Putting Every Penny to Work

Question of the week:I was lucky enough to get a nice holiday bonus of $2,000 this year. Any suggestions on how to make the most of this extra cash? --J.S. Dear J.S., Lucky you are, given that most businesses these days do not give their employees holiday bonuses. In fact, according to a survey last year by American Express, just 43 percent of business owners planned to give bonuses. That's all the more reason to make the most of your extra cash. When we asked Armchair Millionaire community members about how they planned to use their holiday bonuses, we heard from some with generous--and not so generous--employers: Baby bucks. "I got a $100 bonus, or basically, one day's pay. Since I was getting new glasses the same week (I used my last pair for 6 years!), I just put the money toward those. After the way my stocks have performed lately, I'm ready to take a second job and can't afford to put any 'bonuses' toward luxuries." --Erin Big bucks. "I got a $15,000 (pre-tax) bonus. Breakdown of where it's going: $3,000 into an IRA, $4,000 to pay down personal debt (almost done!), $2,000 towards a new (used) car we need and the rest into a new PC and home repairs." --Bob Regardless of the amount of your bonus, you still want to leverage the money in the best ways possible. My checklist provides my top recommendations for putting your money to work. The Armchair Millionaire's Checklist for Turning Casual Cash into Serious Bucks Zap your consumer debt. Carrying a balance on your credit cards? Use that extra cash to get rid of it, or at least to put a big dent in it. If you have a $2,000 credit card debt charging 18 percent interest, it will take you more than seven years and over $1,700 in interest to pay if off if you just make the minimum payments. But pay it all off now, and that's like cash back in your pocket. Secure your retirement. Ready to get your retirement plan on track? Consider putting that cash into an Individual Retirement Account. You can put up to $3,000 into an IRA this year, money that will grow on a tax-advantaged basis right up until you withdraw it during retirement. If you put $2,000 each year into your IRA over the next 25 years, and it grows at an average annual rate of 10 percent, you'll end up with about $233,000. While most people are eligible to contribute to an IRA, check with your tax advisor to make sure you are. Save for college. Have a college-bound child? An annual contribution of $2,000 to a college fund earning an average return of 10 percent will grow to just over $36,000 in 10 years. There's a nice range of college savings programs now available, most of them offering substantial tax advantages. One of my favorite Web sites for learning about your college savings choices is www.savingforcollege.com. Pay off your mortgage early. Want to get out from under the mortgage burden? An extra $2,000 payment each year on a $200,000 30-year mortgage with seven percent interest will knock off more than eight years of payments--and save you nearly $90,000 in interest. THE BOTTOM LINE: Creating a real and positive difference future your financial future doesn't require you to be a money whiz or even to have a huge amount to begin. Just commit to a plan and get started.

A Squeaky Clean Credit Report

Question of the week:It seemed that every place I did my holiday shopping this year offered a discount for opening up a store credit card. I'm afraid that I fell for it and now find myself the holder of four brand new credit cards. Have I ruined my credit score? --J.T., Gainesville

Dear J.T.,

Owning a handful of cards seems to be a habit for most Americans. According to Fair Isaac Corporation (FICO), the company that compiles credit scores for the three national credit reporting agencies, the average consumer has about seven credit cards. I suspect that some of those accounts were opened under circumstances just like yours.

When we asked Armchair Millionaires about the number of credit cards they have, we heard the entire gamut, from those who believe in keeping credit cards to an absolute minimum to those who have a whole stack of plastic. Here are two such comments:

"I have just one credit card which I use daily for everything. I chose it because I receive frequent flyer miles for each dollar I spend. Without fail, I pay the entire balance monthly." --Cecelia KC

"I have 16 credit cards, although I only really need one. All of these cards are older cards that I'm trying to pay off and then close." --Jenny

In terms of how your new cards will affect your credit score, you can take comfort in knowing that, according to FICO, the amount of new credit you have is just one of many factors it considers when it calculates your score. My guide provides an overview of the information FICO uses to determine your score, along with tips for improving your score.

