Retire by 30? Absolutely, but it depends on what your idea of retirement planning is. It is possible to arrange your finances so you don’t have to rely on working for money, it may not be possible to save enough money to fully retire. Click Here To Go Straight To Our Online Tutorial
Retirement planning is the key to success. It can be hard to put your finances and plans in the hands of another person but certified financial planners, CFPs, are an invaluable tool. They take the emotion out of your financial equation, a leading cause of personal financial disaster, and guide you on the most efficient path to your goals. Read on to find out everything you need to know to get started on your early retirement plan.
How to retire early depends on your goals, income and risk tolerance. This is where careful planning comes into the picture. A plan lets you know where you are now, and what you can do to change the situation. We walk you through what it takes to achieve early retirement in this article. Along the way find our twelve (12) early retirement tips to help you meet your retirement goals.
A Comprehensive Guide On How To Retire By 30
Retire by 30; it isn’t as hard as it may sound if you start retirement planning early, plan well and follow through with what you plan. For others, it may be more of a challenge, but that doesn’t mean you can’t retire early. You will find, in this comprehensive guide, all the information you will need to plan for your early retirement.
Before moving on, I think it best if we define what early retirement means for you because it doesn’t mean the same for everyone. In many cases, and this is reinforced by the media, retirement means saving, saving enough money so that you have enough to cover your expenses and do what you want when you stop working. In this sense your savings is finite, it will hit a peak at which point it will (theoretically) cover your expenses. The downside to this approach is that from the point of retirement on, your savings dwindle until you die. Hopefully, your savings won’t run out before you pass and, if you are lucky, you will have some left over to give to your children.
For others, retirement planning means building a portfolio of investments that can sustain a lifestyle once the accumulation phase of life is over. The accumulation phase of life is your early and middle years, the time in which you are working the most and saving money. You can, as in the first example, simply save enough to pay for retirement or use that money to buy an asset that can pay for your retirement.
What are assets? Assets are anything you can own that pays you a return for owning it while maintaining, theoretically, its intrinsic value. Assets include stocks that pay dividends, bonds that pay interest, real estate that accrues rent (not the home you live in, that’s a liability but more on that later) or businesses that deliver profits. If your portfolio of assets produces enough income to sustain your lifestyle you can safely retire at any age with little to worry about.
Tip #1 – Know Your Objective
The first step in any retirement planning is setting an objective. In this case, it means the age at which you want to retire but more than that. It also means how you want to retire. How much monthly expense do you to plan to have? What kind of activities do you want to do and, most importantly, how are you going to fund it? There are many ways to fund retirement, and we will discuss them all in due course. The key, in all cases, to retiring by the age of 30 is to start early, before the age of 18 if possible, and stay focused on your goal.
The Five Stages Of Your Financial Life
There are five stages of your financial life spanning from your early-accumulation phase through retirement. The accumulation phase, broken in early-accumulation and late-accumulation, are the times of life in which you are accumulating most of your wealth and using it to build your portfolio.
The early-accumulation period is right after college, or earlier if you choose another path (honestly, tradesmen and other skilled laborers are more likely to retire early than not), and is the time in which you should be saving and investing as much as possible. It is also the time at which you can take on the most risk because you have the most time to correct a mistake should one occur.
Late-accumulation may begin in your early 30’s as you focus on career and family (or earlier if you get started accumulating earlier). This is a time in which you save, but maybe not as much as before. This is also a time in which riskier assets are purchased, but maybe with a slightly lower tolerance for loss than in the early-accumulation phase.
In the pre-retirement phase, around 45-50 for those not on the early retirement track, investors begin to shift out of the riskier assets in favor of fixed income. This is not to say that a major shift occurs but enough to mitigate some risk and begin establishing a regular, sustainable and guaranteed cash-flow. More on equities, investing and fixed income below.
Early-retirement means no more working for money. At this point in life, accumulation is over, you are living off of your retirement portfolio and selling your risky assets in favor of fixed income. This may mean liquidating stocks and real estate unless you have chosen to focus on one or other of those markets as a source of post-accumulation phase income.
Late-retirement is the last phase of your financial life. By this point, your retirement portfolio has been converted almost entirely to fixed income (or dividends), and you are living the life you’ve been planning for, free and easy.
Successful Retirement Planning Begins With Positive Cash Flow
Successful retirement planning begins with positive cash flow. If you are currently living outside your means, there is no way to retire early without hitting the jackpot, winning the lottery or coming into some other windfall. The reason is simple, it comes down to math, most investments yield (what they pay you) far less than what credit cards and other debts will cost you. Trying to plan for retirement without first getting debt and spending under control is a no-win situation.
Regardless of your debt situation, the first place to start planning your finances in preparation for early retirement is with a Cash Flow Statement and Balance Sheet. The cash flow statement is a document used by individuals, organization, and businesses to document where their income is coming from, how much there is, where it is going and what their liabilities are. The balance sheet is a document that lists assets and liabilities (debts) with appropriate information on cost, interest/yield, and outstanding debts.
