how to retire early using an IRA

[Guest set4life]

im currently 26 years old and make 52k per year. i just spent the last year chipping away at all my debts. i am totally debt free(besides utilities, ins. and rent). unfortunately my family history does not include a long lifespan.

i want to setup a plan that would let me retire at 50-55 yrs of age(obviously i wont be wealthy, but im not interested in working my ENTIRE life). would there be any benefit to using an IRA? would the tax advantages outweigh the 10% penalty?

ive just started researching my future and i see there are many different strategys to retirement, unfortunately you have to live past 60 to reap any of these benefits.

am i forced to stick with money markets and mutual funds?

like i said i just started researching so i am open to any and all suggestions.

[Guest ERISA_kid]

The Internal Revenue Code has an exemption from the 10% penalty for pre-59 1/2 distributions from IRAs if you take distributions over your life expectancy. See IRC Section 72(t)(2)(A)(iv). I recommend visiting www.72t.net, which has some great information on this particular exemption. However, in your situation, keep in mind that the maximum IRA contribution limit is still relatively low (greater of $3,000 or 100% of earned income) so even if you maximize IRA contributions, it may not be enough to fully support a retirement lifestyle so early. I suggest that you speak with a financial planner about the possiblity of supplementing your retirement savings with annuities, which may have similar exemptions for distributions based on life expectancy. Keep in mind that there are very strict requirements that must be followed in order to qualify for this exemption. See Revenue Ruling 2002-62.

[Guest ERISA_kid]

Correction to the above IRA contribution limit: the annual contribution limit is the lesser of $3,000 or 100% of earned income in 2004.

[JanetM]

Max out your employers 401(k) plan if you can, you can defer $13,000 in 2004. If you are self employed you can do 401(k) profit sharing plan to set funds aside.

After you max out tax deferred savings, invest all you can in taxable investments. Find a financial advisor you feel comfortable with and trust to help you.

[John G]

Some points:

- Your conclusion that "you have to live past 60 to reap benefits" is completely incorrect. There are lots of ways to systematically invest for the future - both via tax shelters and just buying and holding long term. There are lots of folks that have been able to amass over a million dollars by the time they are 55. Lets just use the Roth option - if you start right now and invest the max each year for 29 years and average an 11% return by focusing on a stock portfolio with a slight bias towards growth companies you will have over $750,000 when you are age 55. If you also have a company program or other investments, a $1 million level is possible.

- You can always removed contributions to a Roth IRA without penalty. You can establish an regular IRA withdrawal plan for pre-59 1/2 but frankly you might be able to live off other assets to bridge a few years.

- Roth limits are going to rise in the coming years, but the prior comment that you are not likely to be able to achieve your goal if the contribution is $3000 or $5000 is probably correct because your are talking about 20 years of compounding.

- Yes, do look into employer based plans as you can set aside more per year AND the employer will often match your contributions.

- If you are self employed or own a business there are many options for setting aside more money each year. A lot more.

- Roth investments can include individual stocks, bonds, mutual funds, CDs and money market accounts. With a 25+ year horizon, you probably will need to consider equities (aka stocks) since the expected return is higher than IOUs like CDs and bonds. You might want to ask your custodian what materials they have about "how to invest". You library has lots of books on the subject. I highly suggest that someone at your age subscribe to Kiplinger Finance magazine as it targets its articles towards 20-30 somethings and often has interesting stories about people who retire early.

- Retiring early can be accomplished by amassing significant assets. But another approach is to keep your "needs" simple so that your expenses are modest. I was advising a exec a decade ago who said "I NEED an income stream of $500,000 to retire". This guy ended up working an extra 8 years when he could have been enjoying a wonderful life earlier, all because he had let a lifestyle of spending money control his decisions.

- Yes, you may want to consult with a financial planner to explore your options and develop a plan. You can accomplish some of this by reading - think about setting aside 1 hour a week to read about financial planning. That is about 50x more than the average person your age does in a year.

- Lifespan: Have you talked to your doctor about this? Medical advances in the next twenty years may change your prospects. When you were born, bypass surgery was just becoming a standard proceedure, MRI and CAT scans were a research concept, no one had even started mapping DNA and I you were not supposed to shoot a laser at someones eyes.

