It is possible, even easy, to achieve a comfortable retirement with a bit of planning and a little discipline for those with more than a few years yet before retirement. It might require a little more time and a little more discipline, but it is also very possible to retire early comfortably. For those of you under the age of 30, you can almost guarantee an early and comfortable retirement if you set that as a goal now and work towards that goal over the next 30 years. Achieving that goal will not require winning the lottery or inheriting a couple million, and you almost certainly will not achieve that goal looking for the next 100-bagger stock.
I decided not to discuss the concept of "rich" or how to achieve getting rich in this article. The term "rich" means different things to different people. Some people might define rich as sending your kids to private boarding school, having a vacation home on the coast, and owning "his" and "her" Ferraris. Others would say "rich" is not having to worry about how to pay the mortgage or having enough in the bank to cover a medical emergency. So, rather than have a discussion over how to get "rich" whatever your definition of the term, this article will cover the planning, actions, and discipline needed to achieve an early and comfortable retirement.
Background and Qualifications
On the Seeking Alpha website, it's often the case you see comments along the lines of, "Why are you qualified to give advice?" or the more pointed variety of comment, "He's just talking up his book". Seeking Alpha is an open forum, and essentially anyone can publish articles and post comments, so the qualification issue is a fair question. I'll lead into this article with some of my background and qualifications, which hopefully will give readers some confidence that they can also achieve their financial goals.
I retired about 2 years ago when I was just short of 56 years old. I had planned to continue working up to my 60th birthday, but life threw me curve. We had been preparing for this type of curve ball for over 30 years. Because of that planning, I was able to retire, and my family and I live comfortably in a nice neighborhood off the income from our investments. However, that successful outcome was certainly not a given, based on my rather humble start in life.
Up through my early teens, I grew up living between my uncle's farm and my grandparents' farm while my parents worked at various jobs. Both farms were small subsistence farms, and neither had indoor plumbing. My grandparent's farmhouse was all of 1200 square feet with 5 rooms total.
Baths were taken in a large galvanized tub in the kitchen with water heated on the gas stove. My grandparents grew vegetables, some of which we sold at a roadside stand in front of the house. They also raised chickens for eggs, and an occasional steer or hog for meat. I learned all kinds of useful things from my grandparents. I'm probably one of the few SA contributors that also knows how to scald and scrape a hog or make a snapping turtle trap out of an old whiskey barrel.
While I didn't really appreciate it at the time, we were pretty poor in financial terms. When I got old enough to be a latch key kid and watch over my two younger brothers, I didn't spend so much time with my grandparents. We did have indoor plumbing at my parents' house, but we still weren't living very much higher on the hog. One of my most vivid memories was of my parents struggling with how to come up with the $9 per week for me and my brothers ($3 each) to have hot lunches at school. So, you should be getting the picture that I wasn't born with a silver spoon.
I did well in school, and I managed to get into the University of Michigan to study nuclear engineering. I did get some grant money and a partial scholarship. The balance I paid for by working in the summers as a park ranger and taking out a small student loan. By the time I graduated, I had figured out how meager my family's financial resources really were in comparison to most of the other students'. I decided then that I was not going to ever be financially poor again. In total, I earned a BS in engineering with a minor in mathematics, an MS in engineering, and later attended an executive MBA program. Given my humble start in life and what I've been able to achieve in terms of retiring at the age of 56, I think I'm qualified to provide some advice on how you can do the same.
The Key Elements Necessary for Building Retirement Assets
Even though I'm an engineer, a point that my 15-year old son continually drives home, my thinking on the key elements needed for building retirement assets is very simple and straightforward. In my view, there are only three key elements, and they are extraordinarily simple.
