The Pros and Cons of Early Retirement

April 21, 2010

Who wouldn’t want to retire early and sail around the world? So maybe you don’t want to sail, but you do have an idea of what life will be like post-retirement. You may want to get involved in volunteering in your community, or working with a not-for-profit company.

With life expectancy increasing, retirement means having more money to live on after your work life is over. There are many early retirement activities you can get involved in if you want more time to enjoy life instead of working. But, know the positives and negatives before you choose how to manage your money. Here is some advice to consider about the pros and cons of retiring early.

Pros

Usually, investing in retirement plans is good. Some people forget to enroll in their company’s 401(k) plan after their first year of employment is up. Now, employers have the option of automatic enrollment. Their employees’ pay is automatically deducted for a certain percentage that is used for the retirement plan. The employee then has the option to increase their contribution and also how to allocate the funds.

When you change jobs, you can take your retirement funds with you. If your new job has a waiting period before you can transfer your money, you can hold it in the old investment account or roll it over into an IRA so it can continue to hopefully grow in value. The only difference is that if you roll it over into a retirement plan at your new job, you will be continually adding more money to it so it will grow faster. Rollovers also avoid taxes until you withdraw the money for retirement.

Tax refund money is important to those wanting to retire early. What will you do with this money? The government will allow you to buy savings bonds with your refund. It is a low risk option for retirement but with a limited return. Since this is extra money, you should be able to afford to invest it for retirement.

Cons

Those who retire early may need to take more risks than usual in their investment portfolio. With your IRA, you can choose (just like your 401(k)) how you will allocate your money. While it is not a sound practice to go 100% conservative, it is also not sound to assume 100% high risk. You should discuss with your financial advisor what the appropriate investment mix should be.

To increase your assets, you may assume more risk than you should to get a bigger return. Given the recent economic crisis, this approach can always backfire, leaving you with even less money towards retirement.

Are you trying to retire early? Consider all of the pros and cons to your investment schemes to see if you are making the right decision to grow your money as much as possible for the long term.

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