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Retire (Very) Early


Is 37 the new 55?


At 55, Billy and Akaisha Kaderli have been retired for 18 years, enjoying extensive travel in Asia, South America and throughout the U.S.

Their getaway plan was crisp and simple: They started saving and investing early and avoided debt. Unlike some people with lofty goals, they stuck to the plan.

"We're more concerned about running out of time to pursue our dreams of traveling than we are about running out of money," Billy says.

The couple lived in Santa Cruz, California in their late 30s. He worked as a stockbroker and she owned and operated a restaurant overlooking the Pacific. Not exactly the traditional rat race life, but at 38 they decided they were working too many hours, paying too much of their income in taxes and not traveling enough.

By 1991, they'd stashed about $500,000, including a $100,000 gain from the sale of their house. The couple never paid much attention to "stuff" -- cars, fancy clothes and country club memberships didn't interest them -- so they put what few household goods they had into storage and took the first step in fulfilling a lifelong ambition to see the world.

First stop: Six months on an island in the Caribbean followed by a year-long trip through South America. They returned to California 18 months after they left, bought an RV and toured the western states for two years. They next headed to Mexico, where they planned to stay near Lake Chapala for a few months. The visit lasted four years. They now travel throughout Asia and the South Pacific, regularly stopping in Thailand for a few months to catch their breath. They purchased a modest retirement home in Arizona and occasionally stop by.

The couple invests in index funds and benefited from the 1990s boom. They try to limit withdrawals to about 3% of the gains each year. The money is taxed at the 15% capital gains rate – not the much higher tax rates of 25% to 35% on earned income. They haven't touched their Roth IRAs because they'd get whacked with a penalty for early withdrawal.

The couple tries to limit living expenses to about $24,000 a year – not an impossible goal in parts of Asia and Mexico. But recently they've been hit with unexpected costs: a new laptop computer to update their website and dental work for Akaisha.

"Early retirement isn't just about having the money," Billy says via email from Thailand. "It's about fulfilling dreams. If you don't know the why, you won't be able to find the how."

The how is so basic many people overlook, or ignore, it: Develop a saving and investing plan in your 20s, stick to it and don't go into debt. If you're younger than 30, save at least 10% of your gross income. Boost your savings to 15% if you're over 30 and raise the percentage with each pay increase. Take the money off the top each month. If you don't, you'll quickly discover that expenses rise to consume available income.

"After a short time, you won't miss the difference," Billy says.

Next, take advantage of all retirement benefits, including an employer match for 401(k) contributions. But don't include this as part what you set aside each month from your paycheck for saving and investing – your company's retirement plan should be in addition to what you're already saving on your own.

But that's only half the job. Billy says it's important to cut your spending to the basics. You don't need a large house in an upscale neighborhood or a spiffy car, especially if you plan to retire early. The goal: Adjust expenses downward.

"Always live below your means," he says. "Never borrow against your retirement savings – consider those accounts untouchable."

If you're choosing between a consumer item, like a widescreen TV or a stereo guaranteed to blast the wax out of your ears, and making an additional contribution to your retirement savings, tuck the money away for the future. Aggressive saving and limited spending will keep you out of debt – and interest payments on debt are the universal killer of dreams.

"The formula is basic: Start saving and investing early and don't go into debt," Billy says. "If you start there, the rest will take care of itself. There is no need to make planning for early retirement more complicated than that."

Divorce is emotionally draining and can be financially catastrophic. He recommends finding a "financially like-minded spouse" – someone who shares your view of saving and spending, not to mention someone who you want to take to exotic places. Remember: Kids change everything.

The websites of most financial institutions offer solid information about retirement, including T. Rowe Price (TROW), Merrill Lynch (MER), JP Morgan Chase (JPM), Wells Fargo (WFC) and Wachovia (WB).

"If early retirement is your ambition, remove any obstructions to that goal," Billy says. "You have to stop wishing because wishing without action is like gunning your car's engine with the brakes on."

The couple's future?

"There are still so many places to see," Akaisha says.

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