The first element is to develop a reasonable and achievable goal. Retiring at the age of 55 is a reasonable and achievable goal if you are 30 years old or younger today. Retiring at the age of 45 is probably not reasonable if you pushing 40 now, unless you started working at it many years ago. Take a little time to develop this goal, because you are going to be living with it for a long time. Spend some time on the internet with a retirement planning program to understand what is reasonable and achievable given your personal financial circumstances. There are only about a bazillion retirement calculators to choose from. To narrow it down for you, the following link provides three excellent planning tools: Retirement Planner. Once you have your goal set, write it down and put it somewhere such that you will see it frequently; post it on the fridge, put it in your wallet in front of the cash, post it on the dash of your vehicle. The idea is be continually reminded of the goal you have set.
The second element is to develop a plan to achieve your goal. Because everyone's financial and life situation is different, I can't lay out a single plan that will work for everyone. But, the components of your plan should contain the following.
Make automatic, periodic investments that are consistent with achieving your goal. Examples of this are 401(k) plan deposits, recurring automatic transfers from your checking account into your investment account or IRA. The important characteristic is that you should have a mechanism to move money into your investment account that does not rely on you remembering to initiate it. It is too easy to forget to do it, and too easy to put it off until the next paycheck.
Make your money work for you. Automatically transferring money from your checking account to a money market account is only halfway there. In order to build real wealth, you will need to open an investment account where you have access to mutual funds, ETF, stocks, and bonds. This is more true today than for most of US history. With bank deposit accounts offering sub-1% interest and even CDs offering at best 2%, leaving your investments in the bank will make it much more difficult to achieve your goal. I'll offer some investment options later in this article.
Use tax-deferred investing where possible. There are several different types of tax deferred investment vehicles, including but not limited to employer-sponsored 401(k)s, traditional IRAs, Roth IRAs, SEP IRAs, individual 401(k)s, and Keogh accounts. The reason for maximizing your use of tax-deferred investing is that such investments grow faster than non-tax deferred investments, all else being equal. I recently published an article specific to this subject, entitled "The Real Value of An IRA: The Magic of Tax Deferred Compounding". Maximizing contributions to your IRA or other retirement accounts will make achieving your goal that much easier and faster.
The third key element is to develop the discipline to live below what your salary would allow. Some folks will read this element and decide it is too " preachy" or judgmental. The way I view it, either your retirement savings are a priority or they aren't. That is a decision you will have to make, and if you decide retirement saving is a priority, you will understand and accept the need to live below your salary in order to fund your retirement plan. What do I mean by the term "living below your salary"?
"Living below your salary" means driving a Kia, Honda, or a Ford for 9 or 10 years versus leasing a new BMW or Mercedes every 3-4 years. I'm continually amazed at the used car bargains I find, where the first owner took the 20% hit for depreciation during the first year of ownership.
In most cases, families need to take out a mortgage in order to buy a home, particularly for first-time home buyers. But it is often not necessary to run up credit card balances that cannot be fully paid off each month. In 32 years of marriage, neither my wife nor I have ever had a credit card finance charge, because we pay off the card balance every month without fail.
I recall an exchange I had with an SA contributor who was supporting an investment in Whole Foods (NASDAQ: WFM) after having watched his investment drop from the high $40 range to $30. My post offered my opinion that WFM had priced its products too high to attract the masses, and the WFM investor's response was, "People shop at WFM because of the shopping experience WFM offers and not for the prices". So, if you want to be entertained, shop at WFM. If you want to save money on your food bill, shop at Costco (NASDAQ: COST) or SAM's Club (NYSE: WMT) or any other large grocery discounter. We can afford to shop at WFM, but we chose not to.
At this point, some readers are probably thinking I and my family are so frugal that we've lead a really boring existence. While we do minimize the cost of everyday necessities (housing, transportation, food, clothes, etc.), effectively living below what our salaries would allow, we did so in order to fund our retirement plans and be able to take the vacations to Mexico, Canada, France, and the Caribbean islands. If you spend some time with one of the retirement planners linked above, you will discover that the amount of money you need to set aside for retirement is rather modest. This is especially true if you are starting with a 30 time horizon. While I strongly suggest readers spend their own quality time with one of the retirement planners, I did make some comparisons of retirement savings in a recent article, entitled "The Best Investment Of Your Lifetime That You Can Make Today". A 30-year period of consistent contributions with compounding at a reasonable rate will give you a sizeable nest egg for retirement.