Together, the cash flow statement and balance sheet represent the financial health of the person or business and are, in effect, the scorecard for life. The idea is to maximize income and minimize outflow on the cash flow statement to build assets and reduce debts on the balance sheet. When the volume of assets and the cash flow they produce is enough to sustain lifestyle a safe, secure retirement is all but assured.
Tip #2 – Use Your Balance Sheet To Reduce Debt
How to retire early? For those with debt look to the balance sheet for ways to reduce the amount of debt and ways to lower your interest rate. The interest is the single largest factor in the amount you will pay over time and can save you thousands of dollars if reduced. Choose the debt (credit card in most cases) with the highest interest rate and pay it down first, then moved on to the next.
My wife and I had the opportunity to pay off a credit card and then used the extra money to help pay off the second card faster than expected. Bottom line, you have to stop carrying credit card debt, or you will never be able to retire early. For best results freeze all your credit cards in a block of ice so that you have them if you need them but can’t use them without waiting a few days.
When looking to find savings in the flow of money look first to your outflow, the bills and liability payments, before trying to cut out day to day expenses. If there are bills that can be cut (the gym you don’t go to) or lowered (find a better phone deal) those savings can go directly to saving and used to reduce debt or build assets.
Your Income Is Key To Early Retirement
So far I have only talked about the income you plan to have during retirement, the income you will derive from your investment portfolio, but that is not the most important income in this process. The most important income is the money you earn now, during your accumulation phase, because it is the money from which all your savings and retirement income will derive. If you are serious about early retirement, this is an important area of life to focus on.
Do what you have to do to maximize income at your job, even if this means leaving for another position or better pay. If possible, a second job may be a good idea as it can add an extra boost to your savings ability. If you work for yourself or own your own business, it may be wise to expand or add employees but only if the numbers work. When you are at work take advantage of any retirement savings or 401(k) matches to fully realize your earnings potential, you don’t want to leave money on the table if you can help it. Don’t worry if the retirement plan or 401(k) doesn’t meet your investment needs; you can always roll it into your IRA account when you leave the job.
Tip #3 – Don’t Lose The Forest For All The Trees
It is easy to get lost in the details of retirement planning but don’t let that get you down or distract you from your goal. Retirement saving is not rocket science but a simple method to accumulate income and use it efficiently for retirement purposes. In this equation, the word retirement is crucial because it means you were first employed and now you aren’t. Don’t let your quest for early retirement distract you from making the money that will allow that dream to come true, or worse, lose a job because your head is not in the game.
Saving Is The First Step In Retirement Planning
While saving money is not the end of your plan for early retirement it is the beginning. Your savings is the money from which you will build your investment portfolio and the earlier you start, the better. Those who begin saving at an early age are far more likely to retire early, retire well and stay retired than those who don’t.
The reason is twofold; the first is discipline. Those who start saving early create a habit that becomes ingrained in them, a habit that can carry them through into retirement. My parents are a prime example; they have been saving their entire lives, are now retired yet still save and invest some of their income every month.
The second reason starting early with your retirement savings is compounding. Compounding is the process by which an asset’s earnings are reinvested to make the investment grow. Over time the account will grow faster and faster as the earnings are reinvested again and again.
To be clear, your savings account is your first asset. It pays a percent yield based on an average daily balance (in most cases) that is added to your account each month. This means that each month your account will grow even if you don’t put any more money in it, it pays you. Each month, month after month, as you continue to save and the balance continues to compound it will grow faster until you reach your goals.
Using simple monthly compounding at 5.0% (you’ll be very lucky to find that in a savings account), and starting with $10,000 an 18-year-old would have $18,199 by the age of 30, a gain of more than 80% if the earnings were allowed to compound year after year. If that same person were to take out the earnings at the end of each year, $512, they would make $6,144 in profits or a gain of only 60%. If an additional $100 is added to the same account each month, the gains are greatly enhanced. The first year will see the account increase by $1,745 versus $512 and, if left to compound over the next 12 years, would grow to $38,000 in that time.
Tip #4 – Start Early, Save Regularly
Start saving early and be aggressive about it. Let the power of compounding work in your favor and build the habits it takes to be successful. The caveat is in your return on investment, the ROI, or how much you will get back on your saving account investments. Savings accounts are your first asset, but they are not your best asset. Regarding ROI, they are the lowest yielding place to put your money, so you will need a plan to combat that if you want to retire early. What we suggest for your savings account is to set a predetermined level you would like your savings to be and put additional savings into an investment account. Your savings should be equal to 3, 4, 5 or 6 months of your pay, whatever it takes to keep you sleeping soundly at night, so when your savings account reaches that level, it will be time to start funneling funds into other investments with better ROI.
