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5 Rules of Early Retirement

Geoff Williams

Being able to retire early is a goal that most people arguably share. Even if you love your job and want to work as long as you're physically and mentally able, you probably would appreciate knowing that if you needed to retire earlier than expected, you could -- without any serious financial hardship.

A successful early retirement can happen for anyone, experts say, but only if you follow certain rules. Sure, there are always exceptions, like winning the lottery or discovering a rich uncle has left behind a fortune. But for those of us who aren't expecting a windfall of retirement cash, we'll have to familiarize ourselves with these five rules.

[See: 11 Money Tips for Older Adults.]

Invest and save your money early. It makes perfect sense -- if you want to retire early, and have a lot of money to fall back on, then you have to invest and save your money early. Of course, that doesn't help you if you're in your 50s now and thinking about an early retirement, but if you're a millennial and hope to retire early, you'd better start making plans now.

"The best time to plant a tree is 20 years ago, but the second-best time to do it is now," says Marty Phelan, president of Phelan Financial Solutions in Buffalo Grove, Illinois. "The sooner a person starts saving, the sooner they can put the magic of compound interest to work for them."

Ryan Brown, a partner at CR Myers & Associates, a wealth management firm in Southfield, Michigan, agrees.

"Saving early and as much as comfortably possible is the key to successfully retiring early. Einstein once said that compounding interest is the eighth wonder of the world," Brown says.

Have an early retirement strategy. Saving early for a young retirement isn't enough. How you save and invest your money is also vital.

"Three necessary places to put your money if you want to retire early include a Roth IRA, your employer-matched 401(k) and an investment plan with good dividend-paying stocks," says Hunter Unschuld, a fiduciary advisor who owns Fractal Profile Wealth Management in Albuquerque, New Mexico.

He adds: "You can diversify further with a cash-intensive indexed universal life insurance policy. I believe in having assets in several different classes to cover all eventualities."

Now, you don't have to follow the plan Unschuld has laid out. But the more thought you give your retirement plan, the better.

[See: 10 Ways to Get Help Saving for Retirement.]

Invest so that you're light on fees and taxes. Depending on the type of investments you make, this may be easier said than done.

But if you can help it, Brown says, "Don't pay the high fees when you don't need to. The greatest minds in finance like Warren Buffett, John Bogle and Eugene Fama all preach indexing [investments]. Why try to beat the market for 25, 30 or 40 years when you can basically be the market for that entire 25, 30 or 40 years? Companies like Vanguard allow an investor to do that just for about a nickel on the dollar."

Phelan agrees that fees can really damage one's retirement fund.

"Where compounding can work against an investor is regarding mutual fund and other advisory fees. ... Every additional 1 percent in fees can add up to 10 years that someone has to work before retiring," Phelan says.

As for taxes, you want to pay attention to that, as well.

"The [No. 1] expense during retirement is not medical care -- it's taxes," Phelan asserts. "Without having a plan in place to provide for tax-free income during retirement, people will have to either work longer before they retire or accept a lower standard of living."

Unschuld agrees: "If you want to retire early, you're going to need a lot more money and you don't want to see your money going to taxes."

Which is why Unschuld recommends being "tax efficient in your investing. Look at using exchange-traded funds, which are more tax efficient than mutual funds. If you're investing directly in securities, always use a buy-and-hold strategy. Don't be a trader and generate a lot of additional taxable revenue."

[See: 10 Financial Perks of Getting Older.]

Budget for your health care costs. Taxes may, on average, devastate your retirement income more than health care, but medical costs can nonetheless drain your finances -- especially if you're retiring early.

If you're quitting your job and retiring, you're going to need to buy your own health insurance until you hit age 65 and are eligible for Medicare, Unschuld says.

"Which won't be cheap," he adds.

That doesn't mean it isn't feasible to retire prematurely, but when you're budgeting, you don't want to forget about your health care as one of your main expenses, Unschuld warns.

Get your debts paid off. Last year, Bankers Life Center for a Secure Retirement conducted a nationwide survey of 1,001 middle-income Americans ages 52 to 75. The survey found that 81 percent of respondents were carrying some debt.

And perhaps not coincidentally, 69 percent of respondents said they didn't believe or know if they had enough money to live comfortably to age 85.

Not only should you pay off your debts before you retire, try and stay away from high-interest debts in the first place, Phelan warns.

"Studies have shown that the average American pays [up to] 34.5 percent of every after-tax dollar on interest charges. That's not a good retirement strategy," he says.

But what is a good strategy is finding a place where all of those high-interest debts can play shuffleboard, take fiber supplements and spend their golden years. In other words, you should only feel comfortable retiring early if you've retired your debt first.

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