirement accordingly.

It is often difficult for you to save a lot of money when you are young because you are dealing with college loans, entertainment and perhaps even buying your first home.  It takes a great deal of self control to be able to start the process that will guarantee that your dream of earlier retirement will become a reality. Save as much as you can without deferring your current dreams in favor of a distant future.

Learn more about this author, Isabelle Esteves.
Click here to send this author comments or questions.