Monday, July 24, 2006

For Those Who Plan to Retire Early

Often times young people express their desire to retire early: various ages are bandied around; for some it is 50, 45, 40 and even for the most daring 35! But hey, before you scoff at the idea it has been done and can be done. Think about Mark Cuban, the billionaire Dallas Mavericks owner- oh yeah! Kaching- he retired early. Yeah he was a business owner, he sold out at the height of tech boom - but he still did it. Aside from winning the lottery, hitting a jack pot on Wall Street, inheriting an estate or just being plain lucky it is still possible for young people to build quite a considerable fortune in twenty years (assuming they enter the work force at age 20 i.e. from those Internships) to retire comfortably.

Many financial advisors scoff at the idea of early retirement: they point at the greater number of seniors that are refusing to retire but are instead extending their days of welcome in the workplace. (Reality Check: If you plan to retire early, you might live longer and require a bigger nest egg)But they forget that this is a different generation. Most young people don't want to retire to sip wine in the Florida Keys, what they seek to do is build a nest egg that secure their future enough to pursue their other dreams - may be it is to own a business, engage in charity and humanitarian causes, get a new degree and have a change of career, do fun stuff like painting, pottery etc. or some might even want to join politics (No ideas please).

For immigrants returning home with lower costs of living makes early retirement a real possibility. So retirement for this generation X might as well be a money spinning adventure but they are unwilling to take the risk until they have their million dollar Kaching in their bank account to do so. The thing to learn from the current generation is to avoid greed- many of the baby boomers lost money to the tech boom because they were too old to think like Cuban: oh the age long human problem of greed. It is my intention to teach you the early bird, a trick or two on how to save up quite a considerable fortune 15-25 years down the road enough for you to stick it to the man! But you will have to do it slow and steady- you can’t be greedy.

In short, there are no hard and fast rules to this. These are four simple elements to being rich enough to retire in 20 years time and they are:

1. Invest in your employer matched 401 (K) up until the limits or more (if you can spare more). Invest in 2-5 Index Mutual Funds Not, I repeat, NOT managed mutual funds. They are low cost out performers that will consistently compound your net worth year in, year out. That is the best kept secret on Wall Street...for how you can design your 401-k - read all the parts of this highly recommended article

2. Own your Home: When you own your home you are secure. I will advice you to seek a shorter tenured mortgage if you can- look into the 20, 15 or 10 years traditional mortgage and for a start, buy something small, tasty and affordable. Your home is your best investment. Along the way, pick up investable real estate portfolio that should include land, REITs and cooperative investment in rental properties with friends or partners that can become money spinners. In case of future emergency when you retire, you can always take equity off your home - heck- it is your money.

3. Save and Insure: It is always a good idea not to be penny wise, pound foolish. Save at least a hundred buck from every paycheck to an online high yield savings account. Emigrant Direct and HSBC offer some of the best option. You can make it automatic and get it deducted from your paycheck. Raise the amount you save when you get regular raises and promotions- because it will come in handy on the rainy day. Talking of rainy day, insure what you have today and later. Your Health, your car, your house - everything! Everything insurable should be insured to the minimum. But use your brains...thou shall not over insure. Skip the full coverage if your car is more than 3 years old. Use HOA specials instead of HOB for your home insurance if you are not in flood prone area. Use your brains.

4. Invest in an IRA: No doubt, aside from being a robot of mutual funds and your company match another way and a sure fire way to retire rich early is to build a nest egg in an IRA. You generally have a limit of $4000 annually i.e. $150 per pay check. Preferably a Roth IRA. This is because it is post tax and it can serve as an emergency savings account since you are not penalized for withdrawing for certain uses from this retirement account. What else? You have the choice on which kind of investments that will be contained in the IRA. The best way of course is to build your IRA with a series of 3-6 Exchanged Traded Funds (ETFs). These are basically low cost mutual funds trading as stocks. Next time we shall learn how to build this Kaching machine and how to optimize your returns. Till then, read this on what ETFs are.

One last thing – reduce your living expenses. The best way to have more to spend in the future is to spend less now. Premium cable, dining out and expensive vacation trips can be sacrificed for cheaper and equally exciting alternatives…if you want to know how, contact me.