If retiring early is one of your life goals, now is the time to take action. The sooner you start saving for retirement, the sooner you can take advantage of the magic of compounding interest. However, it is essential to understand what financial options make sense when your goal is to retire at 55.
1. Save in a Roth IRA
One of the advantages of using a Roth IRA to save for retirement is that you can withdraw the contributions at any time, regardless of your age. For example, if you have a Roth IRA that contains $100,000 in contributions and $10,000 in earnings, you can take the $100,000 out whenever you need it. This makes it a top retirement savings vehicle for individuals who wish to retire at 55.
It is important to note that your earnings are handled differently. To withdraw your earnings without penalty, you must be 59.5 years of age, and the Roth IRA should be at least five years old.
With a Roth IRA, your contributions are made with after-tax money. Consequently, when you need to take those contributions back out, you do not have to pay tax on them again.
As of 2016, you can contribute up to $5,500 a year if you are under 50. If you are 50 or older, this amount increases to $6,500.
2. Pay off or pay down your debt.
Retirement experts often say to plan on needing 70 to 85 percent of your current annual salary once you enter retirement. If you can decrease your monthly expenses, you require an even smaller percentage of your present spending. One of the most cost-effective ways to reduce your spending is to pay down or pay off your debt.
For example, if you pay your mortgage off before you retire, this eliminates a good chunk of your monthly fixed expenses. By paying your mortgage off early, you also decrease the amount of interest that you pay over the life of the loan, giving your money a guaranteed return.
3. Save in a taxable investment account.
When you retire early, you need to save in an account that lets you access the money before the common retirement age. Investing in a taxable retirement account lets you accomplish this objective. You invest in the account with after-tax dollars. Within your investment account, you can choose from an assortment of funds, such as stocks, bonds, or money market funds. You can easily find an investment that suits your personal risk level.
The tax rate that you pay on your earnings depends on how long you have held the investment. Generally, an investment held for less than a year is considered short term, while those held for over a year are long term. Expect to pay taxes equal to your marginal tax rate when you sell short term investments. However, when you sell long term investments, you qualify for a long term capital gains tax rate. As of 2016, the long term capital gains tax is 15 percent.
In order to fund your retirement at 55, you must make wise financial decisions. Decreasing your expenses and investing in the right types of accounts are two ways you can work towards your goal. Get an early start on making your dream of early retirement a reality. For more information, talk to a financial advisor.