Choosing stocks for an early retirement
Investing in stocks could help you grow enough wealth to retire by age 50, provided you start at a young enough age. If you’re 29, you have a 21-year window to build your nest egg. It bears repeating, if you only hold stocks, you are taking on an immense amount of risk. If the market decides to dive before you retire, you could see all your plans destroyed.
We can still crunch the numbers.
If you’re able to invest $1,000 a month, and if your portfolio generates a yearly 8% return, which is a bit below the S&P 500’s historical average of 10%, then you could end up with a $600,000 nest egg. Make it $1,500 a month, and you’re looking at $900,000. To reach the $1.46 million figure Americans believe they’ll need, you would have to invest about $2400 a month.
While $900,000 is a decent amount of money to retire on at a more traditional age, you may run into challenges at age 50 since you'll need it to last some 40 years.
There's also no way to know how much you can safely withdraw each year since the 4% rule is for a portfolio to last 30 years and is based on a balanced portfolio that has both stocks and bonds in it.
If you still insist on a 100% stock portfolio, there’s another approach you can take. You can load up on dividend-paying stocks in your portfolio so they generate ongoing income for you. However, there are big risks involved. For one thing, dividends are not guaranteed. Companies can cut their dividends or eliminate them altogether at their discretion. So you’ll need to be careful about relying on dividend income for an early retirement.
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Read MoreChoosing real estate for an early retirement
Like stocks, betting your entire retirement nest egg on the real estate market is a silly decision.
If you own a portfolio of rental properties, you might manage to generate more ongoing monthly income than what you can withdraw from a stock portfolio, but the stock market is thought to provide better growth as an investment than the real estate market. There are also big risks and low flexibility in going this route.
Unloading an underperforming rental property isn’t as easy as selling a stock. It can take time to find a buyer and even more time to replace it.
Also, while stocks have the potential to lose value, it won’t cost you money to keep holding them (other than perhaps capital gains taxes if you sell at a profit). With rental properties, there’s a host of expenses you might incur, from maintenance to repairs to property tax hikes. Plus, you never know when a tenant might damage your property, or when a property of yours might sit vacant, thereby costing you money instead of earning you money.
A diversified approach is your best option
If you’re eager to retire at 50, saving adequately and investing in stocks, real estate and other types of assets simultaneously would help spread out your risk and set you up for steady withdrawals and income you can live on.
Also remember, if you’re retiring at 50, you have a long way to go until Social Security kicks in. And if you’re 29, you’re not eligible for your complete monthly Social Security benefit until age 67, so you may want enough passive income to last through then.
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