The Armchair Millionaire's Guide to Ramping Up Your Credit Score

• Payment history. Whether or not you've been late paying your bills is the most important factor FICO looks at in calculating your score. Raising your score in this area is simple: Pay your bills on time!
• Amounts owed. This includes how much you owe overall, how many accounts have balances and how much of your credit line you're using with each credit card. The best way to improve in this area is to keep your balances low or better yet, at zero.
• Length of credit history. This looks at how long your credit accounts have been opened and how long since you've used certain accounts. In general, a longer credit history will help your score. On the other hand, opening a lot of new accounts all at once will lower the average age of your accounts, which will have a negative effect.
• New credit. This includes how many new accounts you have, how long it's been since you opened an account, and how long it's been since lenders made inquiries on your credit report. To keep your score up in this, don't open up a lot of new accounts all at once. At the same time, if you've had credit problems in the past, you shouldn't hesitate to open a few new accounts over time--provided you know you'll be able to pay them off in time.
• Types of credit you use. FICO looks at the kinds of credit you use, such as credit cards, a mortgage and car loan, as well as the total number of accounts you have. In general, having a mix of accounts will improve your score--people with no credit cards, for example, tend to be a higher risk than people who have credit cards and manage them well--but you should still not open new accounts just to get a better mix.

THE BOTTOM LINE: Because your credit score is determined by so many different factors, one wrong turn is not likely to completely sink your score. The accumulation of many bad decisions will, however. Know what keeps your credit score up and manage your credit accordingly.

Teach Your Children Well

Question of the week:My parents were terrible teachers and role models when it came to money. I have my own kids now and don't want to make the same mistakes. What should I be teaching them about money? --C.P.

Dear C.P.,

Given the complexity of personal finance and investing nowadays, it's a constant challenge for parents to prepare their kids well to manage money on their own. Unfortunately, it seems that many young adults are really not prepared at all--according to the Consumer Bankruptcy Project, a staggering 94,000 people under the age of 25 declared bankruptcy in 2001.

We asked members of the Armchair Millionaire community for their opinions on what's most important to teach kids about money and heard a wide range of ideas. Here are just two:

"Children need to learn about delayed gratification and goal setting, and to be given money choices early in life." --Ken

"Teach your children that they only need ONE credit card. And teach them how to use it wisely and pay it off each month." --Michelle

Kids today--and especially teens--have more money than ever before. That means it's more important than ever to instill sound financial habits from an early age. My guide provides some of the basics you should be teaching your children at every age level.

The Armchair Millionaire's Guide to the Important Financial Lessons

• Preschoolers. By the age of three, most kids start to become curious about money and how it works. This makes it an ideal time to model good spending habits. For example, when you take your preschooler along to the grocery store, show them that you plan what you're going to spend by using a shopping list. Many older preschoolers will want to start saving money. Help them get started by setting up a savings account for them. Many banks will waive their fees for children's accounts.
• Elementary school age. By this age, your child will be keenly interested in money and how to get more of it. Provide an allowance so that they can have an income of their own in order to learn their own real-life money management lessons. Let them make mistakes-they can't do a lot of damage at this age. They'll learn just how far a dollar goes, and will begin to learn how to prioritize their spending. Many older kids in this age group will want to start earning their own money. Help them out with simple money-earning ideas.
• Pre-teens. By the time they hit middle school, kids these days have become full-fledged consumers and are ready to start learning how to make good spending choices. If you think your child is ready at this age, provide a monthly clothing and entertainment allowance. They will either learn how to make a budget, or learn to do without that pair of hip new sneakers. It also gives you an opportunity every month to talk over their financial successes and mistakes.
• Teens. This is your last good opportunity to prepare your child with financial life lessons. Make sure they don't leave home for good without knowing how to balance a checkbook, what using a credit card really costs, the power of compounding interest and the basics of common sense investing.

THE BOTTOM LINE: Kids learn about money in two different ways: though their own experience and from watching their parents. Set your children up for financial success by grounding them in positive experiences and by being the good model they need.

