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Q I'm 30 and have about $80,000 in my 401(k). If I hope to retire early, should I start putting something away in a different product? My concern is that I won't have access to those funds until retirement age, and I'd like access earlier. -- BRIAN
A Whether or not early retirement works out for you, putting some long-term investment money into a taxable account is a good move. Still, I'd continue to fund your 401(k). Then send some extra money (maybe monthly?) into a taxable account that's invested in a long-term asset like stocks. It's very easy to set up an automatic saving plan these days.
There's a tax bite. But you keep the yearly tax bill down by investing in broad-based index funds. Although tax rates likely will change over the next two decades, at least for now you'd see a benefit on the tax side when you withdraw the money. A good portion of taxable funds will qualify for low-rate long-term capital gains tax treatment. Money taken from a retirement account is taxed at your ordinary income tax rate, which tends to be higher. And you can get to the money in the taxable account without paying the 10 percent penalty for early withdrawal.
I am an early retirement skeptic. It was a big topic of discussion in the '90s. But fewer and fewer people are taking that step for one very good reason: health insurance. Talk about sticker shock! The high cost of health insurance and lack of good coverage are most significant in deciding whether a person can or cannot do an early retirement.
Indeed, early retirement is out of the question for two groups of people: anyone without the means to easily absorb expensive annual health insurance costs, and anyone with a serious medical problem. Hopefully, there will be major health care reform long before you hit your early retirement years.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to: cfarrell@mpr.org, or to kaching@startribune.com; put "Your Money" in the subject line.
