The first thing that you should do if you are interested in early retirement is to make sure that you contribute as much as possible to your 401(k) plan if you have one. Contributing the maximum amount each month is a superb investment for and should be a part of any early retirement planning. This is especially if your employer will match these contributions. If your employer matches every dollar that you contribute with 25 or 50 cents, you will instantly have made a 25 or 50 percent gain on your investment! You will find it very difficult to find any other type of investments that can offer you the same gain – and still be legal. The fact that your contributions and the capital gain for your 401(k) plan are tax-deferred makes it an even better investment. You will not be taxed until you retire and begin to withdraw the money, and if you find yourself in a lower tax bracket after retiring than while working – which most of us do – you will avoid a substantial amount of tax by contributing the maximal amount of money to your 401(k) plan every month.
If you are already contributing the maximum amount of money to your 401(k) plan each month, a Roth IRA can be a good addition to your early retirement plan. It is however not possible for anyone to include Roth IRA in their early retirement plan, since you will be disqualified if your modified adjusted gross income exceeds are a certain size. Your money will always be taxed before you contribute them to your Roth IRA, but the Roth IRA is still a recommended part of an early retirement plan since the money will not be taxed when you withdraw them.
When you have reached the limit for Roth IRA contributions, or if you are disqualified from a Roth IRA due to a high income, it can be a good idea to increase your contributions to your 401 (k) plan even the amounts will be unmatched. Even an unmatched 401(k) plan is considered a suitable part of an early retirement plan since you will receive beneficial tax treatment.
The next step in your early retirement planning can be taxable investments, such as equities. There is currently a 15% maximum federal tax rate on long-term capital gains and since early retirement planning is usually a long-term project you will be able to benefit from this if you choose the right type of investments. Your early retirement planning will, therefore, benefit if you hold your stocks for at least 12 months. It will also be best for your early retirement planning to purchase mutual funds that have a low annual turnover. A higher turnover rate will increase the amount of money that is subjected to taxation at higher rates. When you choose between different types of taxable investments for your early retirement planning you should always keep an eye on the expenses and administration fees. It is not uncommon for brokerage firms to charge unreasonably high fees that will harm your early retirement planning.