Are you among the millions of American workers who would like to retire by age 55? If so, do you have what it takes-motivation and effective strategies? While the determination will have to come from within, here are three investment moves that can spell the difference between retiring early, retiring late, or not retiring at all.

(1) Maximize Your Tax-Deductible, Tax-Deferred Contributions

Contributions to your 401(k), 403(b), 457, SEP, IRA or any other employer-sponsored plan are tax-deductible (except IRAs if you earn too much income) and lower your overall tax liability each year you invest. Since dividends and capital gains are also not taxed each year, your account grows faster. Another advantage of a 401(k) or other employer-sponsored retirement plan is that there is often some kind of employer match. That is free money to you, not unlike giving you a raise, but usually you must invest your own money to get your employer's match. If you want to retire early, one of the best ways to get there is to take advantage of any tax-deductible, tax-deferred retirement plan available to you.

(2) Start Investing As Early As Possible


Assume two 22-year olds graduate from college and begin their careers. Graduate A establishes an IRA and invests $2,000 each year for 10 consecutive years ($20,000 total). No other dollars are added but that $20,000 is left to ride in the account at a 10 percent average annual return until retirement at age 67. Graduate B procrastinates and doesn't start investing in an IRA until age 32, but then puts away $2,000 every year for the next 35 consecutive years (a total of $70,000) at the same 10 percent average annual return. Who will have the most money when they both retire at age 67? Would you believe Graduate A? And it isn't even close! Don't underestimate the power of tax-deferred compounding.

   Total Invested Account Total at Age 67
Graduate A $20,000 (Age 22 to 32) $900,000
Graduate B $70,000 (Age 32 to 67) $545,000

(3) Save As Much Of Your Annual Household Income As Possible


According to a June 2003 news release by the U.S. Department of Commerce (, the average savings rate in America was only 2.3 percent in 2001 and 3.7 percent in 2002. If your goal is to retire early, you need to save as much of your annual household income as possible.

Assume your two-person household (both age 25) earns $40,000 per year after taxes and saves the 2002 average of 3.7 percent for retirement-that's $1,480 per year. What are the chances you will retire early? After 20 years you will have contributed $29,600, which will have compounded to $89,400 tax-deferred given a 10 percent average annual return; after 25 years, it will have compounded to $156,300. But as seen in the chart below, a 3.5 percent inflation rate (this is just a figure to use in our example, not a prediction) will cut those totals significantly. You won't retire early unless you inherit a lot of money or have a substantial employer-funded pension to supplement it!

Save 3.7% of Income Total Account Value 3.5% Inflation-Adjusted
After 20 years $ 89,400 $57,200
After 25 years $156,300 $86,700

But what if you save 30 percent of your $40,000 after-tax annual income-the minimum the author and his wife saved on average over their 18-year careers? It's an entirely different story. You can plan your exit from full-time employment while your friends (who didn't save) continue to grind away from day to day.

Save 30% of Income Total Account Value 3.5% Inflation-Adjusted
After 20 years $725,200 $464,100
After 25 years $1.27 million $703,100

If you are 25 years old reading this, you can potentially retire at 45 with over three-quarters of a million dollars (nearly a half-million inflation-adjusted). But if you wait another five years and retire at the grand old age of 50, your account will be worth $1.27 million (a little over $700,000 inflation-adjusted). And if you decide to wait until 62 to retire? You will have $4.45 million ($1.7 million inflation-adjusted) securing a most comfortable retirement. You can calculate your potential savings accumulation under different scenarios (savings amount, investment return, inflation impact) by going to and clicking on Savings Tools, Financial Planning Calculators, and then How much will my savings be worth?

You CAN Retire Young!

As clearly illustrated in the examples above, while it is never too late to start investing for retirement, the sooner you start and the more you invest, the faster your money grows as tax-deferred compounding works in your favor. Most working Americans have a common goal: to one day have the option of working (either full-time or part-time) out of choice rather than necessity, or retiring and never working again. But the only way you can give yourself that option in the future is if you have a sufficient net worth.

How long it takes you to reach that goal will depend on income, savings, investment return, inflation, and whether or not you have any other source of retirement income (traditional employer-paid pension, inheritance, lottery win, or some other windfall). Obviously the more you earn the easier it can be. But regardless of income, keep this in mind: If you are a prodigious saver who starts early and contributes as much as possible to your tax-deferred retirement accounts, you will accelerate your retirement date and accumulate more money than would otherwise be possible. Not only will you enjoy a more secure retirement, you may even retire young!


Larry Ferstenou retired over ten years ago at age 42 and is the author of You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich. More information can be found at