Build A Portfolio Of Investments You Can Count On
Retiring early, unless you are one of the lucky few, means building a portfolio of investments you can count on. This may mean, while you are young, living below your means to maximize investable assets but it will pay off in the end. While the people you knew in college are slugging it out at their dead-end jobs, you will be living off of your investment returns.
- Investment Vehicle, Security – Any of a number of forms of product that allow the purchaser to realize a profit, or loss, over time. This may include but is not limited to stocks, bonds, options, futures, commodities and real estate.
In most cases, your portfolio will be built around three things; equities, bonds/debt, and real estate. Equities are another name for stock; a stock is equity ownership in a company or business, you can own them for a number of reasons the primary being dividends but more on that later. Bonds and debt are the second major asset class and pay a yield. In the bond asset class, you will be loaning, through security, money to businesses and individuals in return for their interest payment. Real estate investing can come in many forms and, depending on your risk and motivation, could easily become a job.
An Introduction To Equities And Equity Investing
Equities, stock, are the easiest and most accessible investment vehicle available to average investors. By average I don’t mean to sound condescending, I mean those who don’t have at least $1,000,000 of investable cash or make over $250,000 per year. You know, most of us. Stocks can be purchased through most major financial institutions (banks) or, if not, there are dozens of brokerages to choose from. All it takes to join a brokerage is to sign up, verify your identity and fund the account. Being successful is quite another matter but also not too difficult with a basic understanding of the market.
- A stock is equity ownership of a company or business. It represents one share of ownership and entitles the bearer to a portion of profits and a say in the company’s operation.
The first thing you need to be aware of is the vast array of equity and equity-related products. The most common, aside from stock, are mutual funds. Mutual funds are actively managed funds based on an underlying investment thesis. The thesis could be based on an index, a sector, an asset class or any other strategy you can think of including astrology if you can believe that. To participate, you give your money to the fund manager, and they make investment decisions for you. Many people choose to go this route, but it is not the best one for those who want to retire early because of fees, liquidity, and performance.
Tip #5 – Speculation And Investing, You Need To Know The Difference
Speculation and investing are two practices attached to the financial market that are crucial to your early retirement planning. While similar, they are not the same and should be used accordingly. Investing is the methodical purchase of assets with the intention of earning a return over time. It focuses on valuation and income and should be the core of your portfolio. Speculation is the purchasing of assets in the hope they will become more valuable (or less, depending on the trade) at a later date and carry a much higher risk. Speculations play a role in your early retirement plans but should not be the core of your portfolio.
Speculations are much riskier than investments because they are more often based on market sentiment or expected changes than the value of the underlying asset. Successful speculators often start as investors who, after long experience or intense study, learn to predict the movement of prices. Speculators can use high-risk speculative trading vehicles like options and futures to create cash-flow regardless of an assets price movement.
These Are The Basic Strategies For Successful Equity Investing
There are two basic strategies for successful equity investing; income and capital gain. Within each basic strategy are diverse sub-strategies and techniques, enough to fill a library of books. At heart, income based strategies typically mean dividends paid by the underlying company while capital gains are the profits you make when selling stock at a higher price than what you paid. While both have their attractions, the very best investments include a little of both.
Dividend Income Strategy For Early Retirement
Dividend Income Strategies can be very simple; look for the highest yielding (the amount of dividend relative to the stock price, expressed as a percent) issues and let them pay you to own them. The problem with this strategy is that the highest yielding stocks are often the worst to own. A high yield can be a sign of underlying weakness (management is trying to buy support) and unsustainability. The better choice is to look for the highest yielding stocks from among a group with stable/rising income and the free-cash-flow to pay the dividend distribution without question.
One of the best dividend income strategies is to look for companies that are expected to increase their distributions. This strategy takes advantage of the fact companies in a dividend hiking cycle attract new investors looking for higher yield, and that usually results in a higher price for the stock. A stock’s value is often tied to its dividend. If a stock trades with a yield of 3% and raises the distribution, you can expect to see the price of the stock rise until yield returns to its nominal range.
The Dividend Aristocrats are a group of stocks with a long history of dividend increases. To be an Aristocrat, a company must have increased its dividend for at least 25 straight years, and many have surpassed the mark by a wide margin. The current list spans all eleven S&P 500 sectors and includes both large-cap growth and large-cap value stocks.
To put the dividend growth strategy into perspective consider this; the average dividend growth rate for the S&P 500 Dividend Aristocrats is nearly 6% over the last 40 years. That means a dividend growth strategy based on the S&P 500 Dividend Aristocrat Index would have seen their distribution rate grow more than 1000% from 1988 to 2018.
The Capital Gains Strategies For Early Retirement
Capital gains strategies are focused on the valuation of an underlying stock. They tend to be riskier than dividend-focused strategies but should not be excluded because risk means reward. The key is to do the research, learn what it is that drives business and pick your investments wisely. There is a lot of hype in the market, and many of the growth-oriented companies are nothing but hype, stock worth $100 today could be worth half that tomorrow simply based on market perception.
