Prepare your plan for an early retirement
You can retire early — really! It starts with disciplined savings habits.
For some, early retirement is the ultimate financial goal. Getting an early start may be the best way to make it happen. For inspiration, meet Nick Hall, who's got a real shot.
On his number
Nick, 26, intends to retire in his mid-50s. He'll need to save a lot and invest his savings wisely. How much should he shoot for? Generally, it's recommended that retirees withdraw no more than four to five percent of their savings in retirement.
On not buying beyond his means
Nick, who works in financial services in New York City, made an important discovery shortly after moving into his first apartment a few years ago. He spent $800 outfitting his new place — and put that balance on his credit card. "The next day I thought about what I'd done and realized that I didn't have $800," he says. So he returned most of what he bought and replaced those items with less expensive ones from a discount store. "That was a turning point for me in learning about how to handle my finances."
On his savings discipline
- Nick started contributing to his employer-sponsored retirement plan right after graduating from college in 2007 — just enough to get the 5% match from his employer. "I needed to pay the rent. But I knew I wanted that match."
- He has increased his contributions by 1% of his salary each year and is now up to 8%. "I plan to continue doing that with each raise or bonus, because it's money I was already doing without."
- On top of that, he puts another 10% of his paycheck toward savings each month.
On his investing approach
- In his employer-sponsored retirement plan, Nick mostly divides his retirement funds among more aggressive asset categories.
- Nick practices diversification. And he keeps an eye on how his investment elections are doing. About a year ago, he transferred his emergency savings to a different fund because of low returns.
- Finally, he also contributes several thousand dollars a year to a Roth IRA. "The goal is to leave it alone until retirement," he says.
Fast Facts: April 18 is the due date for filing your federal tax return, and it's the deadline for making a 2010 contribution to an individual retirement account (IRA). One option: a Roth IRA, in which contributions are made after taxes and potential earnings are allowed to grow tax-free. Check the following table to see if you're eligible to contribute to a Roth IRA.
|Modified Adjusted Gross Income (MAGI)**||Eligible to contribute?||Contribution limit*|
|Less than $105,000||Yes||$5,000 annually|
|At least $105,000 but
less than $120,000
|Yes||Less than $5,000**|
|$120,000 and over||No||N/A|
|Married filing jointly|
|Less than $167,000||Yes||$5,000 annually|
|At least $167,000 but
less than $177,000
|Yes||Less than $5,000**|
|$177,000 and over||No||N/A|
*Individuals age 50 and older may be allowed to make additional "catch-up" contributions of up to $1,000.
**In this MAGI range, contribution limits are reduced on a sliding scale per IRS guidelines and dollar limits are for the 2010 calendar year.
Roth IRAs allow you to make tax-free withdrawals of both your principal and earnings, as long as the account has been open for five years and you meet either of the following criteria:
- You are 59-1/2 or older.
- You withdraw $10,000 or less from the Roth IRA to purchase your first home.
Withdrawals also generally are tax-free in the event of death or disability. The IRS offers more guidance about Roth IRA rules at irs.gov.
Choosing the right IRA depends on several variables, from your long-term financial goals to your age and investment strategy. Talk to a financial professional or a representative of The Principal whenever you have questions. Whether it's help choosing the right IRA or building a diversified portfolio, we can provide information to help you stay on track to reach your retirement goals.