10 ways to retire early — it’s not easy, but it’s doable
Reprinted courtesy of MarketWatch.com
Published: Feb. 9, 2017
To read the original article click here
Most people look forward to retirement, and many wish they could retire earlier than age 65. I’m here to tell you that’s very possible, though it’s not necessarily easy.
A generation or two ago, retirement was relatively easy for many workers. You put in your time at one or two companies for a whole career, then you collected a secure pension at age 65, plus Social Security.
I know lots of people my age who retired that way and live well without having to dip into their investments to meet their daily needs.
In those days, the retirement wind was behind your back, so to speak. But in the 21st century, would-be future retirees are facing various headwinds, some of which seem to be getting stronger.
- Pensions are much less frequent, and those that remain are less secure and often less generous.
- The new administration is proposing to rescind a new law that would require financial advisors to recommend products that are in our best interests.
- Interest rates are flirting with all-time lows, making it all but impossible to keep up with inflation, let alone make any money, from risk-free savings. From 1980 through 1999 short term U.S. Treasury Bills compounded at about 7%. From 2000 through 2016 that dropped to 1.6%. Currently, T-Bills pay only 0.5%.
- Long-term stock market returns, while always unpredictable, are widely expected to be lower in the future than they were in the past.
For these and other reasons, some advisors and pundits have adopted the phrase “80 is the new 65,” meaning many workers may have to work longer and retire later.
All that could be called “the bad news.” With that out of the way, let’s get to the good.
The good news is that many people have found ways to retire early. You can too. Here are 10 proven steps that will take you in that direction.
1) Save more money than you ever considered. Do your best to salt away 15% to 20% of your income. This will likely require you to live well under your present means, and you’ll sometimes miss out on things your friends and colleagues are doing.
But this will be terrific training for when you retire, because you won’t be accustomed to high living. I’ve met very few retirees who adjust easily to living on less, but I have met many couples who are content to spend the same in retirement as they did during their working years.
2) As you accumulate savings, do so in a methodical way by dollar-cost-averaging. This means investing a set amount regularly; the result is that you will automatically acquire more shares when prices are low and fewer shares when prices are high.
Over the years I have concluded that investors who use 100% mechanical portfolios in conjunction with dollar cost averaging are the most likely to consistently do better than the market.
3) Increase your savings as your income goes up over the years. Not yet saving 15% to 20% of your income? You don’t have to get there all at once. Set up an automatic savings plan that will raise your savings rate by two percentage points a year until you reach your goal.
Listen to Merriman’s podcast:“The three most important steps to early retirement.”
4) Make sure your spending and borrowing don’t sabotage your long-term plan. If you’re married, get your spouse on board with a long-term plan to spend less than you make now in order to have a better lifestyle later.
In virtually every case I know where young people are successfully saving over 10% a year, the spouse is 100% behind that commitment.
5) During the first 20 to 25 years of your working/investing life, keep your investments all in equities. You’ll read and hear lots of advice to keep some in bonds; when you’re young, don’t do it.
Bonds will sometimes bring you short-term comfort during times of market volatility. But they are not a good deal if early retirement is your goal: Their lower returns will deprive you of the long-term returns you need to build your investments.
You can expect that every 10% of your portfolio that’s in bonds will likely reduce your long-term return by 0.5 percentage points.
6) Keep your investments focused on the equity asset classes with the best rates of return over the last 50 to 90 years. Don’t yield to the temptation to invest in gold or other commodities.
A well-diversified stock portfolio is the most likely vehicle to take you where you want to go. If you want to reach for more growth, do it by tilting your portfolio toward value funds and away from growth funds.
Read: This 4-fund combo clobbers the S&P 500 Index
7) Invest in those asset classes in ways that keep your expenses as low as possible, thus preserving your stock-market returns for you. Most likely that will mean investing in carefully chosen index funds or ETFs.
You can invest in an S&P 500 index SPX,
8) Avoid bailing out of the market for emotional reasons during market declines.
In the earlier years, when you’re invested heavily or exclusively in equities, take the time to learn enough about what you are doing — and why you’re doing it — that you can “stay the course.”
As you get closer to retirement, add some bond funds to reduce the volatility of your portfolio.
9) Be smart about the investment vehicles you use. The best options are the Roth IRA and the Roth 401(k). Maximize your opportunities to use those accounts, and you’ll be rewarded.
Under the current federal tax laws, any money you withdraw from such accounts will be tax-free. Trust me on this: When you retire you will appreciate that.
10) Don’t lose faith. It’s inevitable that your portfolio will suffer some setbacks during bear markets along the way. This is normal. These setbacks will hurt you only if you bail out in search of comfort.
Especially in your early investing years, try to adopt an attitude of welcoming the bear. Why? Because you’ll be buying shares at lower prices than you’ll find in bull markets.
Read more articles by Paul Merriman
Richard Buck contributed to this article.
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