VOL. 115 | NO. 221 | Thursday, December 27, 2001
Give the gift of early retirement
Give the gift of early retirement
At this time of year, families are reaping the benefits of giving and receiving holiday gifts. But think about giving what some consider the best gift of all the gift of early retirement.
Retiring early takes meticulous planning and more than a tidy sum of money, but for the truly committed, early retirement is possible. Here are some tips the Tennessee Society of Certified Public Accountants suggests for those desiring an early escape from the work world.
Envision retirement years
One of the biggest challenges retirees face is determining how much they need to save by the time they hope to retire. The further from retirement one is, the more difficult the task. CPAs and other experts say retirees need somewhere between 70 percent and 80 percent of pre-retirement income to maintain a standard of living. This rule of thumb is helpful for starters, but it doesn't consider the amount of money needed in future years depends, to a great extent, on the retirement lifestyle planned.
Make the most of saving
Perhaps the best way to prepare for an early retirement is by taking full advantage of 401(k) plans or other employer-sponsored, tax-deferred retirement plans. These plans make it possible to invest pre-tax money for retirement directly from a paycheck and, as an added bonus, many companies will match part, or even all, contributions.
Self-employed people can create a retirement plan by opening a Keogh account. Even for those who work for another company and are covered by a retirement plan, a Keogh plan shelters self-employment income earned from consulting or freelance work.
Traditional and Roth IRAs offer additional opportunities to build a retirement nest egg. Eligible workers can contribute to an IRA even if covered by a 401(k) at work. In certain cases, the IRA contribution may be tax deductible and, in all cases, there is no tax on earnings inside an IRA until the money is withdrawn.
Retiring early is an aggressive act that requires not only intense saving, but a serious willingness to live below means during the wealth accumulation phase of life. Be willing to replace expensive restaurant meals with dinners at home. Lower housing costs by trading down to a smaller home. The more fat trimmed from a budget, the more invested toward achieving early retirement.
Become an astute investor
It's important to be vigilant about the allocation of the assets in an investment account. The biggest mistake made with retirement savings is to play it too safe. The longer the period before retirement, the more should be invested in stocks that offer growth potential. Stocks may be considered risky because they are more volatile in the short term but, over time, stocks typically outperform other investments. The challenge is to achieve a reasonable balance between risk and reward.
Consider future insurance needs
Right now, most probably have health, disability and perhaps life insurance coverage under an employer's group policy. In fact, the employer probably pays some of the cost of this coverage. When retirement nears, at the very least, one will need to replace health insurance with a new policy that will carry to age 65 when Medicare kicks in.
Retiring early necessitates far more than a desire to call it quits before reaching normal retirement age. It requires a knowledgeable look at the lifestyle envisioned and the resources to fund the future. A CPA can be a valuable resource for would-be early retirees. He or she can work out a spending and investment plan that considers retirement goals, current resources and investments, and future sources of income, as well as taxes, inflation, interest rates and other components that factor into a plan.
The sooner one makes an appointment with a CPA, the sooner he or she will be on the way to achieving early retirement.
Tony Jennings, principal and managing partner of Dent K. Burk Associates, an accounting firm in Kingsport, Tenn., is president of the Tennessee Society of Certified Public Accountants.