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Early Retirement Planning: How I Save For Retirement

21 August 2008 9 Comments

When it comes to early retirement planning, putting away money for your retirement is a given. Whether you focus on a 401(k) or a savings account or a Roth IRA, hopefully you’ve begun saving for retirement. If not, well, you better get your butt in gear because time is wasting. In this post, I will describe the very simply yet effective way that I put money away for retirement.

Now, my process is different from many because I work for a small company and do not have a 401(k) plan. Because of a lack of a 401(k), I use a Roth IRA to put away money. If you do have a 401(k), I’d encourage you to continue to contribute to that plan up until you max out your company matching. All money saved on top of that can be put away in the manner I describe here.

Currently, the maximum contribution for my Roth IRA is $5,500 a year. I max this out each year. Basically, I put money away each month into my ING Direct high interest savings account with the intention of eventually going into my Roth IRA.

It is not too difficult to have $5,500 in that account by the end of the year (now that I’m married, I’m trying to double that to max out my wife’s Roth IRA as well). When January 1 rolls around for the next year, I immediately put the total $5,500 in my Roth IRA and thus maxing out the contributions for that year.

This way I can immediately put that money into the stocks that I want right off the bat. With my savings account empty, I begin the process of putting money away into that savings account that will eventually be contributed into my Roth IRA at the start of the next year.

The Alternative

Obviously, the alternative to this early retirement planning process would be to just put away money each month into your Roth IRA as you save it. My process is more simple and allows me to buy fewer, larger positions instead of buying smaller, more frequent positions in my Roth IRA. This cuts down on commission costs (although I don’t pay any commissions with Zecco anyways), but is also more in-tune with my investing style.

If you are currently following this alternative method and it’s not working out that great for you, perhaps you should try doing it the way I do as described above. With that said, if this early retirement planning process isn’t for you, that’s fine, just find a way that works for you to kickstart your savings for retirement!


  • Eli said:

    Isn’t the 2008 limit $5,000 and $6,000 for age 50+?

  • kevin duffey said:

    Yes you’re right. In 2009, it is bumped up to $5,500. Since I’m already maxed out this year, I have 2009 in focus and the $5,500 number on my mind.

    Thanks for the clarification.

  • Sean said:

    Why do you favor buying lots of stocks at once rather than dollar-cost averaging if you do not pay commissions per trade? (sorry if you’ve already covered this)

  • kevin duffey said:

    By at once, I mean once a year. I prefer not to dollar cost average every month. If you’re doing that, it may work out or may not but it kind of indicates you are very unsure of your positions. When I transfer the max Roth IRA contribution annually into my Roth IRA, I may or may not purchase stocks immediately with those funds. If I’m waiting for a better buying opportunity, there may be some cash in the Roth IRA for some time.

    If I am buying more shares of positions I already have, then I may be participating in dollar cost averaging also just on an annual basis as opposed to monthly.

    Thanks for the comment.

  • Kevin said:

    Kevin you might want to consider balancing your IRA contributions between a Roth and a traditional IRA. Since a 401K plan offers tax-deferred earnings (just like a traditional IRA), whereas a Roth IRA offers tax-exempt earnings, opening a traditional IRA can diversify the taxing of your portfolio.

    In theory the Roth is probably better for tax purposes because you will hopefully be in a higher tax bracket by the time you’re ready to withdraw. But nothing is set in stone and it could be beneficial to have some retirement savings that you can deduct from your taxable income today.

    Perhaps you could have your wife’s IRA set up as a traditional and keep yours as a Roth. This method would avoid multiple IRAs under your name.

    One last thing – dollar cost averaging is really a wash. It’s not necessarily beneficial, but it’s not detrimental either. Just a matter of personal preference (I can quote one of my former Finance professors on this one, as I was unsure myself!).

    Good luck!

  • kevin duffey said:

    Kevin, great thoughts. Mixing up my strategy with a traditional IRA might be a good idea considering the uncertainty of the future. Thanks for the comment.

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  • Retirement Investor said:

    Due to current economic turmoil many employees are leaving the workforce in favour of early retirement which is putting an increasing strain on the state’s finances.