To retire early requires early investing. Everyone should put 20% of their earnings into savings, IRA, or 401K. If you start this early enough, retiring in your 40's should be simple. I'll admit that I wasn't one of those people that saved when I was young. In fact, I didn't start saving until I was in my 40's. So it's never too late to start early investing for retirement.
So what do you do with the money you're saving? How do you invest it? I will tell you what worked for me. I'm not a financial planner; I'm just someone that can analyze the data.
The Right Employer
First and foremost is that if you have an employer that does any matching funds, contribute to the max. The employer contribution is the easiest money you can make. I was lucky enough throughout my career that all my employers did some matching funds. I can't tell you about the number of people I knew that never participated in their employers matching fund program. It's just crazy to be throwing away free money. In fact, it's important enough that this should weigh into the decision-making process when looking for a job.
IRA's are great. Especially because of the additional benefit of the tax savings. However, you can't access that money penalty-free until your 59 1/2 years of age. My savings went into my 401K. A great benefit of a 401K (or 403B) is that you can use the IRS rule 72T and retire in the year you turn 55 and get penalty-free access to your money. With my 401K, I was able to self-direct the funds into any of the mutual funds the company offered.
My strategy was to put it all into the highest paying fund (over the previous 12 month period). I know this is contrary to what financial planners tell you to do. They want a balanced portfolio. But if I did the balanced portfolio, I'd never have the funds I ended up with at retirement. My strategy was to watch the mutual fund performances and every six months decide to move it or not. I know this is a little work compared to the “deposit and forget” method but spending 30 minutes a month was worth it. I was always aggressive in my selection. Sometimes I had it in real estate, other times in high-tech, once in a medical fund and once in Treasury notes. In the last ten years, I never made less than 17% annually on my money. And one year I made 26%. I'm very data-driven.
What About the Crash Years
During the market corrections in 2000 and 2008, I made simple fund changes that saved me thousands and jumped back into the aggressive funds when they were on their way back up. Let me be clear; I wasn't day trading with my retirement account. I didn't move my money back into the aggressive fund on the month it was starting to go back up. It was four months before I made the change. I would review my early investing monthly so that I knew what they were doing. My mutual fund company allowed me to change mutual funds every 90 days for no penalty cost. If there was a reason I needed to make a move sooner, there was a $30 fee. There was only one time that I incurred the $30 fee (the year 2000) because of the market correction that was occurring.
There you have it. Simple, right? It is. You just need to find ways to save. If you want to retire earlier than 55, then you need to put money away in your savings/investment accounts. Because the earliest you can get your money out (penalty free) from any of the retirement instruments is 55. So start thinking how you can save now. Savings doesn't mean you have to live like a pauper. You can save money and still do vacations and other fun things. You just need to be sure you are living within your means. And don't carry debt. The only thing credit cards are good for is building credit and the free points/money you can earn. But pay them off each month. Be sure and read my other post (How to Retire Early, Less Money Than You Think) on things you can do now, way before retirement age to get closer to living abroad or retiring early.
Retirement at an early age is great. Our friends see all the things we do through our blogs and Facebook and one commented that it seems like we are on an extended vacation. And that's exactly how we feel. We are always doing fun things. And there's no better way to enjoy life!
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