One of the main goals for many people is to retire at a relatively young age. The stock market provides an opportunity to do just that. Although it may take many years to achieve enough wealth to retire, doing so after 30 years of working full time is a realistic prospect.
The key to retiring by the age of 50 is to start investing at a young age. In fact, starting with your first job, it is crucial to save and invest even a small amount each month. This allows compounding to have an even bigger impact on the value of your portfolio over an extended period of time.
For example, investing for a 30-year period versus a 20-year period makes a huge difference to your portfolio value. Assuming an 8% total return per annum would equate to a total return over 20 years of 4.7 times the original value invested. However, investing at the same rate of return for 30 years would cause the total return to rise to over 10 times the original value. Therefore, in order to increase your chances of retiring by 50, it pays to start as young as possible.
The right stocks
Clearly, investing for a long period will be fruitless if all of your stocks perform poorly. That’s why it is important to have a mix of shares which offer growth and income prospects.
During a 30-year period there will inevitably be boom and bust periods. Therefore, there will be times when it makes sense to buy higher-risk growth shares, which could offer significant capital gains. But there will also be periods where more defensive, higher-yielding shares provide better returns thanks to their perceived safer status among investors.
As a result, it is logical to have a mix of growth and income shares in a portfolio. Various studies have shown that the majority of investment returns in the long run are derived from dividends. While they may lack the excitement of growth shares, dividend stocks should still form part of a portfolio which is focused on early retirement.
It is difficult to set aside an amount each week or month for retirement. For starters, retirement feels like a very long way away for most of your life. Therefore, spending today and living in the moment seems like a better way to spend your hard-earned cash. However, the reality is that retirement will almost certainly come along for all of us. It therefore makes sense to plan for it and to make sure it is as enjoyable as possible.
This planning takes discipline since there is always a temptation to spend on cars, holidays, and other consumables today. However, by investing generously in terms of the proportion of your income today, it is very possible that by the age of 50 you will no longer need to work to afford an abundant lifestyle.
These five stocks could help you retire early
With that in mind, the analysts at The Motley Fool have written a free and without obligation guide called 5 Shares You Can Retire On.
The five companies in question offer stunning dividend yields, have fantastic long term potential, and trade at very appealing valuations. As such, they could deliver excellent returns and provide your portfolio with a major boost in 2016 and beyond.
Click here to find out all about them– it’s completely free and without obligation to do so.