I am intrigued by your circumstances and thinking. Please post again with additional questions or fee free to email me.

[Guest set4life]

well anything that can run in my family does. cancer, hypertension, diabetes, high cholesterol, etc. currently at 26 i am severely hypoglecemic, high blood pressure, and high cholesterol. my diet and excersise plan is as good as it can be.(i researched trying to extend my life before my plan to die rich early) of course im keeping my fingers crossed.

as of now i think im going to try this...

for my "rainy day" savings i will use a ING money market account(maximum $5000)

i will set up an IRA and max it into a growth and income. i will keep it there just in case i do endure.

now for the mutual funds. i see these "fund of fund accounts" that do all the diversifying for you, Vanguard Target Retirement 2035 Fund is an example. they look great on paper but how are the real world results???

as of now i want to stay away from watching the stock market 24-7.

[dh003i]

I would suggest at least funding your 401k up to the point such to max-out your employer's contributions. Then, I would suggest considering maxing out contributions in a Roth IRA or Traditional IRA, depending on your situation (with preference towards a Roth). After those are maxed out, contribute whatever you can in addition to your 401k. Also, don't assume an 11% rate of return, and assume you're going to live to be 120 or older. Simply because various investments ahve returned 11% average over the past so-many years doesn't mean they'll do so indefinately (indeed, there is much reason to be pessimistic, given inflation, regulation, intervention, and taxation). Also consider simply not retiring, but changing jobs to something that you can do relatively leisurely, but that will provide needed income. Retirement is not a "natural institution", but it was created in the 1900s. Indeed, it's a loss to society that many individuals retire during the years when they're the most knowledgeable and the most productive.

[John G]

DH003, the 60 days have lapsed and I welcome you back to the message board.

As I have asked before, please drop the tag line "billboard" for your ideology. This is a message board of information to users who post questions. Rants and political posters are best suited for other web areas like Yahoo.

[Guest set4life]

please comment on my last post. also my job does not have a 401k program.

[John G]

On the medical front - I hope you are listening carefully to your doctor. There are both Rx and lifestyle changes that will help you.

for my "rainy day" savings i will use a ING money market account(maximum $5000)

Don't know ING, but most money markets are a safe place to park cash. The key problem is that you might just get 1%. You should probably have a larger "rainy day" amount, while 5K is a good start a 6 month reserve of about 25K might be your target 4 years from now. Those assets can be in cash, money market, Roth (since you can withdraw funds), or for some folks a bank line of credit or margin on equities. These funds are what you might have to tap if you lose your job, have a medical expense or need to replace a car. Reserves are needed so you don't have to liquidate something to solve a short term problem.

i will set up an IRA and max it into a growth and income. i will keep it there just in case i do endure.

Good. It looks like your will qualify for $3,000. Growth and income is just fine, generally this is a mix of income producing stocks/bonds plus some growth company stocks.

now for the mutual funds. i see these "fund of fund accounts" that do all the diversifying for you, Vanguard Target Retirement 2035 Fund is an example. they look great on paper but how are the real world results???

Fund of funds are a relatively new invention and one that I think is more marketing hype than real use for investors. First, any general mutual fund will give you reasonable diversification. Second, some of the F of F have two layers of expenses and that erodes performance and this double hit is often well hidden. Why take a F of F when you can get what you need with just one fund? For example, either the Vanguard 500 or total market index funds will do just fine. Skip the sector stuff, skip the international. You don't need them right now.

as of now i want to stay away from watching the stock market 24-7.

Understood. Folks that watch the markets too closely often trade or change allocations based upon the headlines and 24 hour TV news cycle and can hurt their performance. It is my experience that following the "herd" is often not as good as being a contrarian (going against the conventional wisdom).

Time is you friend as an investor, think long term as in decades. One of the benefits of owning a broad no load mutual fund is that you come close to leaving it on auto pilot. You can look at the statements once a quarter or even once a year. (except you should always check that contributions get posted and that purchase/sell actions are reflected in the statement.) The average Joe does not need to be thinking about investments 24/7.

Does your employer have a "thrift" plan, profit sharing or ESOP? These are other investment options besides the 401k. Any employer match program is usually a good way to boost your investment results.