5 Obstacles to Early Retirement

Man using cell phone and laptop in bedroom
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.

%VIRTUAL-WSSCourseInline-792%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.

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