- Contributing to a 401K or traditional IRA - I like 401Ks and traditional IRAs because contributions are before taxes. Thus, contributions are partially funded by the government, since our tax liability was reduced. As I've written before, I like the idea of using other people's money to fund our retirement savings.
- Taking advantage of an employer match in a 401k - To me, an employer match is like getting free money. If an employer matches 100% up to 3% of one's salary, then it is the equivalent of getting a 100% return on up to 3% of salary. There are not many investments that can guarantee a 100% return.
My spouse's employer matched up to 2% of her salary. Unfortunately, my employer did not match. However, I still contributed to take advantage of the tax benefits from #1. - Avoiding an early withdrawal - The penalty for early withdrawals is typically 10%, unless it is for a qualifying reason. In addition, taxes may also need to be paid on all or part of the withdrawal. While there may be good reasons for an early withdrawal, 10% is a pretty high penalty to pay for non-qualified expenses.
Doing the above does not necessary guarantee sufficient retirement savings. However, I think doing these helped us to retire, especially since we retired early.
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This is not financial or retirement advice. Please consult a professional advisor.
Copyright © 2008 Achievement Catalyst, LLC
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4 comments:
Regarding point 3, are you aware of SEPP, which is a way to receive money from your retirement accounts without penalty? I've just started learning about it myself, but so far it seems like a good option for early retirees.
- Elizabeth
These types of tax deferred accounts are designed for withdrawal to begin at age 59.5, not before. I don't consider that "early" retirement.
Kristin,
No, I don't consider 59.5 early, either. There's something called the 72(t) rule that allows people to withdraw from their tax-deferred accounts before that age as long as the withdrawals are taken in "substantially equal periodic payments" (SEPPs). There's a decent explanation here:
http://www.investopedia.com/articles/retirement/02/112602.asp
@ Elizabeth,
Thanks for the information. I am aware of SEPP, or 72(t), distributions but am trying to not use them due to the "must withdraw" reequirement. As I understand it, SEPPs must be done for 5 years or until 59.5, whichever is longer.
@ Kristin,
Agree that tax deferred retirement accounts are for after 59.5. For us, it was an "and" to retire early. We needed enough savings for before and after 59.5. The tax deferred accounts let us be more effective at saving for use after 59.5 so that we could get saving for before 59.5.
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