Things to look for are companies that are growing revenue, expanding the operation, reinvesting in their business and deliver value to the market. The value could come in many forms but typically is a product, service or technology that people want and will use. If you can find all this with a dividend attached all the better, that means you can expect to see share prices rise and earn income along the way.
How To Retire By 30, Use Options To Your Advantage
Options are a great way to enhance your returns and grow your early retirement account. By options I don’t mean choices although it is another choice, stock options are a financial derivative product based on stocks that can be used to leverage returns. Options are akin to renting; they provide temporary ownership of the stocks they represent; traders may buy them as a speculation on market movement, investors may choose to sell them to earn income on stock they own.
Not all stocks are optionable, that is, not all of them have options listed that you can trade, so be sure to take that into account when choosing your investments. The good news is that most of the stock on the US market do have options listed, the bad news is that many do not have enough volume (market interest) to make trading them viable.
The basic strategy for investors using options is called the “covered call.” This strategy allows you to sell an option on a stock that you own in exchange for a fee. The fee is called the option premium and is the profit you make when employing this technique. To sell a covered call use a stock that you own and don’t mind selling (at a higher price, usually) or one that you’ve chosen specifically for this purpose. Then choose an option strike (the price at which you agree to sell your option) and sell it using your stock trading platform and collect the premium.
Once you sell the option there are two possible outcomes; your option will expire worthless, or you will have to sell your stock to cover the obligation. If the option expires worthless, you get to keep the premium, your profit, and are free to sell another call. If you have to sell your stock to cover your obligation and the strike price is higher than the price you paid you profit twice (the premium and the sale of stock) making this strategy a win/win for savvy investors. Why would a call option expire worthless? Because the price of the underlying stock was below the strike price of the call at the time of expiration.
Tip #6 – Use Your Options To Enhance Your Return
Using options is a must for any early retirement account. You don’t have to get complex with your strategy, using the covered call is enough to provide a 5% to 10% ROI every month, but you do need to use them. Bottom line, options are a liquid market waiting to be tapped, if you want to retire young, early and wealthy, you can’t leave money lying on the table.
Equity Investment Alternatives To Stock Ownership
Mutual Funds, Not The Best Choice For Early Retirement Accounts
Mutual funds charge the highest fees of any form of managed investment (an investment where someone else makes the decisions for you) and are not liquid like stock. Fees can run more than 5% annually, and you have to pay them even if the manager fails to make you money. Because you are not buying shares in a company, but shares in a fund you cannot buy and sell them the same way as stock and this is a big problem, especially when the market is moving.
To buy or sell a mutual fund you have to wait until after the market closes. This is so the manager can assess the value of the fund and how much it will cost you to buy or sell a block. When you give them your money, they buy more stocks on your behalf, based on their strategy. This set up means that there can be an unlimited number of shares of a fund even though there are limited numbers of shares of the underlying stock within the fund.
Actively Managed Closed-End Funds Are Better
Actively managed closed-end funds are a better choice for your early retirement equities account but are not suitable for all investors. Because they are actively managed, a fund manager is buying and selling portfolio assets on a regular basis, they carry high fees when compared to stocks and ETFs (exchange-traded funds, more on that next) and tend to trade at a discount to their NAV or net asset value. They do come with one major bonus; they tend to pay higher than average dividends because closed-end funds are designed to earn money and pay those earnings to shareholders.
Closed-end funds tend to trade at a discount to their underlying value because there is a risk the manager will not realize the full potential of his strategy. They, the managers, are human just like you and me and driven by the same fear and greed that underlay the market. The discount has become known as a value trap because there is no guarantee that NAV or the discount will remain stable, or that you will ever realize the full value of the investment. There are some closed-end products with a termination date, a date at which the fund will liquidate, the only true means of recouping the full value of a closed-end fund portfolio.
The major difference between a closed-end fund and a mutual fund is liquidity. Closed-end funds have a limit to the number of shares that can be issued versus an open-ended mutual fund which can issue new shares whenever someone wants to buy in. This means that a closed-end fund can be exchange listed just like a stock which makes them liquid like a stock; you can buy or sell them at any time the market is open. Mutual funds do not trade at a discount to NAV because their value is pegged to the value of the underlying assets at the time of close and not the performance of the manager.
Value investors can use the discount to NAV as a strategy for investment because it tends to fluctuate along with market conditions and sentiment. Investors can target times when the discount is wider or narrower than usual as points for entering or exiting a position. A widening of the discount caused by an increase in the net asset value is a particularly bullish signal that precedes a subsequent increase in share prices.
BDCs, business development companies, are a special type of closed-end fund. They are in business to loan money to businesses to help them grow and develop. Because they are investing in riskier, start-up and early growth phase businesses they receive tax and other benefits from the government. To qualify, among other things, the underlying fund must pay at least 90% of its NII, net investment income, to shareholders which can make them quite profitable to own..