The last issue I'll mention with respect to investment discipline is to never withdraw funds from your retirement plan assets, especially from a qualified retirement plan. Utilize every other option available to protect your retirement plan. When you think you are out of options, ask friends and family members if they can come up with options you haven't.
Unlike when I started 30 plus years ago, investors have today a very broad selection of investment vehicles and options from which to choose. We might actually have too many options today, making it difficult to select funds suitable for retirement planning. I lean towards fairly conservative investments for my retirement funds, and that was the case even when I started in my 20s. I had more than 30 years to accumulate and grow my retirement funds, so the way I view it, there was little reason for me to invest in higher-risk (and maybe higher-return) investments. This does run counter to some advisors' traditional approach of recommending higher-growth and higher risk-investments for folks with a very long time horizon. My more conservative approach allowed me to sleep comfortably and have some certainty of reaching my goal.
I favor the Vanguard Group for my retirement investments. Vanguard has a broad selection of stock and bond mutual funds and ETFs. For qualified (tax-deferred) retirement plans, I still prefer the standard, boring old mutual funds. The possible tax efficiency of an ETF doesn't matter inside a qualified retirement plan, so I've stuck with the tried and true mutual funds. Vanguard also has some of the lowest management fees in the industry for both index funds and actively managed funds. Finally, my experience with the company's representatives have always been first rate; Vanguard is very client-focused. All that said, there are other fine mutual fund companies out there besides Vanguard. My focus on Vanguard is because I'm very familiar with the company and its offerings.
I am a strong believer in the need for diversifying your investments. Mutual funds generally provide great opportunity for diversification in individual stocks and bonds, but also across sectors as long as the investors does not put all of his assets into a sector-specific fund. Today, as an exception, I'm essentially out of bond investments. With interest rates at historic lows and bond prices at historic highs, I've sold out of bonds after some pretty fair capital appreciation. You may feel otherwise, but I'm focusing on equity-based mutual funds until there is some normalization in interest rates.
My favorite Vanguard mutual funds are listed below, with some brief notes.
- Capital Opportunity (NYSE: VHCAX) - Currently closed to new investors.
- Dividend Growth (NYSE: VDIGX) - Currently closed to new investors.
- Energy (NYSE: VGENX) - Energy sector fund. Possible play on crude oil price recovery.
- Equity Income (NYSE: VEIPX)
- Global Equity (NYSE: VHGEX)
- Healthcare (NYSE: VGHCX) - Healthcare sector fund.
- Long-Term Investment Grade Bond (NYSE: VWESX) - I would hold off until rates normalize.
- Mid-Cap Growth (NYSE: VMGRX)
- Short-Term Investment Grade Bond (NYSE: VFSTX) - I would hold off until rates normalize.
- Wellington (NYSE: VWELX) - Excellent long-term balanced fund.
- Windsor II (NYSE: VWNFX)
While the list above reflects my personal favorites, there are literally thousands of mutual funds and ETFs from which to choose. The only guidance I would provide on selection of funds is to choose those with a long history of good performance. With a long time horizon, it is a lot more valuable to hold a fund with consistently decent returns than it is to hold the latest high-flying fund that flames out after a couple years.
With more than 50% of people under the age of 30 not yet saving for retirement, and almost 31% of the entire US population without a retirement plan, there will be a lot of people just scraping by in retirement in future years. You don't have to be one of the people just scraping by. There are excellent free retirement planning resources available on the internet. The availability of investment vehicles and options has never been better. All that is needed is the decision to develop a retirement plan, and the discipline to implement and stick with the plan.
Disclosure: I am/we are long VDIGX, VMGRX, VGHCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.