Avoid the Retirement Planning No-Nos

Question of the week:I don't want to hit any bumps on the road to retirement. What are the most common mistakes people make when planning for their golden years? --Indy Gen Yer

Dear Indy,

Great question. To give you some perspective, we asked members of the Armchair Millionaire community about any regrets they have about how they've planned and saved for retirement. While many people were quite happy with how they've done so far, we did hear from a few people who wished they'd done things a bit differently. Here are two:

Max out that 401(k). "My company has always put an amount in a pension fund, but I just started contributing to my own 401(k) plan about five years ago. While I am grateful for the company contribution, I wish someone had told me in my younger years to put my own money away in a 401(k)." --Michelle

Start young and get an education. "I wish I started funding an IRA at age 20 or younger. And I wish I'd been offered a personal finance class back in high school." --Mike B.

My guide provides the top retirement planning mistakes I hear about and how you can avoid them.

The Armchair Millionaire Guide to Retirement Planning No-Nos

• Cashing out your 401(k). Far too many people changing jobs (more than 40 percent, according to a recent Hewitt Associates study) cash out their 401ks. There is no better way to torpedo your retirement years. This money is not a windfall--it's the core of your retirement income. Instead of cashing out your account, roll it over into an IRA or move it to your next employer's 401(k). Either way, keep that money in a tax-advantaged account.
• Investing too conservatively. Afraid that they could "lose" all their money if it's invested in the stock market, many people instead choose to put all their retirement money into CDs or money market funds. Trouble is, the return on these investments barely even keeps up with inflation, and is certainly not enough to grow your money the way you need. By choosing to avoid risk, these people actually risk not having enough to retire at all.
• Counting on Social Security. Too many people assume that their monthly Social Security check during retirement will take care of everything. But even if Social Security is still around when it comes time for you to retire (a bit doubtful in my mind), will it really provide enough? Probably not--the current average Social Security retirement benefit is just $903 per month for individuals and $1,492 for couples. That won't go very far towards funding a care-free retirement.
• Never starting. Some people, daunted by the sheer amount of money they will need to accumulate to secure their retirements, throw in the towel before they even start and give up on the idea of being able to retire at all. But the hardest part is actually just getting started. Small amounts invested regularly will grow into a healthy nest egg over time. Just $200 per month, for example, will grow to nearly $570,000 over 30 years when it achieves an average annual return of 10 percent a year.

THE BOTTOM LINE: A few mis-steps along the way can have a huge impact on your retirement years. But a sensible plan for saving and investing, along with a good dose of common sense, will keep you on the right track.

Ready to Dump Your Funds

Question of the week:With all the news lately about improper practices in the mutual funds industry, I'm about ready to dump my funds completely. Do you have any suggestions for a good alternative place to put my money? --S.C.

Dear S.C,

Given that Americans have $7 trillion invested in mutual funds, and a steady stream of troubling news from the industry watchdogs, I'm sure there are many other investors out there who are having the same response. When we asked members of the Armchair Millionaire community for their reactions to the mutual funds mess, we heard a range of opinions. Here are just three:

Voting with his feet. "Although I only have a money market account with Strong, and was not affected by Dick Strong's market timing of his own company's funds, I am going to close the account and put the money with a company that is more ethical. I also closed a Janus account for the same reason. If more investors voted with their feet, fund companies would soon get the message." --John R.

Wait and see. "So far I am hanging on to good quality mutual funds, but I am watching and listening ..." --Les

Sticking with funds. "I have left my mutual funds alone, intact and where they were for the most part. I think this is just a 'bump in the road' and that fund investing will continue as always. --Alana F.

In terms of alternatives to mutual funds, there is one choice that offers the easy, instant diversification that makes mutual funds so attractive. Exchange-traded funds (or ETFs, for short) look like an index fund, tracking the securities of a particular equity or bond index. However, they trade just like stocks, so you need to buy them through a broker. Perhaps the best known ETFs include SPDRs (often called "spiders"), which track the S&P 500, and DIAMONDS, which track the Dow Jones Industrials.

My guide gives you a look at the most important differences between ETFs and mutual funds in the key areas you should consider.

