Retiring early is a great goal. If you leave work at a younger age, you're going to have more time to enjoy your freedom before health issues potentially set in. But it also means you'll need more money since your retirement accounts need to support you for a longer time.
You can't afford to make errors in your investment efforts if you need to build a big nest egg. And there's a particularly silly mistake you should avoid.
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Investing too conservatively could cost you your early retirement dreams
Investing too conservatively is one common error people make when they hope to stop working ahead of schedule. Since you're going to need to rely on your retirement accounts sooner and for longer, you may be especially worried about facing potential losses.
This could prompt you to be too conservative in your asset allocation. The problem is, not having the right investment mix limits your potential returns. And that's a costly problem that could leave you with too little to retire at your desired date.
Say, for example, you want to retire by age 60 instead of waiting until you're in your mid-60s or beyond. And let's assume you've started to save for this goal at around age 30 (an age when many people start to think seriously about their future needs).
The table below shows the amount you'd need to invest each month to have a $1 million nest egg by age 60. You may need more or less than that amount, depending on how much income you want your retirement investments to produce. But the table still illustrates the point pretty clearly that you can achieve big goals even at a young age if you're earning reasonable returns -- but not if you're too scared to put much of your money into the stock market, where it can work hard for you.
| 4% Return | 6% Return | 10% Return | 12% Return |
|---|---|---|---|
| $1,485.84 | $1,054.07 | $506.60 | $345.29 |
Chart and table calculations by author.
As you can see, you can't afford to make the silly mistake of being too conservative when you decide how to allocate your assets unless you have a lot of extra money to invest.
Don't be afraid of investing in the stock market if you want to retire early
It's understandable not to want to risk losses when you're hoping your hard-earned money will allow early retirement. But the reality is, even though there's always a chance of loss, you really don't have to be afraid of investing if you do it right.
The S&P 500 is a financial index that tracks the performance of 500 of the largest U.S. companies. It's consistently produced 10% average annual returns over the long term. No one who consistently invested in it and left their money alone for at least 20 years has lost money, no matter how poorly their investments were timed. While you may be able to do better if you pick individual stocks, you can always put your money into an S&P 500 exchange-traded fund (ETF) if you want to minimize your risk.
You do need to make your portfolio more conservative over time as you draw closer to your early retirement. But don't jump the gun and do that too quickly, and don't assume you'll need to get out of the market entirely before retiring.
A good rule of thumb is to subtract your age from 110 and put that percentage of your portfolio into stocks while putting the rest of your money into safe investments like high-grade bonds or government debt. Consider taking this approach if you don't have a personalized plan for asset allocation.
By avoiding the error of investing too conservatively, you'll hopefully have plenty of cash to make your early retirement dreams come true.
