Tag Archives: Finances

15 Ways to Retire Earlier

AN EARLY START TO YOUR GOLDEN YEARS

The word “retirement” and number “65” are as linked in the North American psyche as “bacon” and “eggs.” Then again, that all depends on how fast you want your eggs, right?

Retiring early — or leaving the work force for the golf course, if you like — might sound like an unattainable goal. But there are many ways to make it, so long as you take numerous approaches into account.

Yes, 65 is the standard — but what’s 21st century life all about if not exceeding standards? Here are 15 major financial and lifestyle moves you can make to achieve this goal.

Are you fantasizing about early retirement. Here’s how to make that dream a reality.

1. LIVE TWO TO THREE TIMES BELOW YOUR MEANS

Sorry, folks: Simply skipping that $4 latte in the morning ain’t gonna cut it. It takes a much more committed approach where “sacrifices” are viewed in a new light. “It’s amazing when I work through the numbers that some people think manicures, landscapers and maids are a need,” said Michael Chadwick, a certified financial planner and CEO of Chadwick Financial Advisors in Unionville, Conn.

2. REDEFINE ‘COMFORTABLE RETIREMENT’

Less spending later constitutes the flip side of less spending now. If you imagine comfy retirement as a vacation home and monthly cruise ship trips, revisit that vision so you don’t have to bleed cash — but can still retire in style. Instead of two homes, for example, why not live in your vacation destination and pocket the principal from selling your primary residence?

3. PAY OFF ALL YOUR DEBT

That’s right, all of it. First: Is it time to pay off your home? You might not have the resources now to plunk down one huge check, but consider savvy alternatives such as switching from a 30-year to 15-year mortgage. Monthly payments aren’t much higher, but the principal payoff is much greater. Second: Do the same with loans and credit cards, as high interest eats up income faster than termites chewing a log. A credit card balance of just $15,000 with an APR of 19.99 percent will take you five years to eradicate at $400 a month — and you’ll dish out a total of $23,764.48, the calculator on timevalue.com shows.

4. CONSIDER OVERLOOKED FINANCIAL RESOURCES

While it’s risky to count on unknowns such as an inheritance, you might have cash streams available outside the traditional retirement realm, said Jennifer E. Acuff, wealth advisor with TrueWealth Management in Atlanta. For example, “Understand your options with respect to any pensions you might be entitled to from current or previous employers.”

5. INVEST EARLY AND AGGRESSIVELY

If you’re in your 20s and start investing now, you’re in luck, said Joseph Jennings Jr., investment director for PNC Wealth Management in Baltimore. “Due to the power of compounding, the first dollar saved is the most important, as it has the most growth potential over time.” As an example, Jennings compares $10,000 saved at age 25 versus 60. “The 25-year-old has 40 years of growth potential at the average retirement age of 65, whereas $10,000 saved at age 60 only has five years of growth potential.”

6. MARRIED COUPLES: PLAY RETIREMENT ACCOUNT MATCHMAKER

The wisdom of taking advantage of a company match on the 401(k) is well established — but think about how that power is accelerated if a working couple does it with two such company matches. “If your employer has a matching contribution inside of your company’s plan, make sure you always contribute at least enough to receive it,” said Kevin J. Meehan, regional president-Chicago with Wealth Enhancement Group. “You are essentially leaving money on the table if you don’t.”

7. PRACTICE SOUND CASH FLOW MANAGEMENT

The methodology is simple, yet the results can be profound: Put money at least monthly into systematic investments during your working years. “There’s no other element of investment planning or portfolio management that’s more essential over the long term,” said Jesse Mackey, chief investment officer of 4Thought Financial Group in Syosset, N.Y.

8. JUMP ON EMPLOYER STOCK PURCHASE PLANS

How about some free money? The ESPP typically works by payroll deduction, with the company converting the money into shares every six months at a 15 percent discount. If you immediately liquidate those shares every time they’re delivered, it’s like get a guaranteed 15 percent rate of return,” said Dave Yeske, managing director at the wealth management firm Yeske Buie and director of the financial planning program at Golden Gate University. “Add the after-tax proceeds to your supplemental retirement savings.”

