5 Obstacles to Early Retirement

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Getty ImagesEarly retirement typically requires that you start saving at a young age.
By Joe Udo

Early retirement is a dream for many employees toiling away at dissatisfactory jobs. But that doesn't mean these workers are planning their escape. The 2014 Retirement Confidence Survey by the Employee Benefit Research Institute found that half of all workers have less than $10,000 saved for retirement. That's not enough to retire at a normal age and makes early retirement an impossible dream. Here's why retirement in your 50s or earlier is out of reach for most people:

Spend too much money. The American consumer lifestyle dictates that we buy a lot of depreciating junk. Almost every consumer item loses its value over time. A $1,500 60-inch smart HDTV will be worth nothing in just a few years. A new car loses value moments after it's driven off the lot and about 20 percent after the first year. That's a lot of loss for the new car smell. We think of these things as assets, but they are just sitting around depreciating.

Most of us think it is fine to spend money because we work hard for it and there will always be another paycheck. This is a huge barrier to early retirement. If you want to retire early, you need to plan for the day that the paycheck stops coming in. Buying less stuff and getting rid of unnecessary services is a good start.

Didn't start saving early. I am forever grateful to my dad who convinced me to start saving for retirement as soon as I started working. After a few years, I maxed out my 401(k) and I've been adding to my retirement fund ever since. Time is your best friend if you start investing early. Compound interest will make a huge difference over 40 years. If you invested $5,000 per year from age 25 to 35 and then stopped, you'll have over $600,000 by the time you turn 65, assuming 7 percent annual gains. Putting off retirement investing until you're in your 30s will drastically decrease your chances of achieving an early retirement.

Didn't save enough. Saving early is great, but you also need to save more. Financial planners recommend saving 10 percent of your salary, but that's not nearly enough for early retirement. The earlier you retire, the less time you have to save and the more time you will need your nest egg to last. If you want to retire early, you need to save much more than 10 percent. This is where spending less money helps. Reducing your expenses will enable you to save more and compounding will work in your favor.

Didn't invest consistently. Individual investors are notoriously bad at timing the stock market. Many investors sold off their stock investments during the 2007 and 2008 financial crisis and missed much of the recovery. If you're a genius investor who can consistently beat the stock market index, then by all means do it. However, if you're a regular investor, it's better to figure out a target asset allocation that you're comfortable with and invest with low cost index funds. Keep investing through the downturns and you won't miss out on the recovery. The bear years are great buying opportunities for young investors.

Have a large family. Kids are another huge obstacle to early retirement. The USDA calculated it will cost almost $250,000 to raise a child from birth to age 18. This doesn't even include college, which will probably cost more than that in 18 years. It costs a lot to raise a family, so if you have three or four kids, then early retirement might be out of reach.

Early retirement is a possibility for some savers, but it won't be easy to get there. Keeping lifestyle inflation down is very difficult in our culture, but once you figure out to buy Apple (AAPL) stock instead of the latest iPhone, you'll be well on your way to early retirement. It's best to buy income generating assets and minimize depreciating consumer goods as much as possible. Living below your means and investing consistently for many years can bring you closer to your desired early retirement.

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.

5 Obstacles to Early Retirement
If you've been making mortgage payments for a while now, it may have become just another task you do automatically each month. But it's time to start thinking about your end game. When will your house officially be paid in full, and how will that date intersect with your other plans? Do you need to adjust anything to make your "mortgage freedom" date align with the rest of your life? For example: Do you want to have your house paid off by the time your kids leave for college? If so, start scrutinizing the timing, so you can figure out if you need to make extra payments.
The average student graduating in 2014 emerged with $29,000 in student loan debt. There's no predicting what that number will be once your children are ready to don a cap and gown. But you don't want your kids to be saddled with tens of thousands in debt as they begin their adult lives (or potentially live in your basement well into their 30s because of that debt).

While your children should absolutely apply for every scholarship they can, you can't count on them getting what they'll need. So. there's no time like the present to start seriously building up their college funds. If you're not quite sure about the best ways for you to do that (529 plans are great, but they're not the only good choise), a fee-only financial adviser can walk you through your options.
Are you putting aside enough for retirement? Aim to replace 70 percent to 85 percent of your current income, or save 25 times your current annual expenses. Once you have that final number in mind, use an online retirement calculator or sit down with a financial adviser to come up with a plan for how much you'll need to save each year to reach it. If you haven't already done this, don't delay another day. Future You will thank you.
Credit card debt is a shackle that can prevent you from reaching every other monetary goal on your list. One of the first things you need to do to get your financial house in order is to eliminate all consumer debt -- the sooner, the better. Otherwise, you're losing money each month that could be put to better use elsewhere.

Make debt payoff a top priority. Try an aggressive method like the "debt snowball," where you throw every extra dime you can at your smallest balance until you've decimated that bill. Then move to the next one on the list and continue amassing "victories" until you're done with every debt. Where can you find the money to accelerate your debt payoff? Reduce your  expenses or take a temporary second job, if necessary. The sooner you free yourself from debt, the better.
Your current vehicle won't last forever, no matter how diligent you are at taking care of it. When it comes time to buy a new car, will you have saved enough to make the purchase in cash? As you get older, you should be systematically reducing the number of financial obligations you're saddled with -- not adding on new ones. Car loans take from three to seven years to pay off. (The current average length is around 5½ years.) Even if your current car lasts you well into your 50s, financing a new one could mean that you'll be facing loan payments into your retirement years. Instead, plan ahead so you can pay cash.
If you're married, have children or support your parents financially, you should have term life insurance. Tragedies can happen at any time, and term insurance can help you create a Plan B for the benefit of those who rely on you. If you're healthy, you can get term life insurance coverage with a $500,000 benefit for roughly $29 a month. That's a small price to pay to know your family will be cared for if anything happens to you. The longer you wait to get that coverage, the higher your price will be.
Just like life insurance, disability insurance is a wise investment. (And, just like life insurance, the longer you wait to get it, the higher your monthly payments will be.) Should you fall ill or get injured and be unable to work for a period of time, disability insurance can pay out 50 percent to 70 percent of your income. Hopefully, you'll never need to use it -- but you never want to be in a spot where you do need it and you don't have it.
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