Nobody ever got rich on accident!
In order to become rich and retire early, you will need a strategy. A strategic plan of attack filled with timely, achievable goals along the way to your ultimate goal of financial independence. What follows, are the strategies I have found to be most successful when planning my road to early retirement.
Anyone can quit their job and say they are retired. The key to retiring early is to assure have enough money to stay retired. In order to successfully accomplish this you must have a strategy.
There are countless ways to go about preparing for your exit from the workforce. Ask 10 people for advice and you will likely get 10 different answers. When it comes to the nuts and bolts of retirement prep, there really is no one right answer. You will likely use a combination of different strategies in your quest to grow the perfect sustainable nest egg.
I have done years and years of research on the topic and have tried my fair share of strategies and I have found that there is one constant;
You must have a plan and follow it!
Unless you are paid a ridiculous salary and work for a company that offers a hefty pension, you will not become financially independent by accident. Here are some of the strategies you will use to build a nest egg that will allow you to leave the rat race behind and retire early.
How much do you need to retire early
The first thing you need to do is determine how much money you will need so you don’t outlive your nest egg. This number will be different for everyone and will depend on any number of variables including your current age, your current nest egg value, how much you intend to spend in retirement, life expectancy, and many other factors.
I have written an article dedicated to the topic of determining how much you will need to retire which you can read here. Before you continue with a strategic approach towards saving and investing, you will need to determine your endgame. You must know what your final goal will be and create smaller goals along the way so you can track your progress. Once that is done you can get on the correct path towards achieving said goals.
Use the 4% Rule
So you have determined that you will spend $80,000 a year in retirement. Now you are wondering how the hell you are supposed to know how many years that needs to last? If I live another 40 years does that mean I need $3.2 million?
Not exactly. The general rule of thumb is that you will need to save about 25x your annual spending which would bring this grand total down to $2 million. The reason for this is the 4% rule.
Here is how it works. You can safely assume certain variables based on past experience. These variables being about 2-3% inflation annually and about 7-9% growth annually. So if we take use the low end numbers, 7% growth and subtract 2% per year for inflation, that leave 4% every year for you to spend. 4% of $2 million is $80,000 or your estimated annual spending, and you still have a 1% cushion.
You can use any number as for your nest egg and do the math. If you can continue to earn 7% in gains every year and you only spend 4% your money will last forever.
Again, inflation may impact this and I understand market fluctuations may cause you to earn less than 7% but it may also cause you to earn more than 7%. We are dealing with averages here which is why we use the most conservative numbers to be safe.
If you want to learn more about the 4% rule, how it works and the university studies that have been done to back it up, read this article I wrote: Determine how long your savings will last with the 4% rule
Passive Income – Dividends
One of my favorite strategies is to invest for passive income through dividend paying stocks. Who doesn’t love being paid to do nothing? That is essentially what happens when you collect dividend payments. Companies will pay you simply for owning shares of stock in their company.
Let say you own 20 shares of stock in a company that pays a quarterly dividend of $1 per share, you will be paid $80 a year just for holding the stock. And you still have the value of the stock which you are free to sell at any time if you wish. This is why many investors love dividend stocks.
In retirement, dividend stocks can be an even more valuable tool. your portfolio mix pays you 4% in dividends. Lets say the total value of your portfolio is One million dollars. That means you will receive $40,000 a year in dividends. For some people, that is enough to cover their expenses every year in retirement.
I wrote an article dedicated to the strategy of Living off dividends in retirement. Be sure to check it out.
Another reason investors love dividend stocks is the security they offer. Especially in retirement, you will need to manage the risk you take with your nest egg. I have an article dedicated just to that topic which you can read here.
Blue Chip Stocks
Dividend stocks are one investment strategy that many early retirees love and just as beloved are blue chip stocks. Historically, Blue Chippers have gained a solid reputation as steady growth performers that also pay dividends. They are also seen as being impervious to market downturns. Blue chippers are an essential part of any well diversified portfolio.
Read my article on how to build a Blue Chip stock portfolio and the qualities they have that make them so attractive to investors.
Regardless of what type of stocks you might choose to invest in, you will need to earn compound interest on your savings if you are to make any substantial gains. And substaintial gains is exactly what you are looking for. Without them, you could save forecer and still never have enough money to retire, let alone retire early.
Compound Interest
Albert Einstein called compound interest the most powerful force in the universe. Here is how it works. When you earn compound interest, you are being paid interest that will then be paid interest again and again. The interest compounds on top of itself increasing your principle exponentially over time.
If you want to become rich, read my article on how Compound interest will make you rich.
Lower expenses
Now that you understand some how to determine your savings needs and investment strategies, you will need to find some money to save. Hopefully, you are already putting away money towards retirement. If not, what are you waiting for dummy.
Either way, you probably would like to save more. The more money you put away today, the faster compound interest will make you rich and the sooner you can give your boss the proverbial finger and quit the rat race forever.
The first thing you need to do is make a budget and determine where your money is going. Almost everyone can find somewhere to cut spending. I wrote an article demonstrating just how much money gets wasted and how much it would add up to if invested over a lifetime. You can read it here: 10 insanely easy money saving techniques.
Now depending on your age and income level you may or may not already have fallen victim to the deadly lifestyle creep. Lifestyle creep is what happens when your spending rises in step with your salary.
This is such a common phenomenon that psychologists have even named it, Parkinson’s Law. The principle behind Parkinson’s Law is that work will expand to fill the time available for its completion. Anyone with children understand this as a 10 minute homework assignment tends to take an entire weekend to complete. Or you will take the entire weekend to mow the lawn even though it is really only an hour long job.
This is a fascinating concept that applies to many facets of life including your finances. Adjusted for personal finance, Parkinsons Law can be stated as follows. Expenses will expand to meet or exceed ones level of income.
To read more about this fascinating topic and what you can do to combat it, check out this article I wrote.
If you would like to learn more about how to Prevent Lifestyle creep read my article.
Hire a financial advisor
Navigating the wonderful world of personal finance can be quite the daunting task. It is intimidating, time consuming, and can be confusing. At some point you will feel it is necessary to hire a financial professional for help. This is a fantastic idea and well worth the money. Even if you don’t like what you hear or decide not to use the person, you will learn something. I have taken away knowledge of some kind from every person I have every discussed personal finance with and have come out stronger on the other side of the conversation.
Weather you plan to do it yourself or hire someone tomorrow, I highly suggest you at least take the time to read my article titled Is it time to hire a financial professional. I promise you will come out more educated after reading it.
Thanks for reading and don’t forget to check out the resources page to see some of the tools I use myself
Earl