The 7-Day Turnaround, Day 7: Invest For An Early Retirement

This is the seventh article in Frugal Dad’s week-long series, The 7-Day Turnaround: One Week to Change Your Family’s Financial Destiny. Each day brings a new step to implement and help you get control of your finances.

The word “retirement” has always evoked day dreams of playing out the remainder our lives fishing, golfing and joining a bridge club. However, with improvements in preventive medicines people are living longer, and with a bull market at the end of the last decade, many of those people are “retiring” earlier. Instead of retiring from the work world entirely early retirees are simply hanging up their careers and looking for more fulfilling work, a search for that self-actualization Maslo referred to. That is a noble goal. We spend the majority of our early careers working to pay for things (houses, cars, college for the kids). When shopping for all of those things why not check for coupon codes from retailers like Amazon and Toys R Us. Why not start saving for an [tag]early retirement[/tag] from your day job so you can then go do something you have always wanted to do, regardless of the pay.

Invest outside of retirement accounts. We’ve already learned the virtues of investing inside retirement accounts, but in this final step let’s start to invest outside of retirement accounts so that money is available to tap before 59 1/2, the current minimum age to withdraw from an IRA. This step requires closer scrutiny of investment options than investing inside retirement accounts. For one thing, your time horizon is shorter so you have less time to recover from making a bad investment selection. You also have less time to recover from a market downturn, so riskier investments are usually off the table for this type of investment. Capital preservation is nearly as important as capital appreciation in this step.

Don’t forget about taxes. Since these investments are outside a tax-deferred, or tax-free retirement account you have to be more conscious of the tax implications. Consider investing in a more conservative mix of index mutual funds with a low turnover to [tag]minimize taxes[/tag]. Vanguard’sTotal Stock Market Index Fund and 500 Index Fund are good examples of low-cost mutual funds with low turnover. With interest rates hovering near record lows, high-interest savings accounts are not as attractive an option as in times of higher rates. Still, keeping a portion of your “early retirement” fund in cash may make sense if you can find rates that significantly out-pace [tag]inflation[/tag]. Treasury bonds, high-interest bearing CDs and money market mutual funds offer decent returns with minimal risk, but should only represent a portion of your total early retirement fund in the beginning stages. You need growth on your side up front, and once you’ve earned that growth you can begin to take those profits and preserve them in these safer savings vehicles.

At some crossover point in the future your monthly investment income will match your monthly expenses. At this point the money in your “early retirement” account is generating enough working capital to pay your monthly expenses. You are no longer dependent on earning a wage to provide necessities. This point was best illustrated in the book Your Money or Your Life. Author Joe Dominguez used a graph to plot monthly expenses and monthly investment income. Over the years his investment income grew, and as he practiced frugal living principles his expenses decreased. One day the two figures met. It is at this point that you can finally break away from the daily grind. What is it you’ve always wanted to do, but could never afford to start? Maybe you want to start your own business, or perhaps you would like to volunteer more of your time towards a particular cause. Regardless of your chosen endeavor, you are now free to make the jump without worrying about how much money is involved. With that kind of freedom creativity is released in waves, and you just might find yourself making more money than you made in your working lifetime.

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