3 Hazards to Avoid when Planning an Early Retirement

According to a recent study from HSBC, 72 percent of American workers over the age of 45 would like to retire by the time they are 50.1 Unfortunately, many of those workers may find that dream to be elusive.

It’s obvious why so many people want to retire early. If they can do it successfully, they get to stop working and do what they wish with their time. They may be able to add years, or even a decade or more, onto their retirement.

However, retiring early takes discipline, focus and a well-designed retirement plan. To be successful, you’ll need to set a savings goal and stick to it. You will also need to avoid major complications and setbacks. Even one serious financial challenge could be enough to jeopardize your dream of retiring young.

Below are three common hazards that could threaten your early retirement dreams. Avoid these and you’ll be in a much better position to retire early.

1. Taking unnecessary risks.

The path to early retirement is simple and straightforward. It just requires a significant amount of discipline. Set a budget to determine your likely expenses in retirement. Then, work with your financial professional to develop a savings goal and an investment allocation that will allow you to accumulate enough money to support your budget. If you stick to your savings goals, you should be in good shape to retire relatively young.

Some people, however, want to take a shortcut on the path to early retirement. They may invest in business ventures in an effort to make a quick buck. Or, they may speculate on real estate investments or other exotic assets.

If an investment looks too good to be true or if it offers the potential to get rich overnight, there is likely a catch. You could be exposing yourself to serious financial risk and you may be threatening your ability to retire early, if at all.

There’s nothing wrong with starting a business or dabbling in real estate. However, you may not want to use those types of ventures as the foundation of your retirement plan. That approach could be a high-risk gamble that may not payoff in your favor. Instead, focus on meeting your savings goals to reach your retirement savings target.

2. Being too conservative.

While some people may take too many risks, others may err on the side of caution. It’s natural to be risk-averse and want to avoid losses. It’s also true that too many losses or significant losses may threaten your ability to retire at your desired age.

However, to retire early, you will likely need to grow your savings. Often, investments offering no risk also offer little opportunity for return. If you stay too conservative, you may not be able to grow your savings fast enough to meet your retirement goal.

One way to make sure you’re balancing risk and return is to work with your financial professional to create a diversified portfolio consistent with your risk tolerance. Spread your investments across a number of asset classes to limit your exposure to risk and volatility.

Also, consider investments like a fixed indexed annuity*, also known as a FIA. In a FIA, you’re paid annual interest. The interest rate is based on the performance of an underlying index, such as the S&P 500. If the index performs well, you may receive a higher interest rate. If the index performs poorly, you’re usually protected from loss.

3. Not keeping a cushion.

Do you max out your contributions to your 401(k), IRA and other retirement income vehicles? That’s usually a good thing. However, your savings rate could be a problem if you don’t have enough cash on-hand to deal with emergencies and other unexpected costs.

IRAs, 401(k) plans and other qualified accounts are meant specifically for retirement. That means you have limited access to the funds in those accounts before age 59 ½. If you take a withdrawal from a qualified account before age 59 ½, you may have to pay income taxes on the withdrawal along with a 10 percent penalty.2

If you have an emergency or a significant expense before you retire, it could be costly to access your retirement accounts. That’s why it’s important to keep a sufficient level of savings on-hand. Without accessible savings, you may be forced to either take on debt or dip into your retirement funds. Neither is a good choice if you want to retire early.
For more information on retiring early, talk to a financial professional. They can help you establish a savings target, develop a plan and diversify your assets. Contact your financial professional today.

1http://www.cnbc.com/2016/01/26/want-to-retire-early-you-may-not-be-able-to.html
2https://www.irs.gov/taxtopics/tc557.html

*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

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