Start Investing Now – 5 Tips to Retire Before 50

Start Investing Now – 5 Tips to Retire Before 50

From Faisal Khan

Early retirement is a dream. Retiring at 50 is a lofty challenge, but far from impossible. Those who fancy an early retirement need a shrewd, long-term strategy to get there. The most powerful way to retire early is...

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Before deploying money into wealth-building investment vehicles, one needs to assess how much they’ll need at retirement. Now, this may be easier said than done. 

It requires a vision that encapsulates the preferred lifestyle, goals if any, and possible emergencies. Human life expectancy is increasing by the day, so be sure to account for those additional years too. 

Ideally, a retirement corpus should generate enough passive income from risk-free investments to cover insurance premiums, lifestyle expenses, and preferably further investment.

A retirement-focused investment strategy is a key component of early retirement discussions, and justifiably so. Investments can amplify growth; it would be foolish not to leverage their power. 

However, several other factors contribute just as much to retirement goals. The tips that follow discuss investment in great detail, and other things that can put individuals on a path to early financial freedom.

Invest (Aggressively) 

This is hardly a surprise. Investment is the core of any retirement strategy. There’s a ton of traditional wisdom out there like the 60/40 portfolio allocation strategy that tells investors to allocate 60% to equity and 40% to debt. 

However, early retirement is a specific goal. Traditional wisdom doesn’t factor in the early retirement age. Therefore, the approach requires a lot of tweaking. 

Assuming an investor has already come up with a target retirement corpus, it’s a good idea to compute the annuity payments that will help them achieve their target. 

For example, let’s assume the following:

  • The investor is currently 25 years old

  • The average rate of return throughout the investment period and across asset classes comes to 8%

  • Investor’s target retirement corpus is $10,000,000

In this case, the investor will need to invest $10,031 each month for the next 25 years. 

Without this information, it would have been impossible to figure out how much an investor should invest each month. Now that there’s a monthly investment figure, let’s move towards building a strategy.

At age 25, investors can take far more risk than at age 45. Therefore, a good portion of an investor’s portfolio should be allocated to high-risk, high-return assets such as equities, or even cryptocurrencies. 

It’s becoming clearer than ever that cryptocurrencies are here to stay. For those who feel they have missed the bus with Bitcoin, there are plenty of fishes in the crypto sea. 

Investors wary of taking excessive risk could buy USDC. USDC is a Stablecoin, which tends to be far less volatile. However, if an investor doesn’t mind the ups and downs, Ethereum is currently a worthy choice. For investors wondering how to buy Ethereum in Canada – all that’s needed is a credit card and a working internet connection. 

It’s even understandable that some investors may have committed to staying away from crypto altogether. In that case, consider investing in equities, especially fundamentally strong mid-cap and small-cap stocks. While they’re riskier than stocks of larger, established companies, they have the potential to generate colossal returns over the long term. 

Directly investing in equities requires time for research and supervision. A hands-off approach can be costly. For investors that are too busy with a job, which most probably are, it’s best to invest via a mutual fund. They can deliver decent returns, without the hassle of actively managing investments.

For instance, here’s how Mawer Global Small Cap A performed over the past decade:

Source

It grew investor wealth almost 5X in a decade! The thing to remember with mutual funds and equities is that the probability of loss reduces with time. However, these are not risk-free investments. Nobody knows when 2008 will repeat itself, so there’s certainly a good degree of risk here. 

Speaking of risk…

Diversify and insure 

Don’t put all your eggs in one basket,” goes the saying. Diversification is a technical term for this phrase. Investing all of the money in equities can be a costly proposition. Adding diverse, non-correlated assets such as debt or commodities can bring the portfolio’s overall risk down. 

Be forewarned, though. Over diversification can pose a threat too. Investors will still want to retain enough risk to generate decent returns. 

Debt, like equities, is an extremely common asset class that occupies a spot on almost all portfolios. While they generate returns lower than equities, they’re a great way to diversify the portfolio. What’s more, a portfolio’s allocation to debt should increase over time.

Remember, as an individual nears retirement, they’ll want to move investments to fixed-income securities. The reason is that an investor’s risk tolerance tends to reduce as they age. Their focus shifts from generating higher returns to capital preservation. 

Capital preservation also requires insurance. An investor’s capital, in addition to market risk, can also be vulnerable to life’s curveballs. A medical emergency can wipe out a big chunk of wealth unless an individual has adequate health coverage. 

Therefore, diversification and insurance are two elements that can shield the capital against market risk and adversities of life. Make sure to pay due attention to them.

Create new streams of income

Look for ways to increase income. Most people may already be doing things to advance their careers, but ramping up the efforts can go a long way. For instance, invest in educating yourself by taking a course that gives you an edge over other candidates. 

This may require pulling all-nighters, but it’s worth the effort. It’s also possible to increase income via investments that generate passive income, like real estate. For those who have a house with a completely paid-off mortgage, rent can be a great source of passive income.

Increasing income is only half the battle, though. More income means a larger surplus of cash each month. It’s extremely important to make this surplus count because people often fall prey to lifestyle creep. 

Spend as little as possible

Lifestyle creep is a real threat to surplus earnings. Let’s assume that a person’s income increased by $3,000 as a result of promotion. They could choose to spend it on a larger apartment and a new car or park the money in a mutual fund via SIP. 

Spending the money would allow the person to buy $720,000 worth of goods ($3,000 * 12 months * 20 years). Remember, the full amount is earned at the end of 20 years, not at any given point during those 20 years. 

Conversely, investing the $3,000 each month, assuming an 8% rate of return, will leave the person with the following amount in savings after each year:

Source

The investor will end up with almost $1 million more by investing these $3,000 for 20 years than had they spent all of it. 

These figures don’t account for taxes since they depend on an investor’s tax bracket. However, even with a 30% tax rate, the investor will end up with over $1.3 million at the end of 20 years. See how big a difference saving and investing a little amount over a long time frame makes?

Get rid of debt

Debt is one of the most common obstacles to early retirement. Think about it, instead of earning a return on money that’s already been earned via investments, debt makes a person pay interest on money that’s not been earned yet. 

Often, people don’t factor in the opportunity cost of taking debt. For instance, let’s say a car purchase has been financed with debt. The car costs $25,000 and the loan finances $20,000 for the purchase. 

Assuming a 10% rate of interest and a monthly payment of $425 over a 5-year term, the total interest expense adds up to $5,496. So, the borrower may think the car costs $30,496 ($5,000 down payment + $20,000 loan principal + $5,496 interest). However, this isn’t true.

Had the borrower not paid $425 towards the loan each month, it could have earned them a return. Let’s assume an 8% rate of return. This brings total returns over 5 years to $5,700. 

If it’s difficult to understand what the opportunity cost communicates, let’s put it in simple words. Had the person not purchased the car, they’d have saved $5,496 in interest and also earned $5,700 by investing the capital. 

Therefore, they’d have grown their wealth by $11,196 and still retained the capital of $25,000 (i.e., the value of the car).  

Ready to rev the retirement efforts?

Retiring early demands discipline and commitment. There are a million things that may keep a person from staying on track, but remember, that expensive jet ski shouldn’t stand in the way of achieving retirement goals.

Build a strategy based on a clearly outlined retirement goal, and follow these tips to retire early. After all, retirement can be one of the most rewarding phases of life – it’s a time to feed the soul rather than grunt at the desk 9 to 5 each day. Grunt now to make life after 50 a good one.

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