The Armchair Millionaire's Guide to Mutual Funds vs. ETFs

• Expenses. The annual expense ratios for mutual funds can range from a low of about .2 percent for the best index funds on up to 2 percent or even higher for some actively managed funds. ETFs are generally much more cost-efficient, with expense ratios ranging from about .1 percent up to just .6 percent.
• Trading costs. If, like me, you're a big believer in the value of investing small amounts on a regular basis (called "dollar cost averaging"), ETFs are problematic. While no-load funds let you buy shares as often as you wish without paying a sales commission, you do have to pay a brokerage commission every time you buy ETF shares. These trading costs could easily wipe out the advantages of the low expenses of ETFs.
• Selection. With the thousands of mutual funds available, there's one to suit virtually every investor's taste, from the broadest index funds to specialty funds investing in just a single industry or country. But there are all kinds of ETFs, too. There are ETFs that track all the major stock indexes, including large, mid- and small cap indexes, growth and value indexes, global indexes and bond indexes.
• Flexibility. Mutual funds usually require a minimum initial investment (typically ranging from $500 on up to $3,000 or more), but make it easy to automatically make subsequent investments. You can invest in funds through a financial advisor, broker or directly from many fund companies. ETFs, like stocks, are bought and sold throughout each trading day, and can be sold short or bought on margin. There is no minimum investment, but you will need to have a brokerage account set up to buy ETFs.
• Taxes. Because of the turnover of investments held by mutual funds, you may often have to pay taxes on capital gains, even if you don't sell any shares. ETFs, on the other hand, are extremely tax-efficient, though you will have to pay taxes on capital gains if you sell your ETF shares for a profit, just like you would with any stock.

THE BOTTOM LINE: It's certainly not reassuring to hear about big names in the fund industry being investigated for possible wrongdoing. However, you should not simply react and pull your fund investments altogether. By being aware of your alternatives, you can try them out and come up with your best solution.

Tax-Savvy Money Moves

Question of the week:I have to cut costs wherever I can this year and by far one of my biggest costs is my tax bill. What should I be doing to lower it? --Rebecca C.

Dear Rebecca,

It's December, that time of the year when so many of us start dreading the inevitable April 15 date with the tax man. You only have from now until the end of the year to do everything you can to cut your 2003 taxes, but fortunately you have plenty of options.

When we asked members of the Armchair Millionaire community recently about what they'll be doing, we heard an entire laundry list of tax-cutting moves. Here are just some:

"My wife and I are maxing out our 401(k) and 403(b) plans, have stretched our mortgage out to 30 years at 5.375 percent, and make sure the monthly extra goes into something tax-free." --ivroom2

"I've maxed my 401(k) contributions, as well as using the flexible spending accounts at work. I'm also donating used clothing, household articles, and toys to local charities before the end of the year to get the deduction in 2003." --Howard

"Both my husband and I max out our 401(k) accounts. I contribute to a pre-tax transit reimbursement program and to a pre-tax flexible spending account through work. We bought a home and deduct the mortgage interest and I started a small web-based business with my husband. Also, I defer a portion of my bonus into my 401(k)." --Pug Mom

While every one of these tax moves will help cut your tax bill, you should also manage your investment portfolio year-round with an eye towards reducing your taxes-and effectively increasing your investment returns. Even though the tax law passed last spring reduced the tax rates on most stock dividends and long-term capital gains, it still pays to heed the impact of taxes on your portfolio. My guide provides some basics.

The Armchair Millionaire's Guide to Tax-Wise Portfolio Management

• Invest in the most tax-advantaged accounts first. Prioritize your investments according to which vehicles offer the best tax breaks. An investment in your 401(k) that is matched by your employer is hands-down the best place. After that, a Roth IRA is probably the best choice, followed by an investment in your 401(k) above and beyond your employer's match.
• Treat taxable accounts with care. Different types of investments have far different tax implications. For example, an index fund is generally much more tax efficient than the average actively managed mutual fund. And a stock that you hold for less than a year will cost you much more in taxes when you sell than one you hold for five years. So whenever you invest in a taxable account, consider those investments that will keep your taxes in check.
• Harvest losses. Tax law allows you to use up to $3,000 of capital losses each year to offset capital gains or "ordinary" income, like your salary. So if you have an investment that has dropped in value over the last several years (who doesn't?), you can sell it and receive a deduction for the loss. If you have more than $3,000 in losses, you can carry them over to future years. Just be sure to not buy the same or substantially similar investment within 30 days of selling. If you do, the tax deductibility of your capital loss will be disallowed under the IRS's "wash sale" rule.
• Don't buy the distribution. Planning to buy a mutual fund between now and the end of the year? Check the "record date"--the day (typically in December) when funds determine which shareholders will receive a distribution of its capital gains for the year. You'll need to pay tax on these capital gains (unless you hold that fund in a tax-advantaged account), even if you've only owned the fund for a few days. You can avoid paying that tax simply by waiting to buy the fund after the record date.

