How to Retire Early and Rich
So you want to retire rich with lots of money? If you understand the time value of money, then you’re half way there. There’s no need to fret because you can retire rich by following 10 significant steps that will protect your investments, boost your income, and grant your financial independence.
Our biggest keys are time and discipline; master these concepts and you’re well on your way to retiring rich. There’s no hints or secrets involved, just a little motivation, preparation, and as always good old hard work is all you need.
#1- Calculate Your Retirement Savings and Spending Rates
It’s a painless thing to do and will save you pain and agony in the future. By calculating your desired annual income and perceived spending rate during your retirement, you’ll find out early on if you’re savings enough or too little. Cnnmoney.com has a very useful retirement planner calculator on their site.
This is the first step to determining what your retirement expenses will look like. If you won’t have enough to retire, either increase your savings rate or decrease your annual retirement expenses.
If you will have enough to retire, then consider investing the leftover cash in a mutual fund, depending on your age and time until retirement. We never increase present day spending if we can sufficiently retire because we must uphold a conservative margin of safety. This will mitigate risk in case of a stock market crash, financial roadblock, or unexpected decline in annual income.
#2 – Start Investing Early
The earlier you start taking advantage of equities gains, the more time your investments will have to appreciate. No matter what your age is, you can create an investment plan and fund a well-managed portfolio.
If you’re new to investing, start asking questions before you open a brokerage account. Nobody is too old or young to ask questions, especially if you’re in the dark on a subject.
If you’re already an experienced investor, set an investment goal and see if you’ll reach that goal in a fixed number of years. I personally use Fidelity’s Investment Growth Calculator because when you enter in your information, it returns your total amount invested, simple earnings on investment(total earnings without compounded interest), and compounded earnings on investment (total earnings including compounded earnings).
#3 – Rollover Your 401(k) into a ROTH IRA
Now that you’ve calculated your annual retirement expenses and started investing early, you now need to take advantage of your job’s 401(k) matching policy. Let your existing job match as much of your contributions as it can, then rollover those savings into a Roth IRA if you switch jobs.
Don’t make the mistake of cashing out your 401(k) contributions because those paid earnings are taxable. Not only will you lose a chunk of your investment, but you give up any compound interest that money would have earned until your retirement year.
You want to keep your money where it earns the largest return and stays tax-exempt. You can achieve this with a standard Roth IRA account.
#4 – Make Charitable Donations Annually
you can save a ton with tax deductions by simply being a good samaritan. Instead of throwing away old clothing, donate the clothes to a local thrift-store or shelter. Donate your car instead of selling it, support your local television network with a yearly contribution, or even save old lottery tickets and mark them as a tax-write off.
The IRS will give you fair market value for your donation as long as you have valid proof of the contribution/donation. Yahoo! Tax Center provides some great tips on squeezing out extra dollars for a tax deduction. It’s like receiving cash in your hand because Uncle Sam will let you keep the deductible amount.
#5 – Consider Paying for State or Public College Education
Unless you can comfortably afford to pay for a private college education for your child, state college may be a much better alternative depending on your annual income.
In the year of 2006-07, the average tuition at a private university is over $22,000 while public state school costs around $6,000. That’s a difference of around $16,000 dollars which can make a huge difference if saved instead of spent on more expensive higher education.
Take this example, by sending your child to State University, your family has saved $64,000 in 4 years, assuming that only one child is attending college at the time.
Now here’s the fun part, suppose you invest that large chunk of change in a mutual fund which earns 8% interest annually. Without adding a single penny to your initial investment, the total sum grows to $430,000 in about 10 years, not including inflation which would dilute your spending power. By reducing the pressure of college tuition fees on your household income, you freed up nearly half a million dollars without lifting a finger.
Note: These next 5 steps are more precise measures that you can take on your way to retirement. I wouldn’t call them mandatory practices, but these 5 steps are great ways to maximize your net worth.
#6 – Invest for the Long Run
There are different types of investors out there who preach different investing styles. I for one am a long-term investor, but would never try to change someone’s investing approach to match my own personal investing profile.
Number 5 is solely up to you since there are many pros and cons with long-term investing. For one, you must be disciplined enough to hold your securities for the long-run. Some people are better at this than others so I advise that you figure out your own personal style and stick with that.
#7 – Limit Spending to 60% of Income
Richard Jenkins of MSN Money posts an interesting article on the 60% rule. In 20 years, he attempted to spend only 60% of his income, while contributing 20% to his retirement and long-term savings account. The last 20% is for short savings and other expenditures he calls “fun money.”
I like this strategy but also feel it depends solely on your annual income. If you make over $100,000 a year, then you can easily cut down on silly expenses and save a good chunk of your income. For those with lower annual incomes (especially single working adults), this may be a very difficult task to achieve.
It would be interesting to hear what people have to say about this, as it has already caused plenty of chaos in MSN Money’s message board forums
#8 – Start a Business, e-commerce site, or blog
There are plenty of opportunities to generate extra income out there, you just have to think like an entrepreneur. I started this blog last month to interact with other investors around the world and to make a little money on the side.
So far this month, I made $80 with this ite including ads and referrals, but hopefully this blog will make more money in the future. If you have a potential business idea or are thinking about starting a website or blog, go out and do it.
Managing a site is like running your own small business, plus you make all the executive decisions. It’s also a great way to collect more information on your hobby or passion. With proper focus and guidance, a small internet site can provide you with enough secondary income to create an emergency fund or to invest a little for retirement.
#9 – Buy Real Estate or Rent out a room
Consider renting out a room in your home to help you with the mortgage costs or invest in a 2nd home and rent that out too. Homes aren’t your only options, many investors purchase apartment buildings, small businesses, vacant lots, and other types of real estate that produce reasonable returns.
My college roommate and I are trying to purchase a home for rent next summer but I doubt we can cover the loan. We figured we would need around $20,000 for a 5 year ARM on a small, affordable single-story house.
If we cannot raise the funds together, we might seek out two more business partners and split the startup costs four ways. Teaming up with friends or colleagues is a great way to raise large sums of money without forcing anyone to cash out their life savings.
I don’t recommend partnerships with relatives because you’re mixing business and personal life together, a true recipe for disaster.
#10 – Think like a 21st Century Tech Geek
Ideas like facebook.com, myspace.com, and youtube.com all came from tech savvy geeks who had a plan in mind and implemented it with success. The internet has unlimited options for new ideas, gadgets, services, etc.
Come up with a hit and you’ll be sipping margaritas under the sun in no time.
If you don’t have a good idea of your own, the next best step is to invest in a new idea. Just today, I found out that Phil Mickelson is wealthier than Tiger woods even though Tiger earns over $80 million a year in endorsements and winnings. How can this be?
Phil Mickelson was one of the original investors in a company called Google. Heard of it before? We all could’ve bought Google in 2001 and been rich, but there’ll be more opportunities in the future (hint. hint. Nanotechnology).
When it comes to retirement, we all want to be rich, don’t we? You can make your dream a reality by planning for the future and allowing your creative mind to help the cause. You can retire rich easily after all.