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Lifestyle, saving lead way to early retirement Low debt, investing are keys to early retirement


This month, at age 41, Stuart Miller achieved the career goal of many -- he retired.

Stock options from his employer of 15 years, MCI WorldCom, helped. But a modest lifestyle, regular investing and squirreling money away in his employer's 401(k) also built his nest egg to the point that he could wave goodbye to the corporate world at an age when many Americans just begin retirement planning.

Miller plans to go back to school to become an English or history teacher at a Montgomery County public high school. How much will he earn?

"I don't know because I don't care. I'll take whatever they give me," said the Silver Spring resident, who views teaching as a way to give back to his community.

Early retirement is a common dream; in fact, a survey this year by Charles Schwab & Co. found that almost three out of four investors 41 and younger plan to retire before 65. But unless millions of dollars suddenly fall in their laps, that dream won't happen without some financial planning, experts say.

That means years of saving and investing, and, perhaps even harder, making sure the money in retirement stretches 40, 50 or more years in up and down markets.

Often, those most likely to pull off an early retirement have simple, debt-free lifestyles, experts said. That's the case with Gene and Debby Szarowicz, who retired not long ago in their late 40s.

While working, the couple lived on Gene's income as a full-time aircraft maintenance officer with the Maryland Air National Guard and saved and invested Debby's paycheck in mutual funds and blue-chip stocks. "We stayed away from extremes. You can make a lot of money, but you can lose a lot of money," said Gene, 51.

They poured as much as they could into their 401(k) plans. They didn't try to keep up with the Joneses, didn't drive fancy cars and never carried balances on their credit cards.

"You should collect your own interest and not give it to the darn credit-card companies," said Debby, 50, a former information and technology manager with Blue Cross and Blue Shield of Maryland. And with no children, the couple didn't have to pay for college tuition.

When it came time to retire, they sold their Bel Air home and most of their possessions, bought a boat and sailed to the Bahamas. After a year on the water, they traded in the vessel for a house in Florida. Today, they continue living modestly, but comfortably, on half their pre-retirement income, Gene said.

Lifestyle is a major factor in whether you can retire early, but other influences include inflation, assets, life expectancy, tax rate and expected rate of return on investments, experts said.

There are numerous retirement calculators online, particularly at mutual fund Web sites, that can help you determine whether you're a candidate for early retirement. Experts suggest being conservative in your retirement assumptions.

For instance, the average annual return for the stock market is about 12 percent, but workers should use a more conservative figure in their calculations, such as 9 percent, said Seth Hammer, an assistant accounting professor at Towson University. If you're relying on recent market returns to continue, you're likely not ready to retire, he said.

Generally, when workers' stockpile enough to retire early, they will split their money into two pots with different investment strategies, experts said.

In the first is money that retirees will need to live on before they can tap into retirement accounts that carry early-withdrawal penalties. The second pot is made up of the retirement accounts or other investments that are expected to carry retirees through their 60s and beyond.

"The money you need early on you want to invest more conservatively," Hammer said. That includes bonds, such as tax-free municipal bonds, cash investments, short-term Treasuries, value stocks or stocks that pay a good dividend, experts said.

Money in retirement accounts or to be used later in life has more time to weather market turmoil and should be invested more aggressively in a diversified portfolio of growth stocks, stock mutual funds and -- for those more risk averse -- some bonds, experts said.

In some cases, you can tap into 401(k) plans and individual retirement accounts before age 59 1/2 without triggering a 10 percent penalty. For example, money can be withdrawn from a 401(k) if you're 55 and no longer working, said Bill Bartin, a certified financial planner at Tucker Anthony, a Boston brokerage.

Money from IRAs can be drawn early, too, as long as equal and regular withdrawals are made for a minimum of five years, Bartin said.

But he advises against ransacking retirement accounts early. Draw from nonretirement accounts first, he said, and "allow the tax-deferred account to continue to compound without taxes."

Miller recently met with his Baltimore broker, Beth Rosenwald of Legg Mason Wood Walker Inc., to discuss his retirement. Miller's wife, Sally, continues to work. To supplement their income, he will make regular withdrawals from mutual funds outside his retirement accounts, Rosenwald said.

Miller's 40l(k) money will be rolled over into an IRA that he won't touch before age 59 1/2, she said. That money will be invested in value and growth stocks and mutual funds with an expected average annual return of 12 percent to 14 percent, Rosenwald said. "I don't want to give over-enthusiastic returns and not meet those expectations," she said. "What happens if we have another '73 and '74 [bear] market?"

Those who thrive on risk while working often shrink from it as an early retiree, said Lyle Benson, president of L. K. Benson & Co., a Towson financial planning firm. "The fear of running out of money is heightened in that kind of situation. Someone realizes it's a long time period, and the money has to last a long time."

They struggle with being too conservative, knowing their money may not keep up with inflation, yet worry that by being too aggressive their portfolio may sustain hefty losses, he said.

Benson said one of the keys to managing cash flow for early retirees is a budget. "A lot of times people at that point don't think they have to focus on a budget," but that simple tool that helps keep track of spending may be more important ever, he said.

Do you have a personal finance issue of general interest that you would like to see addressed in this column? Contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.

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