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Adjust investment strategy to retire

Thursday, November 20, 2008

Do you want to retire early? Many people do -- but they're not always financially prepared.

If you're thinking of taking early retirement, start preparing for it -- as early as you can.

To afford early retirement, you've got to address at least two key financial concerns.

First, by definition, you'll have more years of retirement to pay for then people who retire later.

And second, by retiring early, you're sacrificing the opportunity to contribute to your 401(k) or other employer-sponsored retirement plan; also, you need earned income to contribute to an IRA.

How can you overcome these potential barriers to a successful early retirement?

For starters, you'll need to put as much as you can possibly afford into your 401(k) and IRA each year -- and a greater percentage of the investments in these accounts, may need to be in growth-oriented vehicles, such as stocks.

Of course, it's not a good idea to fill your retirement accounts entirely with stocks, given their higher risk and volatility. You'll also want to add some bonds, certificates of deposit (CDs) and other fixed-income investments to help diversify your holdings. (Keep in mind, though, that diversification cannot guarantee a profit or protect against loss).

Furthermore, if you're going to retire early, you may well need these fixed-income vehicles to provide you with a more predictable income stream. Remember, however, that since your retirement could last 30 years or more, you'll still need growth-oriented investments to keep you ahead of inflation, which, over time, can seriously erode your purchasing power. So, a few years before you retire, you may want to review your portfolio to make sure you have the proper balance between "growth" and "income" investments.

To afford early retirement, you may also decide to take Social Security earlier than at your full retirement age. Your monthly payments will be lower than if you had waited, so, before you retire, make sure these smaller checks can still provide for some of your needs.

And speaking of checks, there's no reason that early retirement means you'll never earn another paycheck.

If you decide to open a small business, take a part-time job or do some consulting, you can once again contribute to an IRA or even open your own retirement plan, such as a SEP-IRA or SIMPLE IRA. Obviously, the additional income and the ability to contribute to a retirement plan can make early retirement more affordable.

One final note: If you're contemplating early retirement, you may want to consult with a professional financial advisor well before you make your move to make sure you've saved enough.

A financial advisor can also help you decide upon a reasonable annual rate of withdrawal from your investments.

You don't want to take out so much that you risk running short in later years, nor do you want to withdraw so little that you struggle to make ends meet.

Early retirement can be both a challenge and a joy. To reduce the challenge and increase the possibility of joy, though, you'll need to start planning soon -- as in right now.