Why Retirement Accounts Won't Help You Retire Early

US News

I love my Roth IRA and 401(k) accounts. If your employer matches some of your 401(k) contributions, it's one of the best investments you can make. Where else can you get an instant 50 percent return on an investment? The Roth IRA is also a great investment because you won't have to pay any tax on the gain once you qualify for withdrawals. However, if you want to retire early, these retirement accounts just aren't enough.

Tax-sheltered retirement accounts are meant to fund your retirement after you reach age 59 1/2. There are early withdrawal penalties to discourage investors from taking their money out prematurely. The earlier you withdraw, the higher chance you have of depleting your account before you're done with retirement. Early retirees need to utilize retirement accounts, but they also need to figure out a way to bridge the gap between early retirement and when they turn 59 1/2. Here are some strategies to bridge that gap:

Dividend stocks. When a company makes a profit, it can re-invest the surplus in the business or return some of it to the shareholders. Many blue chip companies raise their dividend payout consistently, and it's a great way to generate passive income. Qualified dividends are also taxed at a lower rate than many other forms of income, so it's nice to have these in your taxable investment account.

Rental properties. Many people like owning a tangible asset like a rental home because you can see it and have more control over it. Being a landlord isn't for everyone, but if you can handle the headaches that can come with managing a rental property, then it's a great way to generate some income. Also, the rental income is somewhat inflation adjusted because you can raise the rent over time.

Pensions. Some jobs allow you to collect a pension benefit when you retire early. For example, you can start collecting a regular retirement check at as early as 37 years old if you retire from the armed forces. Of course, these jobs aren't easy and many of them carry significant health risks.

Work part time. Why take an early retirement if you can work part time? Many of us are stressed out and unsatisfied with our jobs. If you have been diligent in adding to your retirement savings account, then leaving a secure career to work part time might be the ticket to a more relaxed lifestyle. The good thing about working part time is that it will give you more time to pursue your passions, which could start making money for you. Leave the retirement accounts alone and let them grow so you'll have a more secure retirement after you're 60 years old.

These are just a few ways to cover your expenses while you are younger than 59 1/2. Once you're 59 1/2, you can start withdrawing from your retirement accounts without having to pay the 10 percent penalty.

There is no denying that it's difficult to save in retirement accounts and then invest in other accounts, too. However, if you work hard and sacrifice up front, early retirement can be a real option for you. When you take an early retirement from your career, you will still be young and can probably find an enjoyable part-time gig. If you live within your means, a little active income plus the passive income from your taxable investments should be enough to cover your cost of living until you can start using your retirement accounts.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.



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