Two Questions For You
At least once a week, four or five times a month, since I retired in September 2009, I hear the same question, “How can I retire early?” I always respond by asking two questions.
- How old are you?
- How old do you want to be when you retire?
Just Give Me An Age
The answer to question #2 is not, “I can’t afford to retire when I want to.” Tell me an age. Let’s say you are 40 and you want to retire when you are 55. That’s 15 years. But most of the people I talk to are not 40 years old. They are usually 50 and want to retire at 55. If you are 50, can you save $1450 every two weeks to reach your goal of retirement at 55?
Can you Save $35,000 a Year?
If you are 50, you can retire at 55 if you can save enough. Most people can’t save at that rate of $1450 every two weeks. It would take saving about $35,000 a year at a rate of 20% on your investments to get the same amount of money that a 40 year old would have at 55 using only $4,000 a year in a Roth IRA.
But you can only put $4,000 into your Roth until you get to be 55 and when you can put in $5,000, but you want to retire at 55 so that shoots that plan. Also your earnings every year will be taxable, since you are saving $31,000 more each year over what you put in the Roth. So your net result will be less. To offset a 28% tax rate, you’d have to save over $40,000 a year. So the goal of retiring at 55 might be unrealistic. Or maybe not, depending on your savings rate.
Can You Live On Less?
If you are 50, and want to retire at 55, you have to ask another question. Can you live on less money? Is retiring at 60, or in 10 years, acceptable? Saving $4,000 a year in a Roth for 10 years, or until you are 60, will give you about $25,000 a year tax free a year. If you have other investments outside of the Roth IRA, it could throw off additional money that you could tap for retirement. You might be able to get Social Security at 62, if it is still around, so that might give you some more money. But that is saving for 10 years and you would not be able to retire at 55 like you want.
One other option would be to make better than 20% on your investments. Yes, it is possible, but . . .
Watch Out For Investment Draw Downs
You also have to worry about investment draw downs. An investment draw down is when you are a “set it and forget it” investor. I actively monitor my accounts and the market as a whole, so in late 2007, I sold everything and sat in cash. I was in cash in a money market account for all of 2008, and continued until March of 2009. I watched the market every Friday using a simple tool on Yahoo.
To be continued . . .
For Taking Early Retirement (TER), I hope you are enjoying a great retirement or are close to that day!
Jeremiah John
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