There are two main types of BDC, equity-focused and income focused. The equity-focused BDCs tend to invest in companies by buying their stock in sufficient quantity to garner a controlling stake in operations. Their goal is to increase the value of the stock, reap dividend payments and eventually sell at a profit. The second type of BDC tends to invest in companies by buying their bonds and other debt instruments. They make money off of the interest payments. In both cases, the BDC is required to provide guidance and oversight to operations in addition to making the financial investment.
A con of owning closed-end funds is that many come with tax liabilities that are passed on to the shareholder. This should be taken into consideration because it will lower your expected return unless held in a tax-deferred retirement account, more on those later.
Passively Managed ETFs Are The Best, Except For Stocks
ETFs, exchange-traded funds, are very similar to closed-end funds with one big difference; they are passively managed. This means that, instead of a manager actively overseeing the day to day operation of a fund, the fund is pegged to an index and tracks its performance. This means, in most cases, a fund with lower fees and better returns than an actively managed fund with the same focus. The most famous of the ETFs, the first one, in fact, is the SPDR S&P 500 index tracking stock SPY managed by State Street Global Advisors.
The SPY tracks the underlying S&P 500 by holding the same stocks in the same proportions as the S&P 500. It is rebalanced and reallocated quarterly and annually, just like the S&P 500, and virtually always has the same holdings. It also pays a dividend relative to that of the underlying index.
The SPY, along with the diverse universe of ETFs, provides instant access to the broad market that can be used by speculators and investors to create cash flow. There is an ETF for nearly every index and trading style in existence, including and not limited to inverse ETFs that move opposite the underlying index and leveraged ETFs that move two or three times the amount of the underlying index.
Early retirement accounts can be built on ETFs. The fees are fractional compared to closed-end funds and mutual funds and the access to diversification is phenomenal. The SPDR depository receipts are a family of ETFs that we particularly like. They represent the 11 main and dozens of sub-sectors tracked by Standard & Poors and are among the most liquid ETFs on the market. A calculated, well-timed investment in each of these would constitute a well balanced and income producing portfolio.
Other Types Of Equities You Should Own
There are some other types of equities you should own including but not limited to MLPs and REITs. MLPs, master limited partnerships, are tax-deferred investment vehicles that own and operate the US natural resource infrastructure. This most commonly means oil, gas and natural gas refineries, pipelines, pumping and delivery stations but could include other types of natural resources. Their value is tied to the value of oil (or other resources) but not dependent on it the way a driller or gasoline retailer is. Refineries and pipelines make their money on volume of product pumped/delivered which makes them a little less risky than an ordinary energy investment.
REITs are real estate investment trusts, businesses who buy, manage and sell real estate to generate income. A REIT may be focused on residential or commercial real estate, development of the space, management of rental units or a combination of all the above. They make their money on rents or the sale of properties and include the operators of hospitals, hotels, malls and apartment buildings.
Both REITs and MLPs are tax-deferred business structures which ultimately means they pay higher than average dividends, usually in the range of 6% to 12%. It also means that there are some tax liabilities you will have to pay on your 1040 form if you choose to hold them outside of your tax-deferred IRA (more on tax-deferred accounts is coming, I promise). They both also tend to trade at a discount to their NAV which provides another opportunity for savvy investors to enhance returns.
Asset Allocation, The Double-Edged Sword
When you begin building your portfolio, and over the life of your investment career, you will want to spend some time on allocation. Asset allocation is the process of spreading your investment dollars around so that you don’t risk too much in any one place; you don’t want to keep all your eggs in one basket. The traditional rule of thumb is to own your age in bonds (lower risk assets) and the remainder in equities, real estate, and other assets but this is not the end to your allocation issues.
Each asset class whether it is bonds, equities or real estate will need to be allocated as well. This means owning different types of bonds, different types of equities and different types of real estate to ensure safety for each portion of your portfolio as well as the portfolio as a whole. Don’t be alarmed; this is not as hard as it sounds, mostly because you don’t have to do it all at once.
Unless you have a sizeable amount of investable cash to begin with, you will likely have to start small, focusing on one asset class and one investment at a time. If you aren’t careful, especially with equities and bonds, asset allocation can be a two-edged sword. Each time you buy there is likely to be a fee or commission to eat into your capital so buying small amounts often is not the best approach.
Depending on what it is you are looking to invest in, it may be wise to save money for a couple of months or a year and buy the investment in one large block. Some brokerage platforms provide commission-free trading for certain assets (like ETFs and mutual funds) so be sure to shop around before choosing.
A term you will hear bandied around is dollar-cost-averaging. Beware. This is a term coined by an industry bent on having us, the general public, make regular monthly investments so that they, the advisers, can earn a commission. Dollar-cost-averaging is the practice or idea that by regularly investing your cost, over time, will average out. This means it doesn’t matter the price you pay or the time at which you buy an investment but it’s a practice that can cost you money. Ask yourself this. Is it better to buy an asset over time, pay random prices and hope your cost average out, or is it better to wait for times when the asset is undervalued and buy then?
