This story was originally published on AOL on June 9, 2008.
MANY PEOPLE DREAM of retiring early, but few actually make it a reality.
Taking certain proactive measures, such as investing in a 401(k) in your 20s and eliminating debt, will help set you on the path to early retirement. But even if you achieve these goals, it's nearly impossible to know whether that nest egg will be enough to get by. (Click here to help you figure out how long your retirement savings will last.) You'll have to consider certain factors such as the lifestyle you'd like to maintain, the number of years before you start receiving Social Security checks (full benefits kick in between age 65 and age 67, depending on the year a person was born) and the unanticipated but costly health expenses that could pop up along the way.
In short, early retirement is possible, but it requires diligent saving and planning. Here are five key things you can do to improve your chances.
Start Early
It's a simple rule of thumb: The earlier a person starts saving for retirement, the better the odds are that they can retire early.
Thanks to compounding interest, investing in a 401(k) in your 20s — even if it's a small amount — will allow your savings to grow and multiply at a rate that would be hard to make up for later on in life. Say, at age 25 you contribute $5,000 a year to a 401(k) with a 7% annual return. By age 55, you'll end up with $543,000. If you start stashing $5,000 a year away at age 40, however, you'll only end up with $148,000 by age 55.
MORE ON PERSONAL FINANCE FROM SMARTMONEY.COM
As you change jobs, make sure to roll over any 401(k) investments to your new provider. Otherwise, if you're younger than 59 1/2, you'll get cashed out of your 401(k) — after your holdings get hit with the normal tax rate and a 10% penalty. If your employer doesn't offer a 401(k), consider stashing your retirement savings in a deductible individual retirement account (IRA), where you'll receive a tax deduction on your contributions and your earnings will grow tax-deferred, or a Roth IRA, where withdrawals from earnings during retirement are tax free.
For answers to some commonly-asked 401(k) questions, read our story or watch our video on getting a head start on retirement.
Get the Company Match
Don't walk away from free money. Even if more immediate expenses, such as a mortgage or health care, are stretching the family budget thin, try your best to contribute enough to your 401(k) to receive the full company match.
With a company match, the employer pledges to match the employee's contribution up to a certain percentage of his or her salary. The most common match is 50 cents for every dollar up to 6% of your pay, according to Hewitt Associates.
"There is no better financial decision that you can make than ensuring that you always accept [this] free money," says Michael Rubin, author of "Beyond Paycheck to Paycheck."
Click here for more tips on getting the most out of your retirement investments.
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