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How To Retire Young – part 1

It’s time to drop the gloves and kick retirement in the butt. I hear you all saying it, “why would I need to think about retirement? I’ve got years ahead of me before I need to worry about that.” If that’s what you think, then this is the exact post you need to read. Notice how it goes from thinking to worrying?

The idea of retiring young is not as far-fetched as you may think. It does take careful planning and execution; however, taking the first step towards a wealthy retirement is crucial. In fact, taking the first two steps is important because, as I learned at a Power Within seminar earlier in the week:

Taking the first step just get’s you ready. You’re not actually moving until the second.

Here is a list of steps you must take to achieve retirement in the given time-lines; however, I am going to put one caveat on this method. To achieve your desired level of wealth you must understand the following three things:

  1. If you decide to stop educating yourself at any time during your life, you’ll soon find that the world has passed you by – leaving your investments in limbo. Read books, attend seminars and talk to people about your area of interest. Keep educated!
  2. Stop spending on credit and start paying for material possessions with cash. If you can’t afford it in cash, do you really need it? Get your spending under control and get your finances into the black.
  3. Life happens. If your investments drop in value or if you make a poor decision -tough luck! Move on to the next stage in your life and don’t make the same mistake again.

With these three rules agreed to, here is a model of wealth building that is working for me.

How To Retire in 77 years

Saving. This is probably the worst possible way you can even consider thinking about retirement. This method has been known in the past as the “cash in the mattress” system, the “Under-Pace Inflation” method or the “Negative Return” technique.

Using saving as an investment technique is like storing fresh fruit in your garage “just in case”. Guess what? While the world moves you by, your money (and fruit) are losing value and freshness every moment. Think of it this way, if you are able to save $300 per month and you choose the mattress system after one year you will have accumulated $3600.

  • Save $300 per month
  • Increase deposit by 3% per year
  • Inflation set at 2% per year

Barring a fire in the house, after 100 years you would have $1,018,115 with zero market risk. Congrats! You’re a millionaire! So what’s the down side? Other than death, at a 2% average inflation rate, the money you have in the back in 2084 will be worth the equivalent of $214,884 in today’s dollars (78.9% eaten by inflation). Can you retire on that?

Realistically, you can probably only save for the next 40 years at most. At this time you would have $263,263 worth $117,505 in today’s dollars.

How To Retire in 38 Years

The easiest and most hassle-free way to accumulate your desired level of wealth is ‘ol faithful: index fund investment. In this case, we assume the following:

  • Save $300 per month
  • Increase deposit by 3% per year
  • Inflation set at 2% per year
  • Set fund growth at an average 8% per year

You would officially break the $1,000,000 mark sometime in the middle of your 38th year; allowing you to retire at the end of the year with $1,088,833 (worth $505,303) in today’s dollars. This still isn’t the greatest prospect; however, you can adjust your final numbers based on raises greater than 3% or investment returns higher than 8%

In fact, if we go with a 23% return (for the Warren Buffetts in the crowd) you’d hit your million in only 31 years.

How To Retire in 20 Years

If you want a nice, slow and easy way to create your $1,000,000, the 20 year method is Real Estate and Re-Invest. With this method, you aim to purchase one small property each year and create a $100 monthly cash flow from each. Using staggered amortization periods, your net worth would reach the million dollar mark in the 20th year.

  • Purchase one property valued at $100,000 each year for 5 years
  • Create a monthly positive cash flow of $100
  • Increase rents by 2.25% each year
  • Home values appreciate at 2.25% each year
  • Reinvest the cash flow at 8% annual return

With this method, after 20 years you would have $733,855 worth of real estate and a portfolio worth $263,642 for a net of $997,840 (so we almost hit the mark…wait a week and you’re there.)

The important thing to remember in this method is that real estate takes time, patience and includes some risk. Make sure you speak to a professional in all areas. As I am not a realtor or a stock/investment advisor, this is a plan that I am using only.

Coming tomorrow

How To Retire in 10 years, 5 years and tomorrow (actually it would be the next day due to tomorrow’s release!)

If I just added 20 years of retirement to your life, consider my Full Feed RSS.
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