How to Retire Early

Forbes

You can live the dream and retire before 50.

Imagine living a life in which your suit is one for swimming, your only appointment is walking the dog and the most important report of the day is on the Weather Channel.

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Actually, this life isn't that hard to picture because this is how many American's view their retirement.

Now imagine living this life before turning 50.

It may sound fantastical, but there are ways to retire young without winning the lottery or having valuable options to cash out. Savvy investing, smart spending and very strict saving can pave the road for the average American to find a way to live out the dream of early retirement.

When planning for early retirement, you must first understand just how much money you are going to need. If you retire at age 50, you could very well have another 35 years or more left to live. Americans in their 20s probably won't have Social Security or pension plans to lean on.

To understand how much money you'll need after you say good bye to your nine-to-five, take your pre-retirement income and multiple it by 35 (assuming you'll live to age 85). For example, if you are living off $100,000 now, you'll need about $3.5 million when you retire. Not a small sum.

Saving is essential for most people who want to retire early. Max out your 401(k) and consider an IRA. Put money into safe, long-term investments, and don't gamble on the stock market.

To retire in your younger years, you'll have to work for it in your much younger years. In order to retire young without an income of hundreds of thousands of dollars, you'll have to live below your means, not within your means -- and it's not going to be fun.

Don't buy a new car -- or even own a car -- or designer brands. Skip eating out, smoking cigarettes and traveling. Even consider lifestyle decisions like not having children or only marrying someone with your same financial goals.

If being painfully frugal isn't your ideal way of life during your youth, you could start your own business, which is one way to manage early retirement. Hire someone else to run the company while you kick back and relax -- still bringing in cash. Even if it's a small sum, if you're able to continue "earning" your spending money even after you're done working, your savings will stretch farther. However, there are never any guarantees in business. It may be difficult to predict how successful your idea will be and, if it is, how long that success will last.

Not everyone has entrepreneurial instincts. Instead, live out that childhood dream of becoming a firefighter. Many government jobs still offer pensions that usually continue to pay a percent of your wages after retirement and, in many cases, kick in after just 10 to 20 years of service.

Unfortunately, as you grow older, your body does too, which greatly increases your chances of incurring health expenses. If you're not working, it's up to you to pay for poor health. A couple looking to retire at age 65 might need to spend about $200,000 during their retirement on health care costs.

Your chances of pulling a Mark Zuckerberg, the 26-year-old who created the networking website Facebook and is now worth $6.9 billion, are slim. And many of us are not ready to join the police force for a pension plan.

So, if you want security after the checks stop coming, emulate oilman John D. Rockefeller and start being prudent. Albeit a billionaire, Rockefeller carried around a little red book and wrote down every single thing he spent his money on. You may have a lot to save before you can say good bye to the working world, but at least it's a start.

Here are some tips:

Invest the Maximum Amount into Company-Sponsored Retirement Plans

Invest the maximum amount possible into your 401(k), which is $16,500 for 2010 and 2011. Also, contribute the max of $5,000 to an IRA. Compound interest will take you a long way toward early retirement.

Put Your Money in Long-Term, Low-Risk Investments

Don't try to beat the market. If you want to retire before your peers, you can't sacrifice your savings by betting on risky investments. Put your money in long-term investments like indexes and mutual funds. You may be hesitant to put money into the market after the recent disasters on Wall Street, but so far, the market has always come back. As one of the world's richest men, Warren Buffett, once said, "Lethargy, bordering on sloth, should remain the cornerstone of an investment style." Unless you're already a portfolio manager, don't try to be one.

Avoid the Coasts

Cutting living expenses is an important savings tool. In most cases, city living is more expensive than suburban. However, the average income in a major metropolitan area is going to be more. Find a way to have an urban income with a suburban cost of living. The best way to do this is avoid cities like New York or San Francisco and settle for smaller urban areas like Dallas, Texas, or Indianapolis, Ind.

See the full list of tips.

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