Early retirement is a possibility if you take the right actions. Fortunately, there are three proven tricks that can significantly increase your odds of retiring early. Some of you may already be doing one or two of the items on this list, but only by using all three will you maximize your chances of success.
One of these tricks could save you hundreds of thousands of dollars when it’s time to tap into your nest egg. Another will instantly boost how much you’re capable of saving. And the last will make the most of your investments. Let’s dive in.
Save on taxes
Economists say there’s no such thing as a free lunch. Saving on your taxes is about as close as it gets. That’s because you could increase the value of your investment account by 20% or more simply by using a TFSA or RRSP. If you already have one of these accounts, then congratulations. But just because you have one doesn’t mean you’re taking full advantage. If you don’t have one, like roughly half of all Canadians, then open one today.
Both TFSAs and RRSPs shield your money from taxes. Money in a TFSA grows tax-free, and can also be withdrawn tax-free, but you must contribute post-tax dollars. That means you earn money from your paycheque, you pay your normal taxes, then you contribute the resulting funds.
Money in an RRSP also grows tax-free, but you must pay taxes upon withdrawal. That’s because you contribute to these accounts using pre-tax dollars. So, when you earn money from your paycheque, you can skip paying the associated taxes and contribute directly to your RRSP.
Don’t sweat the differences too much – as in most situations, the tax benefits even out over time. What you should do is start using one of these accounts immediately. Otherwise, an $800,000 retirement account could be worth just $500,000 under some conditions due to taxation. These accounts are akin to free money. Don’t pass it up.
Be a robot
Fear not, you can keep your emotions and other human traits. All I’m talking about is automating your investment contributions, which has huge benefits for long-term investing. This sounds simple, but it’s one of the most effective ways to boost your chances of early retirement.
In behavioural psychology, there’s something called the “opt-in, opt-out” phenomenon. Study after study shows that humans have strange tendencies when it comes to opting-in or opting-out. For example, if energy users need to opt-in to (manually select) renewable power, some will, but many will not. But if renewable power is already selected for them, and users now have to manually opt-out, significantly more people will stick with the renewable power. It’s simply easier to do nothing at all, no matter what the outcome is.
The same rules apply to investing. If you force yourself to manually contribute to your retirement account, you’re going to miss a lot of chances. However, if you setup your brokerage account to automatically contribute a pre-selected amount of money each month, your odds of doing so increase dramatically. That’s because now you have to opt-out of the contributions instead of opting-in. Nearly all research has shown that this simple trick will considerably boost how much money you’re stashing away.
Your final step is to choose stocks that can reliably build wealth through age 50 and beyond. These stocks can be rare.
Consider the Bank of Nova Scotia. Since 1995, shares have increased by more than 1,000%. The bank has also consistently paid a sizeable dividend, which is currently close to 5%. During market downturns, this stock has performed incredibly well. In August of 2008, shares traded at $48 apiece. By October of 2009, following a calamitous global economic downturn, the stock still traded at roughly $48.
It’s easy to see how the Bank of Nova Scotia was a winning retirement stock in retrospect, but these stocks can be difficult to discover in advance. Yet if you want to retire early, finding these companies is critical.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Ryan Vanzo has no position in any stocks mentioned. The Bank of Nova Scotia is a recommendation of Stock Advisor.