THE BOTTOM LINE: Taxes are unavoidable, but paying more than your fair share is not. Whenever you make a financial decision of any kind, consider the tax implications. More often than not, you can find a way to lower your tax hit.

Investing According to Your Values

Question of the week:I'm just starting to invest and I really want to do it according to my religious values. I've never seen much information on how to do this. What are your suggestions for how to go about it? --M.T.

Dear M.T.,

Even though you don't hear much about it, there are actually plenty of people who pay a good deal of attention to their faith when they make financial decisions.

According to a recent study by MMA Praxis Mutual Funds, 80 percent of investors surveyed consider themselves to be religious or spiritual. Of these, two-thirds would consider changing investments based on their values and beliefs. And the survey also found that the five most important concerns of these investors are the operation of sweatshops, product safety records, high executive compensation, environmental records and adult entertainment.

When we asked members of the Armchair Millionaire community about religion and their money, we certainly heard all kinds of responses. Here are just two:

Values beat fundamentals. "I consider it my responsibility to manage my God-given resources wisely. When considering investing vehicles, I do reject those companies that contradict my moral values--regardless of how great their fundamentals are." --A. Rodriguez

Don't need to be religious to tithe. "Although I don't formally practice any religion, I do give 10 percent of my income to my favorite charities and non-profit organizations." --Mysticaltyger

Whether you would like to avoid investing in companies whose practices you dislike, or use your investments to influence the way companies do business, you have a number of different ways to invest according to your faith. My guide provides the basics.

The Armchair Millionaire's Guide to Faith-Based Investing

• Choose stocks that match your values. Like companies that donate back to the community, that support your favorite cause, or that produce goods and services you believe in? Help ensure their success by investing in them.
• Choose funds that match your values. If you'd rather invest in mutual funds than bother with individual stocks, there are a number of different ones available that invest in accordance with defined religious, social and/or environmental guidelines. You can find more information on these faith-based and socially responsible mutual funds at www.socialfunds.com.
• Engage in shareholder activism. Some investors choose to try to influence company policy by submitting and voting on corporate proxy resolutions. There are a number of organizations devoted to changing the way companies do business from the inside out. One is the Interfaith Center on Corporate Responsibility (www.iccr.org), a coalition of 275 faith-based institutional investors. Another is the Shareholder Action Network (www.shareholderaction.org), which serves as a clearinghouse of information for faith-based groups, and social and environmental organizations involved in shareholder activism.
• Get like-minded advice. Some financial advisors specialize in helping their clients choose investments that are aligned with their values. You can locate one through the directory located at www.socialfunds.com.

THE BOTTOM LINE: Even if you think that money is the root of all evil, that doesn't mean you can't use it to do some good while reflecting your deepest values.

Getting Help Springing the Debt Trap

Question of the week:We've really gotten in over our heads with our credit cards over the last couple of years, and are starting to consider going to a consumer credit counseling agency for help. Do you think this is a smart move? --A.T., Wisconsin

Dear A.T.,

According to the Consumer Federation of America, approximately nine million Americans have some contact with a consumer credit counseling agency each year. When we asked members of the Armchair Millionaire community about their experiences going to an agency for help, we generally heard positive responses. Here are two:

A lifesaver. "I got left with $10,000 debt after a divorce. Consumer credit counseling was a lifesaver! Half my debt was interest free for the four years it took for me to pay it off and the other was dropped to 8 percent. Afterwards, when applying for a mortgage, it came up, but when I explained it they had no problem." --Meg H.