9. START THAT RETIREMENT ACCOUNT TODAY

That is, the earlier the better. Millennials who kick off retirement accounts early will reap big rewards later. A 25-year-old who socks away $4,000 a year for just 10 years (with a 10 percent annual return rate) will accrue more than $883,000 by the time she turns 60. Now then: Can’t you just taste those pina coladas on the beach?

10. PLAN SMART VACATIONS AND TRAVEL — AND INVEST THE DIFFERENCE

There’s no sense in depriving yourself of every single thing, especially well-deserved time off. But Yeske points out that you can save a ton in 150 countries through a service called HomeExchange.com. “My wife and I have stayed for free in London, Amsterdam, New York and Costa Rica,” he said. “And when you’re staying in someone’s home or apartment, you don’t have to eat out at a restaurant for every meal, so your food costs nothing more than if you were at home.”

11. DON’T LET YOUR MONEY SIT IDLE

To get to an early retirement, you have to periodically revisit your IRA, 401(k) or other retirement account to make sure your money doesn’t grow cobwebs. For example, the way your retirement account is diversified shouldn’t put too much emphasis on low-yield investments — such as money market funds and low-yielding bonds. “Dividends can pile up in the money market account, typically earning one one-hundredth of a percent,” Yeske said. “Make sure your cash is invested properly.

12. HOP OFF THE HEDONIC TREADMILL

In this curse of consumerism, you buy something expensive, feel excited and then scout for something else to purchase when the “new car smell” wears off. And it’s a huge trap if you want early retirement, said Pete, a finance blogger who retired in his 30s. Another advantage: “Here in the rich world,” he wrote at MrMoneyMoustache.com, “the only widespread form of slavery is the economic type.”

 

13. LOOK FOR PASSIVE SOURCES OF INCOME

Early retirement doesn’t necessarily mean retiring all of your income, especially if you find ways to bring in money without hard work. Investing in rental properties is one way you can create a cash flow stream — and you can minimize the labor by hiring a property manager. Or: Set up an internet sales business and hire a part-timer to fulfill orders and track stock based on volume

14. ENLIST IN THE ARMED FORCES

Here’s an alternative way to get to “At ease, men.” By serving in the military, you can also serve yourself. Members commonly retire after 20 years, living off generous pensions and health insurance. Even though President Obama in March proposed sweeping changes to military retirement and health benefits, earlier-than-normal retirement should still remain an option for many men and women in uniform.

15. HIT THE ROAD OR GO JUMP IN A LAKE, INDEFINITELY

Some middle agers are selling the bulk of their possessions — including the home — and moving into tricked-out mobile homes and houseboats. These options also open the door to a life of leisure travel and can eliminate major expenses, such as property taxes and mortgage payments.

If you think of retiring early as simply walking away from everyday life — and thus a pipe dream — it’s time to take a step back and look at how others have done it. You might enjoy your job immensely and have friends in the trenches with you. But if work is taking too much away from your family time, community bonds, overall health and peace of mind, you might do well to consider one of the smartest alternative investments of all: yourself.

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How to Remove the Financial Industry’s Horse Blinders

Whoever is careless with the truth in small matters cannot be trusted with important matters.” — Albert Einstein

How to Remove the Financial Industry’s Horse Blinders

By Mark Ford

I am not an investment professional. I have never made any money managing other people’s money. I went from rags to riches the old-fashioned way: by working hard and then investing my income as carefully as I could.

Because I’d done well on my own, I never considered seeking financial advice. Then a funny thing happened. I woke up one day with the thought that I should have a “professional” manage some of my money.

I interviewed two firms. One was a boutique business based in New York City that a friend recommended. The other was a private banking facility for one of the world’s largest brokerages.

The boutique firm was happy to take $100,000 of my money to get started. The other company wanted a minimum of $10 million. They both had fancy offices and pretty marketing brochures. But such frills scare me. They make me think, “Gee, these guys must be charging their customers a lot to afford all this stuff.”

My trepidations notwithstanding, I worked with both of them for about six months. I answered their questions about my tolerance for risk (little to none). I listened to their presentations. And then I did something that I bet few of their clients ever do.