Tip #7 – Wield Allocation To Your Advantage
Don’t be scared of allocation, it is a very useful tool, but don’t over allocate as it can cause undue stress for you and diminish your total returns. Start small, focus on a single position until it meets your goal (or you max out its realistic potential) and then move on to the next. Strategically target new positions to maximize returns and use your capital as efficiently as possible. Take a little time, get to know the asset class and assets you want to invest in and learn what makes them valuable. When they are undervalued or cheap scoop them up and realize enhanced returns over the life of the investment.
Fixed Income Investing For Early Retirement
Fixed income invariably means bond investing. Bonds are a debt-oriented investment vehicle used by business, local governments and countries to raise capital. For the investor, this means interest payments and, in many cases, a lower rate of return than what you might find elsewhere. This does not mean you shouldn’t include bonds in your early retirement portfolio because you should. Bonds can provide a steady stream of income that can be counted on in good times and bad.
There are three important terms that every bond investor must know. The first is the maturity date or the time at which the bond issuer must repay the initial loan amount. The second is the face value or the amount the lender (you, the investor) paid for the bond. The third is the interest or the coupon, the amount the issuer must pay, and the timing of the payments, for the privilege of borrowing money.
Investing in bonds is all about the coupon, or interest rate, the maturity and the credit rating of the issuer. The coupon is the gain you are expected, and guaranteed, to be paid for owning the bond, and that is paid over the course of the maturity period. The bonds longer maturity have lower relative return than bonds with similar coupon rates and shorter maturity periods.
The credit rating is a score given by one of a small handful of rating agencies that judges the likelihood the issuer will be able to repay the debt. The rating system is based on a businesses, or governments, ability to pay back the debt and its susceptibility to adverse economic conditions.
The highest grade is AAA; this rating means a company has an extremely strong capacity to meet its financial obligations and a low susceptibility to adverse conditions. The ratings, from AAA to BBB are considered to be “investment grade” bonds as they are the safest and most highly sought after bonds on the market. The upside is the guarantee; you can be assured these bonds will pay their coupon and their maturity. The downside is that they have the lowest coupon rate of any bonds on the market and not always suited for younger investors (younger investors have the time and risk-tolerance to purchase riskier assets) or early retirement accounts.
Bonds with rating BB to D are considered to be “speculative grade” with one major note; BB bonds are much less likely to default than D bonds which are the most likely to default. The good thing about speculative-grade bonds is the coupon yield, much higher than investment grade and in a range suitable for early retirement planning, the downside is the risk. A BB rated bond may yield two or three times a comparable AAA-rated issue while a D rated bond (also known as junk bonds) may yield five or ten times as much.
Tip #8 – Fix Your Returns For Steady Income
Bond investing is called fixed income for one simple reason; you earn a fixed rate of return that is easy to count on for income. While the younger investor may want to shun investment grade bonds due to the lower relative return, investing in some higher quality speculative-grade bonds is a must. Not only will it help diversify your account it will provide enhanced returns necessary for successful early retirement planning. To mitigate risk stay away from the D rated issues and instead target high to low mid-grade bonds, BB+ to CCC rated for a blend of safety and yield. As you approach your retirement-event horizon, you may want to switch to higher rated more reliable income streams associated with the investment grade issues. Alternatively, investors may choose to invest in closed-end funds or ETFs that focus on bonds, debt and fixed income for comparable returns.
How To Retire Early? Buy Real Estate
Real estate is one the surest and most reliable investments in the financial market. It is in high demand and short supply which makes it perfect for those seeking to build wealth. The problem is that it is not an easy market to get into, real estate is expensive. The easiest way to own real estate is through an equity product such as a REIT, mortgage-backed security or ETF focused on real estate.
An alternative to REITs is Fundrise. Fundrise is a crowd-sourced alternative investment focused on the highly lucrative private market real estate sector. The website generates capital through crowd-sourced funding; the funds are used to create REITs with a major difference to the equity style public market listed REIT. These funds are illiquid, they tend to take 5-6 years to mature, but that risk is mitigated by higher than average returns (10% to 12% annually) and the ease of access the platform provides.
The more adventurous can venture into the physical real estate market and buy income-producing properties. These can range from single-family houses to duplexes, small apartment buildings and even larger complexes and industrial/commercial space as your savvy and investment capital grow. These properties will deliver rents but come with one major drawback; you are directly responsible for their upkeep, maintenance, and occupation. You can hire a management company to oversee the properties, but it will eat into your profits.
