There are folks who manage to leave work much earlier, but tell most people you stopped full time work at 52 and they will assume you won the lottery. I didn't win anything, and neither do you. In fact, far from being financially set when I retired I played with the financial numbers constantly to make sure I hadn't made some horrible mistake. I didn't have nearly enough to live the lifestyle I thought I wanted, but there was enough to make it. Even so, I took a large leap of faith.
The point of this post is to detail the investment/retirement financial approach I took. It may not make sense for you. But, then again maybe it will. Now, one strong caution: if you didn't make a decent start toward retirement in your younger years, then, this probably won't work in your situation. If that's true, maybe you can suggest an adult child or even grandchild read this and decide if it makes sense for him or her.
I am, and always have been, a conservative investor. Even when the whole world believed dot.coms would only go up, or real estate was as safe as money in the bank (a whole other story!) and the stock market didn't know how to decline, I didn't play along. Yes, I dabbled. For a year I messed around with day trading. But, that was "funny money," money I didn't depend on or view as critical to my overall goals. If I lost it I'd kick myself and call myself names, but my financial future would not fall off the tracks.
Over that year of stock trading I made about $1,000. That was a terrible return on my invested time and energy, and cured me of that approach as a useful one for me. There are people who do well in this regard. But, without lots of study and hard work, it is a dangerous game to play.
What I did learn were important lessons from my parents: live beneath your means, whatever they are, and save aggressively. So, starting in my late 20's I began to set aside 5%-10% of my wages. I put the money in a savings account. When the money grew enough I bought some CDs. Over time I found a financial adviser who steered me into safe mutual funds. Every once in awhile he'd convince me to try something a bit fancier. Once the investment turned out to be a fraud and I lost my principal and had to pay the IRS back taxes and interest. Another time or two some "sure thing" stocks weren't.
After changing advisor's (!) I determined my own investment philosophy. This is a crucial point in your journey toward a financially stable retirement lifestyle. Until you know what works best for you, having an adviser or broker is not going to work. Know you own mind and insist that others accept that approach and agree to do nothing that would break your tolerance. In my case I tried one more adviser until I hit the best match. In fact, I have had the same fellow by my side for almost 20 years. He admits my game plan is a bit unorthodox by typical standards, but completely agrees that it is perfect for me
Later, as my career and business began to grow I increased the savings rate to 20% after taxes, eventually reaching nearly 25% for the last several years of my employment. All that time our family lived without falling into the trap of over-consumption that seemed to grip our neighbors and some friends. Our cars were never fancy but not junkers either. Our daughters weren't the first to get an Apple 2 computer, but did eventually own one. Neither girl was a slave to the latest fashions so they didn't pester mom and dad for constant trips to the mall. In short, we side-stepped the biggest deterrent to a happy retirement lifestyle: spending money on temporary pleasure that you should be saving.
Was it a frugal and meager existence? No. We owned time shares and a vacation cabin. We vacationed in Hawaii and took the obligatory trips to Disney World and Disneyland. The point is saving at an aggressive level doesn't have to mean a life lived in the shadows.
OK, so how exactly did I invest to build up a retirement account that will hopefully last longer than I will? Can it work for you?
1) I rarely bought individual stocks (except during that silly day trader period). The stock market reacts to emotion and fear. Rationality isn't much of a factor. No, thanks.
2) I didn't try to "time" my investments. It can't be done, even by the "pros." By the time you decide to jump in or out, you are too late.
3) I purchased mutual funds that were low in fees and high in longevity. For the most part they were not aggressively managed. That tends to lead to way too much stock churning for long term success and higher fees.
4) I invested in high quality bonds..corporate, municipal.
5) I used lots zero-coupon bonds back when they made sense.
6) I occasionally bought "junk" bonds. Some worked out well, on some I lost money. Frankly, these decisions always made me nervous but I did take the risk every now and then.
7) I maintained two accounts for retirement. One was made up of tax-free investments added to on a yearly basis. The SEP account was comprised of taxable assets (before Roth existed) deposited and invested before that year's tax return was due.
This last point was a key to my ability to do what I have done. The tax-free investments were allowed to compound, untouched, for about 20 years. When I retired, the money in this account was what I would live off until my 64th birthday. Because it was tax-free I would not be faced with big tax bills as it was withdrawn. Sure, the interest and dividends were taxable every year, but the principal was not. That account will be drained to zero on my 64th birthday.
The SEP account has been building since my early 30's. That money will be what I use to live starting in another 14 months. I will start taking Social Security payments at 64 and begin regular withdrawls from the SEP. I have added virtually nothing to either account for the past 11 years. The magic of compounding has done its job.
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Do you see anything here that may benefit you? Are there some steps you can take even now that will allow you to break free of conventional wisdom and improve your financial outlook?
Now, 4+ years later, I find nothing I wrote in early 2012 to be so off the mark I'd change it, except in two areas: zero coupon bonds aren't around anymore, and over the last two years a new financial advisor has convinced me to be a little more open to investing in individual equities (stocks). With interest rates so low, that is one of the few ways to stay ahead of inflation.