5 Early Retirement Strategies

AnnaMaria Andriotis

Many people dream of retiring early, but few actually make it a reality.

Taking certain proactive measures, such as investing in a 401(k) in your 20s and eliminating debt, will help set you on the path to early retirement. But even if you achieve these goals, it's nearly impossible to know whether that nest egg will be enough to get by. You'll have to consider certain factors such as the lifestyle you'd like to maintain, the number of years before you start receiving Social Security checks (full benefits kick in between age 65 and age 67, depending on the year a person was born) and the unanticipated but costly health expenses that could pop up along the way.

In short, early retirement is possible, but it requires diligent saving and planning. Here are five key things you can do to improve your chances.

Start Early

It's a simple rule of thumb: The earlier a person starts saving for retirement, the better the odds are that they can retire early.

Thanks to compounding interest, investing in a 401(k) in your 20s — even if it's a small amount — will allow your savings to grow and multiply at a rate that would be hard to make up for later on in life. Say, at age 25 you contribute $5,000 a year to a 401(k) with a 7% annual return. By age 55, you'll end up with $543,000. If you start stashing $5,000 a year away at age 40, however, you'll only end up with $148,000 by age 55.

As you change jobs, make sure to roll over any 401(k) investments to your new provider. Otherwise, if you're younger than 59 1/2, you'll get cashed out of your 401(k) — after your holdings get hit with the normal tax rate and a 10% penalty. If your employer doesn't offer a 401(k), consider stashing your retirement savings in a deductible individual retirement account (IRA), where you'll receive a tax deduction on your contributions and your earnings will grow tax-deferred, or a Roth IRA, where withdrawals from earnings during retirement are tax free.

For answers to some commonly-asked 401(k) questions, read our story or watch our video on getting a head start on retirement.

Get the Company Match

Don't walk away from free money. Even if more immediate expenses, such as a mortgage or health care, are stretching the family budget thin, try your best to contribute enough to your 401(k) to receive the full company match.

With a company match, the employer pledges to match the employee's contribution up to a certain percentage of his or her salary. The most common match is 50 cents for every dollar up to 6% of your pay, according to Hewitt Associates.

"There is no better financial decision that you can make than ensuring that you always accept [this] free money," says Michael Rubin, author of "Beyond Paycheck to Paycheck."

Diversify Your Investments

Having a healthy mix of investments in your retirement accounts can help you withstand market volatility and keep your retirement savings intact.

Ideally, younger investors should put more money into risky investments, such as equities, while those nearing retirement age should invest more conservatively (think bonds). "A couple in their 30s should have anywhere from 60% to 80% [exposure to] equity," says Patrick Kennedy, vice president of wealth management at TIAA-CREF.

If you don't know which holdings to pick, consider investing in target-date mutual funds, which are geared toward specific age groups and gradually become more conservative as the investor nears retirement age.

Remember that retirement planning doesn't stop at 401(k)s. You may also want to consider investing in a tax-deferred retirement plan. With a deductible individual retirement account (IRA), you'll receive an upfront tax deduction on your contributions. Plus, any earnings, dividends and trading profits will accumulate on a tax-deferred basis until you withdraw the money. Another consideration: a Roth IRA, where withdrawals from earnings are tax free (as long as you're over 59 1/2 and have had the account for at least five years).

Eliminate Credit-Card Debt

Even if you have a solid 401(k), you can kiss early retirement goodbye if you have credit-card debt.

"Credit-card balances alone can sabotage a completely sound retirement," says Rubin. "If you can't pay your credit-card bills while you're working, how could you possibly pay them off when you're no longer receiving a paycheck?"

To eliminate such debt, tackle the credit cards with the highest interest rates first. Check your mail for credit-card offers with low interest rates and transfer your balances (just keep an eye out for pricey balance transfer fees). Also, call your credit-card company and request a lower rate. If they refuse, then let them know if you've received offers with more favorable terms, says Scott Bilker, founder of DebtSmart.com.

Pay Off the Mortgage

Just as credit-card debt can derail an early retirement, so can a pricey mortgage. That's why it's important to pay off the house before you start dreaming of days without the 9-to-5 grind.

"Once you have paid off your mortgage, you've eliminated what for most people is their biggest single bill," says Rubin. "That's a huge benefit as you try to calculate [how much money] you'll need on a monthly basis to be able to retire."

You can also decide whether you'll spend your golden years in your home; or you can sell your home, and use the profits as an added boost to your nest egg.