Another bonus of REITs and Fundrise you can’t get with physical ownership of real estate is tax-deferment. Equity products such as REITs can be owned in a tax-deferred IRA or other retirement accounts where it is allowed to grow free from encumbrance. This is especially important for early retirement planning because every dollar you invest now will be worth $5, $10, $15 or more in your retirement years.
Your Home Is A Liability You Can Invest In
There has been a lot of debate over whether your home is an asset or a liability, the best way to look at it is as a liability you can invest in. By definition, your home is not an asset because it costs you money to own live there, a fact that makes it a liability. However, because your home is real estate, there is an opportunity for gain over the long term if you buy smart, reinvest in the home while you use it and then sell smart.
Until then understand that your home costs you money. It is a bill you pay each month that does not generate any income so be wise in your choices. If you don’t have a family, are single, or committed to early retirement planning choosing a lower cost housing option may be a good move. In other cases spending some money to ensure you and your loved ones have a proper base of operations is the right the thing to do.
Tip #9 Your Home Should Be Part Of The Plan
Your home and residence need to be included in all aspects of your plan from early accumulation phase through retirement and your twilight years. You don’t ever want to find yourself without a place to go. In the early years, it is certainly prudent to spend as little on housing as possible. This may mean roommates, living away from the center of town or in a small home. Later in life, it may become necessary to move into a larger home so being prepared for that contingency is best. If you are lucky enough to know where you will or will want to live in the future, you may be able to purchase an investment property in that location and let it pay for itself until you need it. One strategy that works well is to purchase land in the location of your retirement, so it is paid for and ready for a building when you are ready to live there.
Alternative Investments Mean Better Return For Your Portfolio
Alternative investments are anything not included in mainstream investing like stocks, bonds, and mutual funds. These investments don’t have the same protection as their mainstream cousins and are typically only available to high-net-worth individuals and accredited investors, those with $1 million in assets or make more than $250,000 per year. The reason why access to alternative investments is limited is that there is a greater risk, but greater risk also means greater returns.
I’ve already touched on one alternative investment, real estate. Fundrise gives you access to the private market that you don’t get from REITs and other types of bundled products, and this means better returns. Another type of alternative investment today’s early retirees need to consider is cryptocurrency. Cryptocurrency like Bitcoin is not true investments because they don’t pay dividends or yield but they are a valuable commodity.
Commodities, agricultural and natural resources with recognized commercial value, are another alternative investment for early retirees to consider. While commodities are not true investments they can be speculated and the business that profit from them can be invested in.
Marijuana and the marijuana industry are another commodity that is gaining traction within the investment world. The marijuana industry is expected to grow in the high double digits over the next ten years, and that means big gains for savvy investors. An easy way to gain exposure to marijuana and other alternative investments is through one of several alternative investment funds (ETFs or CEFs), or by investing in companies that do business with or in alternative investments.
Tip #10 Think Outside Box, Target Alternative Investments
Alternative investments can provide the kind of returns you need to fuel an early retirement account. The caveat is that they are riskier than mainstream investments, but there are alternatives, no pun intended, to help mitigate those risks. There is a whole universe of ETFs and closed-end funds focused on alternative investment, and they provide a good return on investment. These funds tend to use options and other derivatives (futures) strategies but can also be focused on a specific alternative investment market or type of investment. Regarding investment return, dividends among these funds tend to run above the S&P 500 market average.
This Is Where To Invest For Early Retirement
So, after all this talk about investing, how to invest and what types of vehicles there are to invest in the obvious question is where to invest for early retirement? Naturally, I’m talking about an account at a bank or other financial institution, and there are many to choose from. The two basic types of account you will encounter are the open account and the tax-deferred account.
The open account is one in which your earnings, after taxes, can be placed for investing and trading purposes. All funds in this account are subject to taxes so be careful what you own in this account and when you sell it. In some cases, it may be better to hold an investment than pay the taxes for selling it. This account is usually the most flexible as it allows for unlimited deposit and withdrawals without penalty (other than taxes). The downside to the open type of account is tax liability; you lose money paying income tax before you make the deposits and you lose more money when you sell profitable investments and owe tax on the profits.
The tax-deferred account is where most retirement savings occurs. These accounts let you make deposits before paying income tax and then let the profits accrue tax-free. The idea is that your tax liability will be less at retirement due to two things. The first is that most of your retirement income is capital gains and those are taxed at a lower rate than ordinary income. The second is that any ordinary income you are liable to pay tax on will be less than when you were working, putting you in a lower tax bracket.
Tax-deferred accounts come in many forms, and we discuss them all in our article How To Open A Brokerage Account Online. For this discussion, I will stick to the two most common; the IRA and the 401(k). An IRA or individual retirement account is a self-funded retirement savings account that allows tax-deferred savings. This type of account is limited in that you can only deposit $5,500 per person regardless of how many IRA accounts you have. Another drawback is that you cannot make withdrawals until 59 ½ without paying a 10% penalty.
