Expert: Paul Henneman - 4/18/2004

Question
Hello.  I had a thought today, and wanted to ask a professional about it.  First of all I am 23 years old.  With IRAs and 401ks you have to wait until you are about 60 years old before you can take withdrawls.  Its always great to be able to retire early, say at age 50.

I was thinking, does that mean I only really need 10 years worth of non-qualified funds?  Or should I just invest as much as I can to continue the tax deferred growth as long as I can for the IRA?

Answer
Justin,
  Thank you for your question! I'm with you, earlier retirement than 60 is something worth considering.
  However, I would take full advantage of any 401k plan you are offered. There are several reasons: Taxes. 401k contributions are not taxed, this is a huge benefit. Most people pay over 25% income tax, so even if your 401k plan does not earn much in returns, this is a huge advantage. Secondly, many companies match your contributions up to a certain level. If you have this, all the more reason. It is essentially 'free money' that is tax free to boot! 401k should never be passed up.
  However, if you want to retire early, it is true that you cannot withdraw from a 401k before age 60 without serious tax penalties. So don't do that. Instead consider building a seperate investment portfolio designed to be at its height when you turn 50. Keep these investments out of sources that would penalize you. So for example, direct investment in mutual funds, stocks, or real estate in addition to your 401k is the best way to look to early retirement.
  Consider that you will always need the funds, if you have to wait until 60 to reap the rewards of a 401k or IRA, so be it. But other investments can get you to that point, and leave you with the advantages. Typically I like to suggest contributing the maximum amount to your 401k that your company will match. If your company does not match funds, then 10% contribution will do. Set aside as much as you can easily afford in addition to other investments for the 'pre 60years old' portion of your investment portfolio. But never make your investment schedule too rigid, it should be something you can maintain. Lots of folks start out with great intentions, but try to contribute too much that they will never be able to live life in the meantime, and very quickly stop the investments.
  The Pre 60 portion of your portfolio will likely be in mutual funds and stocks, so it will be a bit risky. Some years will be good, others bad, but stick to it. Regardless you have the 401k building, so with these separate investments you will be well covered.
  I hope this helps get you thinking. Please do not hesitate to follow up with me if I can be of any additional assistance,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com