3 Must Know Tips to Invest for Early Retirement

How to invest for early retirement involves more than just picking the right investments. The right plan incorporates lifestyle changes to make saving easier, long-term retirement savings to see you into your senior years and short-term cash savings for use during the beginning of your early retirement. The following 3 tips will help you create your early retirement plan.

Lifestyle changes can help maximize your budget's potential. Changes such as eating out less and reducing entertainment expenses can help a lot. In Newark, Delaware going to a movie at Regal Cinema costs $10.50 for evening shows. Factor in another $5.00 to $10.00 if you want something to munch on and drink and a night at the movies can cost $20.50 per adult. If you are the type who likes to see the latest releases, you are likely to spend about $546.00 a year. This is just the price for a single ticket. If one were to purchase snacks and a beverage, this figure increases.

Limiting yourself to one or two movies a month will cut this expense by at least half. Do not count on this extra money to be used to purchase anything. Take this money and contribute it to your savings account or investments. Almost all entertainment related expenses can be cut in half, with the savings applied to your early retirement.

Making the maximum contribution to your 401(k) will bring you closer to achieving your early retirement goals. Not only do you have your contributions but your employer matching contributions, which typically are up to six percent of your income according to Bankrate.com. Making the maximum contribution also places you in a lower tax bracket. This means you will owe fewer taxes at the end of year. Take advantage of the tax savings and use them to invest in stocks, CDs or an IRS account.

Many planning for early retirement will be categorized as small investors. As such, the stock market is not the best place to invest your money, considering you may not be in the best position to lose any of the money you are trying to save. While a money market mutual fund will not accumulate a vast wealth for you, it is good to store cash for easier access later on. Unlike with traditional retirement investment accounts, there is no tax penalty for withdrawing the money used in this type of fund before you reach age 59½.

The best matches for early retirement investing are tax-exempt money market mutual funds. According to Investopedia, money market mutual funds that purchase securities issued by state governments can be exempt from federal, state and local income taxes. Tax-exempt money market mutual funds offer lower yields than their taxable counterparts do, therefore you will still need to figure out if the tax savings justify the lower yield.

These three tips for how to invest for early retirement will get you started on the right track. As always when starting out investing, seek the assistance of a financial advisor or planner. Remember these three tips: make lifestyle changes to cut expenses, make the maximum 401(k) contribution and make use of a money market mutual fund for easy access to cash.

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Investopedia Staff. (n.d.). Introduction to Money Market Mutual Funds. Retrieved July 16, 2010, from Investopedia: http://www.investopedia.com/articles/mutualfund/04/081104.asp

Loth, R. (n.d.). Do Money-Market Funds Pay? Retrieved July 10, 2010, from Investopedia: http://www.investopedia.com/articles/02/120602.asp

Strohm, M. (2010, April 16). 3 Tips for early retirement investing. Retrieved July 16, 2010, from Bankrate.com: http://www.bankrate.com/finance/retirement/3-tips-for-early-retirement-investing.aspx