When you are in your 20s, retirement is the last thing on your mind. You are young and energetic. You steal hours from your tight working schedules and busy lives to enjoy your life together as a couple. You work out a plan that balances your personal and work life, because that’s how it’s going to be for the next four decades.
But what if you could retire in your 40s? You won’t have to juggle your work and personal life and would have all the time in the world. You would also have the energy that couples retiring in their 60s don’t have.
Retiring in your 40s might seem too good to be true, but it is possible. And three things can help you realize that fantastical dream.
Increase your savings rate
The household savings rate in Canada is 7.59%. This means that a couple earning $120,000 together will just be putting away a bit more than $9,000 a year. That’s not the number you can afford to go with if you plan on retiring in your 40s.
People who aim for early retirement (the mid-50s) conservatively go with a savings rate between 35% and 40%. Since you are aiming for even earlier retirement, you have to try and push this number as far as you can, ideally to 50%. If it seems too much, or you won’t be able to maintain a decent standard of living if you put away half your earnings in savings, you might need to make some drastic changes.
Earning more and spending less is the most straightforward recipe for saving a substantial amount. If you can’t pad your income, you have to slash your spending. Think of this hardship as an investment in your carefree future.
You should also understand that retiring this early means many more years of living off your savings. Unlike a couple retiring at 65, you will have to depend upon your savings for about four decades.
Befriend tax-friendly accounts
TFSA and RRSP can be your greatest allies in growing your wealth. The tax-friendly nature of these accounts will let you harness the real power of compounding. As a couple, you can effectively run two TFSAs and two RRSPs. For the best results, you can open one traditional RRSP and one spousal RRSP to enhance the tax benefit.
You should also find the right balance between your different investment vehicles. Your TFSA will keep growing tax-free, and it doesn’t have a clock on it. You can keep contributing to it even after your turn 71, unlike your RRSP.
Start investing early
Start investing as soon as you can and in good companies, such as Bank of Montreal, the fourth-largest bank in the country. The bank has increased its dividend payouts for seven consecutive years. Currently, the bank is offering a juicy yield of 4.22%, which, when compounded, will provide you with much higher returns than interests.
The bank also has a history of steady growth. Its market value increased by about 80% in the past 10 years. So, your capital gains will have also increased significantly by the time you are ready to retire.
Foolish takeaway
If you have decided to retire early, then start planning as soon as possible. Start exercising severe financial discipline and look into ways of increasing your income as much as you can. A very high savings rate, smart use of investment vehicles, and good investments should be the three golden rules of your financial life. Then you may get to live the happy dream of cozy, early retirement.