I started asking them questions. And I kept pushing them to explain why I should believe that they could help me become wealthier.

What I got instead was clever circumlocution. A financially sophisticated version of what you’d expect from your teenage son if you pestered him about why he didn’t come home until four in the morning.

Those discussions convinced me that these guys could not manage my money better than I had been managing it.

To be fair, they certainly knew more about investment products than I did. But they didn’t know more about how to become wealthy.

These guys were smart. They had graduate degrees from great schools. They spoke eloquently. They seemed so… so… inside the game. I wanted them to be better than me. I really did.

But they really didn’t seem to care whether their services would make me richer or poorer. The contracts they wanted me to sign were going to put money in their pockets regardless. That didn’t feel right.

In the end, I told both of my elite financial planners to take a hike. And I went back to managing my money myself.

Seeing Only 20% of the Big Picture

The investment advisory industry is a huge, multibillion-dollar business based on hard work, clever thinking and sophisticated algorithms. But also on one teensy-weensy lie.

The lie is that you can grow wealthy investing in stocks and bonds.

It’s not a big, black lie. But the unfortunate truth is the financial establishment rarely looks beyond stocks and bonds. And if you think about it, why would it want to? It makes its money by ushering you from one “hot” stock or “amazing” fund to the next.

Wall Street wants you to think the stock (and sometimes the bond) markets are the only places you can make money. And because they know that you have heard that “diversification of assets” is good, they give you the illusion of diversification by having your stock portfolio invested in businesses that are “diversified” into manufacturing, retail, global trade, natural resources, etc.

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This is, as I said, an illusion. At the end of the day, it’s all invested in stocks or stock derivatives. The result? More risk and less potential wealth gain for you.

So start by deconstructing the little lie.

Building wealth involves much more than just investing in stocks and bonds. Most rich people get that way by consistently doing the following nine things:

  1. Giving top priority to increasing their net investible income, not to maximizing returns

  2. Spending less as a percentage of net income as it grows so they can save more

  3. Understanding debt and using it occasionally and strategically to build wealth

  4. Investing in stocks and bonds with discipline — i.e., without expecting to get returns that are much higher than market averages

  5. Insuring themselves against “black swan” events, but not investing with the hope of profiting from them

  6. Owning tangible, portable and non-reportable assets as a reserve that can be tapped into at opportune moments

  7. Investing in safe real estate — i.e., income-producing properties

  8. Investing directly in private enterprises and other “outside Wall Street” opportunities

  9. Keeping a substantial store of cash to be used when “cash becomes king.”

As you can see, investing in stocks and bonds is only one of nine strategies you must follow to become rich, but that was the only one the two money management firms I tried cared about.

How to Ensure Financial Growth and Security

So if you can’t reasonably expect to get rich with just stocks and bonds, what can you do?

You can model your investing behavior on the behaviors that have been proven, time and time again, to actually work.

I’m talking about asset allocation.

Asset allocation is the process by which you spread your wealth across different sorts of investments.

You might think that something so dull as asset allocation could not possibly be that important in acquiring wealth, but numerous studies have shown that it may be the most important factor. (These studies can be found here.)

Because of an early financial disaster, I became an emotionally compulsive diversifier of practically every dollar I could save, putting some of it in bonds, some in stocks, some in cash, some in real estate and so on.

Over the years, I have made hundreds of individual financial decisions — buy this, sell that. Some of them were quite good, a few of them were quite bad, and most of them were in between. And yet, overall, my net worth has increased considerably and consistently, without any down years, for more than 30 years.

I could see very clearly that particular buy/sell decisions did not account for this good fortune. It was the general decisions about asset allocation that paid off.

Since I discovered this, I have been telling my readers about my own asset allocation decisions every year. Not because I think my portfolio is the best possible exemplum of diversification, but just to illustrate my belief that one needs to go well beyond some combination of stocks, bonds and cash to win at the wealth-building game.

Editor’s Note: As you may already know, Mark Ford was the creator of Early to Rise. In 2011, Mark retired from ETR and now writes his Creating Wealth newsletter.

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