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Here's How to Retire Early

By Maurie Backman - Apr 15, 2016 at 2:05PM

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You don't have to be rich to retire early; you just have to be smart about when and how you invest.

Source: BIGSTOCK.

It's funny that for many of us, our single greatest career goal is to permanently leave our job as soon as possible. When arrived at by choice, early retirement can be a wonderful thing. The sooner you leave the workforce, the greater your opportunities to travel, pursue hobbies, and spend quality time with family with your health and strength intact. There's just one little thing standing in your way: money.

It takes a big chunk of change to retire early. Most of us are told we'll need roughly 70% of our pre-retirement income to live comfortably once we're no longer working, yet Social Security is only designed to replace 40%. This means that if you want to retire early, you'll need to take matters into your own hands. Here's how to do it.

Start early
The sooner you begin saving for retirement, the more time your money gets to grow. In other words, for every year you fail to save money, you're losing out on not just the principal amount you could've put in, but the earnings that money could've generated.

Let's assume you're able to invest $5,000 a year at an 8% average return, which is attainable if you concentrate your investments on stocks, especially early on. Start at age 25, and you'll have $936,000 by the time you reach 60. Wait till 30, however, and you'll have just $617,000 -- still impressive, but those five years would cost you $319,000.

The table below illustrates the huge impact of investing as early as possible:

If You Start Saving at:

By Age 60, You'll Have:

25

$936,000

30

$617,000

35

$400,000

40

$252,000

45

$151,000

Results assume average annualized returns of 8%.

Get aggressive
Bonds, bank accounts, and CDs may be safer than stocks, but if you limit yourself to safe investments, you're unlikely to realize the returns you'll need to leave the workforce ahead of schedule. In our example above, we saw how investing $5,000 a year starting at age 25 would give us close to $1 million by age 60, but that assumes an 8% return, which you're just not going to get with conservative investments. 

In fact, let's replace that 8% with 4% -- a figure you're more likely to see with bonds. Assuming you start at 25 and kick in $5,000 a year, you'll have just $388,000 at age 60 -- far less than half of what that 8% return would've given you. Worse yet, say you're so afraid of losing money you insist on sticking to a savings account alone. These days, you're lucky if your savings account pays you 1%, which means that even if you start at 25, by 60, you'll have just $215,000 to help kick-start your retirement. While investing in stocks does mean taking on more risk, it can also bring greater rewards, so if you're intent on retiring early, you may need to step outside your comfort zone.

Adopt an evolving strategy
It's good to be an aggressive investor early on in your career, when you have time to ride out the market's ups and downs. But your investment strategy should never be static; it needs to evolve as you get older. So while a portfolio heavily concentrated in stocks is a smart idea in your 20s and 30s, as you creep toward retirement, you should shift some of your investments into more conservative options, like bonds. This shift can and should be gradual so that you're generating a decent return on your investments without taking on too much risk as retirement nears.

If your goal is to retire at age 60, you might, for example, convert 20% of your stocks to bonds starting in your late 40s, shift over another 20% around age 50, and then convert another 40% over the course of eight years in 5% increments so that by the time you're within a year or two of retirement, 80% of your stock investments are replaced by bonds. Remember, it's OK to leave some money in stocks when you're in or near retirement -- just not most of it.

While retiring early may seem like a fantasy, as long as you prioritize saving and make smart investment decisions, you stand a pretty good chance at achieving that goal. Remember, it's not just rich people who get to retire early. There are plenty of average folks out there who manage to achieve financial independence long before 65. As with many other things in life, it's all about making a commitment to your future, and the sooner you do so, the more likely you are to succeed.

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