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Advice from the Experts
Here are some smart suggestions from the experts on how you can retire when you want to.Save, Save, Save
Civil engineer John Greaney got serious about saving for retirement way back at age 25 after enduring one too many long-winded business meetings. Greaney, who is single and has no children, started saving avidly -- at one point, about 50 percent of his gross income -- and investing that money aggressively in mutual funds and individual stocks.
By 1994, at the age of 38, he had a retirement portfolio worth $500,000 and kissed the corporate world goodbye. For the first few years of his retirement, he worked as a consultant for 200 to 300 hours a year. Then, when his retirement portfolio reached $1 million, he essentially stopped working altogether.
How much should you save for an early retirement? Greaney has done the math and posted the formulas at his impressive Web site, The Retire Early Home Page. His basic rule of thumb for most people is if you can set aside 25 times your estimated annual post-retirement expenses in savings and investments, and draw down no more than 4 percent of your savings every year, you're home free. (Greaney, on the other hand, saved so much and invested so successfully that he has been able to withdraw even more.)
Move, Downsize -- or Both
"Consider the smallest, least expensive home that will meet your needs and then invest the funds you would have otherwise spent on housing," Greaney says. He started saving more after he moved from Cornwall, New York, to Houston, Texas, where the cost of living is lower. He now rents a townhouse in an upscale neighborhood for $600 a month.
Moving to a smaller home can also free up your equity. Current tax laws allow individuals to pocket $250,000 in tax-free profits on the sales of their homes. For couples, it's $500,000. At a time when you may not need the additional room or want the extra upkeep of a large house, it's a great way to get cash for retirement, says financial planner Rosenberg.
You can also save money by moving to a retiree tax haven, suggests Bob Carlson, a Fairfax, Virginia, financial planner and editor of "Retirement Watch," a newsletter. According to Carlson, Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming are the least taxing states for most retirees because they have no state income tax. Alabama, Illinois, Louisiana, and Utah, he adds, are also worth considering. U.S. government workers might look at Massachusetts or the 11 other states that don't tax federal pensions.
Florida, by the way -- long considered a tax haven because it does not tax income -- does tax accumulated wealth. As a result, it can hit early retirees with big nest eggs especially hard, cautions Boca Raton financial planner Mari Adam.
Over time, the payoff of moving could be huge. If you save even $2,000 a year in taxes by settling in a different place, and you invest it for 25 years to earn an annual return of 8 percent, you will be $146,000 richer.
Live More Cheaply
This may be easier than you think. First, imagine the day when you'll no longer have to lay out money for soccer shoes or school tuition for your kids, and deduct that amount from your budget. Then take out your commuting expenses, and the money you spend on downtown lunches and lattes. Subtract the money that won't be siphoned off for Social Security, Medicare, or other payroll taxes, or in income taxes if your income drops. Now you should have a sense of what you really need to live on -- and how you will be able to cut costs when you retire.
Greaney, for example, says he lives frugally, but well, on $30,000 a year. "I'm not a member of a country club," he says. "I play at golf courses where the greens fees average about $20. And I've found that travel for a retiree is a lot cheaper than travel for working people. You have the flexibility to fly at off-peak hours and the time to drive to places you had to fly to when you were limited to two or three weeks of vacation."
Tap Your Retirement Accounts Sooner
You can take penalty-free withdrawals before you turn 59-1/2 from your Individual Retirement Accounts (including Roth IRAs) and IRA rollover accounts from a 401(k) or other pension. Section 72(t) of the Internal Revenue Code allows you to start withdrawing from your IRAs regardless of your employment status or age, as long as you "annuitize" your account, that is, take out equal withdrawals every year that are calculated using your life expectancy, says Ed Slott, a Rockville Centre, New York, IRA expert and publisher of the newsletter "Ed Slott's IRA Advisor."
You don't have to keep withdrawing these payments forever; they only have to last five years or until you reach 59-1/2, whichever is longer. And these withdrawals can tide you over until you start receiving Social Security benefits.
This isn't small change we're talking about, either. Pioneer Investments, a Boston mutual fund company, estimates that a 55-year-old man with a $250,000 rollover IRA, for example, could withdraw $29,722 a year.
Play Now, Work Later
The hardest stretches of time for many early retirees are the years before they turn 62, when Social Security kicks in, and before 65, when Medicare steps up to take care of healthcare costs. Until then, retirees need to have enough money to support themselves and pay for health insurance.
One strategy was made possible by Congress last year when it abolished the earnings test that limited how much money Social Security recipients between the ages of 65 and 70 could make without jeopardizing their benefits.
What's the new rule got to do with early retirement? Financial planner Rosenberg says some of his clients see it as an opportunity to "retire" at 55 or 60. They can use the time until they are 65 to do what they want, while drawing on their retirement savings to pay for health insurance and other expenses.
Then, at 65, they plan to start working again, collect full Social Security benefits, and rebuild their retirement savings. As Rosenberg observes, "I have a number of clients who have gone back to work part-time simply because they got bored." Maybe it isn't your father's retirement. But it's not 9 to 5, 50 weeks a year, either.
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