Do it yourself and save the fee. "I'm in the midst of paying down significant debt right now. I've used a consumer credit counseling agency and it worked out fine, but then I realized I could do it myself and save the fee the agency was charging me. Every little bit helps when trying to pay off debt." --Jenny

A good credit counseling company will work with you to create a debt management plan and with your creditors to create repayment plans and in some cases, to lower their interest rates. They should also provide financial education to help you improve your overall financial picture and help you to not get back into debt again.

But you should be aware that the credit counseling industry has come under fire recently from the IRS, the Federal Trade Commission and other groups for allegations of excessive fees and deceptive marketing. This doesn't necessarily mean that you shouldn't seek help from a credit agency, because there are hundreds of reputable agencies who have helped thousands of people.

What it does mean, however, is that you need to check into an agency very carefully before choosing to work with it. My guide tells what to look for.

The Armchair Millionaire's Guide to Consumer Credit Counseling

• Fees. Fees vary from agency to agency, and you should look for a good deal. According to the Consumer Federation of America, you should avoid fees higher than $50 to set up a debt management plan and monthly fees higher than $25. And the agency should be upfront about their fees, providing you specific prices in writing.
• Services. Does it offer more than just help creating a debt management plan? You may also want budget counseling want debt counseling and other financial education. You may also want the option to work with a counselor not just in person, but also on the phone or over the Internet.
• Your best interest. Credit counseling agencies are supposed to operate with your best interest in mind, but not all do. Look out for agencies where employees are paid by commission, or that doesn't spend enough time with you to formulate a solution that will work for you. And don't assume that just because an agency has non-profit status that it's automatically looking out for your best interest.
• Advertising. Be wary of agencies that advertise aggressively through telemarketing or that make unreasonable promises to "repair" your credit. While the best way to find a good agency is generally through referrals from friends or family members, you should also check out any agency you're considering with your state attorney general's office or Better Business Bureau to find out if any consumer complaints have been filed against it.

THE BOTTOM LINE: It's not easy to ask for help when you have more debt than you can handle. But it can be the way out of the debt trap--provided you ask for help from the right credit counseling agency.

A Hand for Mom and Dad

Question of the week:My parents are in their late 70s and I'm worried about their finances. Any advice on how I could give them some help taking care of their money? --W.B.

Dear W.B.,

People are living longer, so they need to make their money stretch longer and manage it to an older age than ever before. According to the Census Bureau, there are 35.6 million Americans over the age of 65 (and 4.5 million over the age of 85).

You're not alone. When we asked about the state of their elderly parents' finances, we found plenty of worried Armchair Millionaire community members. This was a typical response:

Dark days ahead for mother-in-law. "I believe that my parents will have a comfortable retirement. They don't have big expectations about traveling the world so they'll be able to get by. Now, my mother-in- law is a completely different story. She has no retirement savings, no life insurance and no health care. We have tried numerous times to get her to 'see the light' but she lives in a bubble that I am worried is going to burst sooner rather than later. She lives in a different country so I don't think she can come to live with us but I am worried we are going to get stuck paying her medical bills and subsidizing the dog food she will have to eat in retirement." --mdonalds

As people grow older, they face a new set of financial issues, including Social Security, pensions, different insurance polices and wills and trusts. This challenge is compounded if they also have the stress of living on a fixed income or of health worries. However, there's plenty you can do to help your parents age with grace financially. My guide will get you started.

