How many of us actually live our lives the way we really want to? If you are healthy, earning a decent sum, and you have a modestly expensive lifestyle (and no unusual expenses or debt), you can lead a reasonably happy financial life. But you might still not have time to enjoy all your favourite hobbies, spend as much time with your friends as you want, or take as many vacations as you wish because you are still working.
And that’s probably why an early retirement seems so alluring. If you can retire by the time you are 40, you would be in your physical prime (or quite near it), and you will have several decades ahead of you to enjoy your life and your free time. You will start living your golden years earlier.
This brings us to a simple golden rule of the golden retirement years: A well-funded retirement is usually a happy retirement. If you want to retire by 40, you have to make sure you have enough funds to sustain you in your retirement life. It might be difficult and not possible for every single couple in their 20s, but it’s attainable if you are willing to make the right sacrifices.
Start a second income
It’s relatively easy for a couple, even if both of you are working, to find enough time to spend together and live a reasonably happy life. But if you want to spend all of your time together (or with your respective hobbies) by the time you are 40, then you’ll have to a trade-off that time now. Start a second income by either taking on a second job or part-time gigs or starting a side business.
The equation is simple. The more money you make, the more of it you can save for early retirement. And a bonus is that a side business can be a great alternative income source (that you can continue if you want) even when you retire from your primary day job. It can be something you enjoy doing.
Fuel the FIRE
“Financial Independence, Retire Early,” or FIRE, was a concept first introduced in a 1992 book. It has been gaining popularity, especially in the last decade and specifically among millennials. The premise is simple to understand (even if it’s hard to practice). You need to live as frugally as possible and save at least 50% of your income until you’ve saved up at least a million dollars, or 30 times your yearly expenses.
The “FIRE” has fueled several early retirements, and many well-known names support this concept for early retirement. The critics of this theory claim that it’s only viable for people who are earning a sizeable income to have no debt and no significant financial obligations, and it still doesn’t account for future financial uncertainties.
Invest and grow your savings
The final and perhaps the most crucial part of the puzzle is to invest your savings. For optimal results, you might have to create an aggressive portfolio, probably with overpriced growth stocks like Constellation Software (TSX:CSU). This overpriced software giant offers a five-year CAGR of 25% and has been growing quite consistently for the past decade.
A portfolio comprised of such powerful growth stocks if it can return about 12% or more annually, can help a couple in their 20s retire by the time they are 40. Let’s say you, as a couple, are earning $80,000 a year and are putting half of it away. $40,000 growing at 12% a year will reach about $1.7 million in 15 years (assuming you are 25 when you start). This is a substantial enough sum to retire on.
While retiring by 40 is certainly possible, you will have to make some pretty financially savvy decisions to make the dream a reality. Asset allocation and tax implications of your investments would have to be dealt with very carefully. As a couple, you might only be able to put away $12,000 of your savings in your TFSA, and the rest can go to your RRSP, which you might not be able to touch till you are 60.
Speaking of early retirements...
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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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Software.