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5 tips for retiring early

It's a lot easier if you begin preparing years ahead, but it can be done even if you don't start saving until you are 50.

By doubleace Apr 14, 2011 6:56AM

This post comes from Lynn Mucken at MSN Money. See the end of this post for a chance to win a $100 gift card.


It's the American dream. No, not the one about a house, a good job, a sweet ride, lots of electronics and nice vacations. Your next American dream -- early retirement.


Whether you are 48, 59, 62 or even 65 (a year earlier than full Social Security payments currently kick in), it can be done. It just takes more than a bit of planning.


Here are five tips for making it happen:  Post continues after video.

Save, save, save. For years, financial planners said you needed 70% of your pre-retirement income to maintain the same lifestyle when retired. Now, noting that Americans are living and staying active longer, their low-end number is 80%, with a strong suggestion that 100% would be more prudent.


Social Security and a pension won't nearly cover that for most of us; the only way we can get there is by saving. You've heard it before: Pay yourself first and start early. If you are putting money into your children's college funds, match those amounts for you and your spouse. Max out the 401k contribution (even if there is no match).


Sure it's tough, but save in little ways: Skip those five $3.50 lattes each week, and take a bag lunch to work ($2 versus $5 for soup and a sandwich). Those alone will save you at least $1,500 a year. After 30 years, at a 5% investment return, that's $111,000 in your retirement fund. You don't have to go without vacations or expanded cable. Instead, live a life of "cautious abandon" by establishing a realistic savings program, sticking to it and feeling free to spend everything else. Try using MSN's retirement calculator.


And remember, it is never too late, even if putting your kids through college and some poor decision-making leaves you with nothing in your nest egg as you turn 50. Pound that 401k, contribute to IRAs. The target: Save 20% of your gross income. It piles up fast. For more specific advice if you're a late starter, read "Playing catch-up: Start in your 50s."


Analyze your dreams. How do you want to spend your retirement years? Working in the garden of your home that's paid for? No sweat. Scratching that long-ignored travel itch or golfing four times a week? Might be a problem.

So be realistic about the future. Dreams are just dreams. Retirement is real life. "The biggest challenge for some of these people is going to be how to spend that time," says Reginald Tilley, a certified financial planner in Bellevue, Wash. "Because if you get six months into this thing and you find that you're bored, you have no sense of purpose, there's a big void in your life, you're probably at more risk from an emotional point of view than you'll ever be from a financial point of view."

Realistically assess the risks. One word: inflation. This is the worst enemy of the retiree. Yes, it is no factor today, but for half a decade in the late 1970s and early 1980s, it was over 10% each year. An $800 pension without a cost-of-living adjustment in 1979 was worth $523 in 1984.

That's a worse-case situation, of course, but look at a more typical figure, 3%. According to "6 keys to an early retirement": "The $50,000 you think you have to live on will be worth only $48,500 next year, $36,871 in 10 years and $27,189 in 20. There's a big difference between living on $50,000 and on $27,189, and it's unlikely that your expenses will be cut in half in that time."

And there are other possible problems: ballooning health care costs, cutbacks in Social Security and Medicare, increased taxes and fees to cover federal, state and local deficits. Being too pessimistic in predicting the future is only a small mistake; being too optimistic? A big one.

Crunch the numbers. Spend a couple of weeks reading -- going to Bing or MSN Money and punching in "early retirement" is a good start -- to figure out everything you need to include in your calculations. Then list your financial assets and match those against your anticipated future expenses for the life you want to live. Some things to consider:

  • Housing. If your home is paid for, great. But be sure to include rising property taxes and maintenance expenses -- they are way more than you think.
  • Health care. During the gap between retirement and Medicare, you have to have health insurance. That can be $1,200 a month or more for a couple in their 60s, and you still will have plenty of out-of-pocket expenses. Even when you reach 65, Medicare isn't free and it doesn't pay for everything
  • Transportation. Check the mileage on your vehicles and compute the difference between their readings and 150,000 miles, which today's cars easily reach. If the gap is 150,000 or less and you drive 20,000 miles a year, you will be needing new wheels inside of seven or eight years.
  • Recreation. Ask any tour operator. Those 60 and above are their primary customers. Foreign travel can be spendy. The golf courses are crowded with older people. Golf is an expensive sport. The old stereotype of retirees spending quiet time on the back deck has been replaced by spending time on a cruise ship's deck.
  • Your lifespan. Americans are living longer. If you make 65, your life expectancy is still 18 more years if you're a man and 21 if you're a woman. So, if you're planning to quit work at 50, you better have enough money to last another 40 years to be on the safe side.

Work just a bit longer. So you're 55 and itching to start the good life. Even just a little more work can ensure a comfortable lifestyle. Consider these figures:

  • A couple earns $100,000 a year and has a portfolio worth $500,000. Working and socking away 15% of gross income for three more years would add 28% to their retirement package.
  • Even part-time work makes a big difference. An income of $20,000 a year  is the equivalent of withdrawing 4% a year from a $500,000 portfolio.

"You don't have to pay for expenses out of savings," says Christine Fahlund, a senior financial planner at T. Rowe Price. "You meet them with your paycheck."


What's important to consider when planning for retirement? We want to hear from you on Twitter!


Share your retirement tip with us on Twitter on Thursday, April 14, to enter for a chance to win a $100 American Express gift card in our MSN Money "Money Tips" Twitter Sweepstakes. To participate, you must follow us on Twitter (sign in or sign up, then click here), @reply us with your retirement tip and include the #MSNMoneyTips hashtag in your tweet.


One winner for this retirement question will be randomly selected and announced on the MSN Money Twitter page on Monday, April 18. We'll collect the best tips and may include them in an upcoming Money feature. Good luck!


For more information about the weeklong sweepstakes, please go here.


More on MSN Money:

Apr 14, 2011 10:34AM
I can't believe that one of your tips for retiring early is to work longer - OMG. Horrible, please retire your advice all together.
Apr 14, 2011 10:14AM
Here's one other consideration:  Vote out the baggers.

Social security is not an entitlement.  WE PAID FOR IT.


But the tea baggers, many who take SS and Medicare, want to kill your retirement.

Vote all career politicians out.  Make them give up their pensions.

Apr 14, 2011 3:23PM
Vote for people who want smaller government and allow us to to invest in ourselves and trust us that we know better than those in Washington!
Apr 14, 2011 2:55PM

Obviously, this article is not intended for the typical working class folk. $500,000 portfolio? Save 20% of your gross income? Please! There are some of us who don't have ANYTHING left over at the end of the month to save.  How about MSN Money takes a reality check????

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