The 401(k) is one of several types of employer-sponsored retirement savings accounts. The 401(k) allows the employee to save money in a tax-deferred account and have those savings matched by the employer. The 2018 limit on personal contributions is $18,500, far higher than an IRA, with the employer allowed to match that amount up to a total of $55,000 or 100% of your salary, whichever is less.
Open investment and IRA investment retirement saving options can be opened at most major banking institutions. They will facilitate, usually for a fee called commission, the purchase, storage, and sale of your securities with some limitations. First, not all investment banks provide the same services. If you are looking to buy and hold stocks, ETFs and bonds just about any account will do. If you are interested in using more advanced strategies you may need to look into a sophisticated trading platform that enables options trading. Fidelity is one of the US leading institutions for retirement accounts, but there are many others. USAA is another good one for those with a military background.
Tip #11 Max Out Your Tax-Deferred Savings And Reap The Reward
One of the best tips for retirement savers of all varieties is to max out your tax-deferred savings. This starts at work with your employer-sponsored 401(k). Always contribute at least as much as your employer will match because this means free money; you will save X amount, and they will save X amount for you on top of your salary), in a tax-deferred account. After maxing out the employer-sponsored options, you can move on to your IRA and max that out as well. If you can save more than $24,000 per year, you may need to talk to a tax specialist.
How A Financial Adviser Can Cut Years From Your Retirement Plan
If you are reading this article you have probably already taken control, or are about to, of your financial life. Speaking from that perspective, you are probably thinking to yourself; I don’t need a financial planner, I’m going to do it myself. Trust me when I say this because I was once like you, a financial planner is a good idea. Working with a planner can turbocharge your retirement planning, speed up the portfolio process and get you on the beach of some tropical island years quicker.
If you are not single, it is virtually guaranteed that you and your spouse will not have the same ideas about how to use your savings. In my case, my wife and I had very different ideas about what to do with our money and eventually went to an adviser, against my will I might add. I was afraid he would derail plans I had been making before the marriage but was pleasantly surprised to find an advocate who supported my and, ultimately, our cause. He was able to explain to my wife what we needed to do in a way I never could. We left that meeting in accord and have been happy with our decisions ever since.
Investing is easy, especially if you are single, creating a plan that carries you through to retirement is much harder. The hard part of investing is patience, having the patience to find a good asset and then having the patience to regularly invest according to a predetermined plan, your adviser can hold you accountable and keep you to the investment plan.
The plan, in most cases, will be fairly straight forward; save some money and then use it by the asset of your choice. Finding a good asset isn’t that hard either. If you aren’t interested in searching on your own, there are hundreds (probably thousands) of websites pointing out the best assets along with how and when to buy them.
Creating a financial plan that takes your current living situation into account while planning for retirement is very tricky. There are taxes to consider, and how your situation will affect your tax liability over time. Along with that is asset protection, estate planning, developing a strategy for social security, insurance planning and education for your kids. An efficient plan that accounts for all areas of your financial life will drastically limit your taxes, increase your available investable income and have a profound effect on your retirement savings.
If you already had an adviser, you may need a new one just to understand what it is that’s in your portfolio. Many advisers, not all, sell opaque proprietary products that are hard to understand, hard to get out of and may end up costing you money in the long run. The worst part is that many of those types of investment, things like annuities and whole-life insurance, come with surrender-charges and penalties for liquidation and early withdrawals. A bad adviser may have helped you into a financial mess; a good adviser can get you out of it, and avoid one in the future as well.
Throughout your life things will change and having an adviser is the most efficient way to deal with them. Marriages happen, kids are born and grow up and go off to college, and eventually, you will want to begin your early retirement. A good adviser will take the emotion out of those decisions and help pave the most successful path.
Eventually, you will retire and grow older. At some point, you will no longer want or be able to actively manage your finances as you once did. An adviser, a good adviser, is a person you can trust to handle things for you and to make sure your loved ones are taken care of according to your wishes.
Tip #12 Get An Adviser, Use Them Wisely
If there is one thing you can do to truly turbocharge your early retirement planning it is a financial adviser. Be sure to do your homework when choosing one, a CFP (certified financial planner) is best, but not necessarily all CFPs are the best choice for you and your goals. You don’t have to use a planner your entire life, you can save a lot of money in fees not having one during your accumulation phase, but it’s a good idea to get started with one, and then touch base throughout your life as things change. When it’s time for you to actively prepare for physical retirement, it may be time to sign one with an adviser for life. Don’t forget to factor in the cost, usually a small percentage of your portfolio annually.
This Is How To Take Early Retirement
Is early retirement possible? Absolutely, but be realistic. If you are already 28 and just starting with your savings you may not be able to retire at 30 without winning the lottery or creating the latest wildly popular technology; you could retire by 40 if you follow a plan and stick to it. If you want to retire by 30, you need to start early, planning when young, even before you leave high school, saving all the money you can. If you invest it, compound your earnings and plan for success you will succeed and retire by 30.