Your Money_ The Missing Manual - J. D. Roth [148]
You can withdraw your contributions (but not earnings) from a Roth IRA anytime without paying penalties. Traditional IRAs don't give you this option.
If you don't know which option to choose, you're likely best off using a Roth IRA. For more info, check out the Roth IRA vs. traditional IRA calculator at CCH Incorporated (http://tinyurl.com/ira-calc) or talk to a financial adviser (How to open a Roth IRA account).
Extreme Retirement Saving
If you've already put enough into your 401(k) to get the full employer match and you've maxed out your Roth IRA, congratulations—you're in great shape! What you do after this depends on your priorities.
If you think you need to save more for retirement, then pump up your 401(k) as far as you can. In 2010, you can contribute up to $16,500, including your employer match. If you're 50 or older, you can contribute up to $22,000.
You might also consider accelerating your mortgage payments (see Should you prepay your mortgage?); many retirees find that owning their home free and clear gives them tremendous peace of mind. A final option is to use targeted savings accounts (Targeted Savings Accounts) to pursue other goals. These are all great options, and Super Savers can't go wrong by pursuing any—or all—of them. They'll each put you that much closer to retirement.
Early Retirement and Other Dreams
For most of us, a job is a necessary evil. Many folks dream of retiring early—finding a way to leave the workplace in their 40s or 50s instead of sticking it out until age 65 (or older). In fact, the 2009 EBRI Retirement Confidence Survey (A Better Way) found that 18% of retirees left the workforce before age 55 (and another 17% retired before they turned 60).
Early retirement is a fantastic goal, but it's tough to do because of four main obstacles. When you retire early:
You have less time to earn money. If you start working at 20 and retire at 65, you have 45 income-producing years. But if you retire at 45 instead, you only have 25 income-producing years to achieve the same results.
Your investments have less time to compound. As you learned on The Power of Compounding, the longer you go without touching your savings, the more you benefit from the power of compounding.
You'll be drawing on your savings for longer. The average American will live to be nearly 80. So if you retire at 65, your savings will probably need to last only 10–20 years; but if you retire at 45, your savings may have to support you for 30–40 years.
You won't have some of the traditional perks of retirement (at least not right away). If you retire young, you won't be able to draw on Social Security or Medicare for many years. You'll also face penalties if you want to tap your retirement accounts before you reach the minimum age requirements.
In short, if you retire early, you'll have less money saved and it'll have to last longer than if you waited. Even if you stay healthy and the economy cooperates, that's asking a lot.
That's not to say you shouldn't plan to retire early. It's a laudable goal (and one I've set for myself). If you're serious about doing it, you need to be extra diligent about living frugally now so you can save as much as possible for the future.
After Philip Greenspun retired in 2001 at the age of 37, he wrote an article about some of the joys, challenges, and practical aspects of his decision: http://tinyurl.com/PG-retired. And at MSN Money, Liz Pulliam Weston profiled people who retired early. In one article (http://tinyurl.com/rb50-one), Weston looks at what it takes to retire by age 50. In another (http://tinyurl.com/rb50-two), she shares how three couples made this dream a reality.
To learn more about early retirement, check out the Early Retirement Forum (www.early-retirement.org) or track down a copy of How to Retire Early and Live Well by Gillette Edmunds. Edmunds' book pays special attention to the financial challenges faced by early retirees—including the psychological