The Armchair Millionaire's Guide to Lending Parents a Financial Hand

• Tread carefully. Money is deeply connected to our feelings of personal independence and dignity. Any steps towards taking over control of that money naturally threatens those feelings. At the same time, you're likely to feel uncomfortable bring up the subject with them, as well. However, you need to overcome this to help your parents avert problems in the future. If they don't want to discuss the topic with you, provide them with the names of several reputable financial advisors, preferably ones who specialize in the finances of retired people.
• Organize paperwork. Know where they keep their financial documents, including insurance policies, bank and investment account information, tax records, and will or trust, so that you can easily find them if there's an emergency. If their paperwork is incomplete or unorganized, help them get it shipshape.
• Make it easier. Save your parents some banking chores by arranging to have their Social Security and pension checks deposited automatically and bills paid automatically. Less stress for everyone. If your parents are no longer up to taking care of their day-to-day financial tasks, and they're not something you can do, either, consider hiring a Daily Money Manager, a professional who can take care of bill paying, balancing the checkbook and organizing records. You can find one through the Web site of the American Association of Daily Money Managers at www.aadmm.com.
• Help them protect themselves. Older people are a favorite target of scam artists. Encourage your parents to never give out any financial information (such as credit card or checking account numbers) to anyone calling them on the phone, as well as take steps necessary to safeguard their identities.
• Consider power of attorney. Encourage your parents to look ahead to a time when they may no longer be able to manage their finances, and to designate someone to act on their behalf if the need arises. A power of attorney document can be created inexpensively by your parents' lawyer.

THE BOTTOM LINE: Just as your parents helped you when you were young, the time may come when you need to help them as they age. Go slowly and respectfully, and your help will be much appreciated.

Crafting an Early Retirement

Question of the week:I'm 30 years old and am absolutely determined to not wait 35 more years until I retire. I'm maxing out my retirement accounts, but what else should I be doing to be able to retire early? --Thomas C.

Dear Thomas,

Given that you may end up living more years in retirement than you do actually working, early retirement calls for some serious preparation and commitment.

When we asked Armchair Millionaire community members how they are planning to retire early, we heard from many who, like you, have had an early retirement in their sights for many years. Here are some typical comments:

Million Dollars or Bust. "I'm confident that I will retire at 50 years old with at least a million dollars. I am 31 now, and I started maxing my 401(k) at age 18." --Dion

Lucky 13. "I would like to retire by the time I am 55 with two million dollars. I am 34 right now. I started saving when I was in grade school with my babysitting money. I currently save 13 percent of my paycheck, which goes into my 401(k), my son's college savings plan and paying off my mortgage early." --Whitney

Retirement Power Tools. "I'll retire hopefully at 55. My wife and I focus on putting at least 10 percent into each of our 401(k) accounts, max out a Roth IRA, contribute monthly to a mutual fund account, purchase government protected I-bonds, and also stash away another seven percent of our gross pay each month into a money market account -- all of which is in addition to pension accounts we have through our employers." --Brent

Committing to early retirement is a big step, and you want to be sure to go into it eyes wide open. My checklist will help.

The Armchair Millionaire's Checklist for an Early Retirement

• Be sure it's really for you. Ask yourself a few key questions. Do you like going to work in the morning, or would you rather do just about anything else? Do you have compelling interests or hobbies outside of work that you know you want to pursue full-time, or would you find yourself with time on your hands without a job? Do you derive a large part of your identity from your occupation, or do you see other things as being more important about who you are?
• Find out what you need. Decide the age you want to retire and then make a guess at your life expectancy (your own family members will be a good guide). Once you know how many years you'll need your retirement income to last, figure out the total amount you'll need to derive that income. You'll need to factor in investment returns, Social Security and pension benefits, inflation and your rate of withdrawal. If it sounds complicated, you're right. Fortunately, there is an array of retirement planning calculators available on the Web. Check out at least a couple and compare the results.
• Know the rules on tapping your retirement accounts early. Many people who retire early may want access to funds in their 401(k) and IRA. While these are generally off limits until you reach the age of 59 1/2, there are some special circumstances in which you can access them early. Because the rules on early withdrawal of these funds are complex, you'll probably want to seek professional advice.
• Plan carefully. Advance planning is crucial because the odds are high. If you begin withdrawing retirement funds and it turns out that you're pulling out too much too soon, for example, you may do irreparable damage to your chances of making your money last as long as you need it to. As you approach the age at which you wish to retire, I strongly recommend that you engage a financial planner to help you run the numbers and figure a safe level of withdrawal, as well as to help you structure an appropriate portfolio.

THE BOTTOM LINE: We all want an abundant and secure retirement. If you want it earlier than usual, then you'll have to work even harder to get there. But with commitment and the right plan, it can certainly be done.