Transcription
Whenever I tell people that I'm planning to retire before I turn 30 years old, one of the most common questions I get is, "How are you investing to retire so early?" What's interesting about this question is that it might be a lot less important than you think. But there are just a few special strategies that I am using to retire early, which I wouldn't use if I was planning on a 40-year career. So in this video, I'm going to explain how I invest to retire early: three investment strategies I'm using to retire faster (which, by the way, you can just copy) and why you'll never be able to retire until you understand one simple lesson.
If you put all of these strategies together, you could become a millionaire and retire early without even saving that much money. And I'm going to show you how at the end of the video. But first, we need to cover the basics of investing because it's important. Investing is a lot, and many people just don't understand how it works. I actually didn't learn much of this until I studied business finance in college, so I know that most people have never been taught this. So here's what you need to know.
Companies enter the stock market when they want to raise a bunch of money to expand their business. When they do this, we say they're going public. This really only makes sense for really big companies, though. Most companies will never go public. But when a company does go public, they sell a certain percentage of the company to the public market, including regular investors like you and me. And that means whenever you invest in the stock market, you literally own a very, very small percentage of a real business.
Now, after a company goes public, they don't raise any more money just from their stock price going up and down. But companies still really care about their stock price because, again, every single person who owns shares in a company is a partial owner of the company. And since companies are required by law to try and make money for their owners, they care a lot about making the stock price go up. But even though the company doesn't make more money by the stock price going up or down, you definitely can. You can always buy or sell shares of a publicly traded company. Ideally, you want to buy shares in companies that will become more valuable and sell the shares of companies that will become less valuable. Of course, this is easier said than done, and that's because everyone has the same information. So you might know that a company is going to become extremely valuable, but so does everybody else. So the stock price might already be super high compared to its earnings. And you might know that another company is going to go out of business, but again, so does everyone else. So the stock price might already be super low.
So to really beat the stock market, you have to know something that other people don't. And it turns out that very few people are able to do this. Less than 10% of professional money managers have managed to beat the stock market over the last 15 years. And those are the professionals who spend every single day just trying to do this. For regular investors like you and me, it's pretty much impossible to beat the stock market without getting lucky. But here's the good news: you don't have to beat the stock market.
People compare investing in the stock market to gambling, but there is a fundamental difference. With gambling, the average return is negative; you have to get lucky just to make any money at all. But with investing, the average company becomes more valuable with time. And that's why a very common investment approach is to not even try to pick individual stocks. Instead, a lot of people just invest in the entire stock market, which has returned over 10% per year on average. Obviously, it varies a lot year to year, but that's not terrible for an average. And even after inflation, it still returned about 7% per year, which is more than most investors. By the way, I put all of this and a lot more in a free guide in the video description. There was a bunch of important stuff that you should know about investing that I just couldn't cover in this video, so make sure to grab that.
But now you know everything you need to understand my own investing approach to retire early. Investing is an absolutely critical part of my plan to retire in 2030, which is when I'll turn 30 years old. For one, my investment returns will help me build more wealth. Even though I only plan to work for less than 10 years, that's still enough time for my investments to earn me tens of thousands of dollars. But more importantly, investing is what would allow me to retire early in the first place because you are only financially independent if your money is growing even faster than you're spending it; otherwise, it will run out eventually. And this is especially important for people who retire early because you could be looking at a 50- or 60-year retirement. So by investing, I'm confident that my money can make even more money, so I don't have to keep trading my time for dollars.
So then the really important question is, how much money is enough? Well, I did the math for myself, and my best estimate is that on my 30th birthday, I'll probably have about $868,000. That will definitely depend a lot on the stock market and my career, but that's a pretty reasonable estimate. If the stock market returns 7% per year, I would be able to spend $6,775 every single year. But the stock market can be unpredictable, so the rule of thumb is that you should only withdraw about 3 to 4% of your portfolio value. But that still means that if I only invested in boring index funds, I would still probably be able to spend around $25,000 to $35,000 per year. That number might be a little higher if people smash the like and subscribe button, but I'm not counting on YouTube money either. But for me, $25,000 to $35,000 a year is plenty, which is why I'm not doing anything crazy with my money. I'm just investing in market-tracking index funds like the VTI index from Vanguard. Funds like this are super low cost, really easy to invest in, and they guarantee that I get the same return as the stock market. I also have some bond investments, but the vast majority of my money is in stock investments.
But even though I use a pretty simple investment approach, there are three strategies I'm using to retire early even faster. The first strategy is actually something you should do whether you want to retire early or not, and this strategy has already saved me thousands of dollars. We need to talk about everyone's favorite topic: taxes. Typically, whenever you make money through investing, you have to pay taxes on the money that you earned. So if you buy $100 worth of Amazon back in 2000 and sell it for 100 times more today, you would pay taxes on the difference between what you paid for the shares back then and what you sold the shares for today. But the opposite is also true: if you lose money investing, you can use this loss to offset other income. So if you bought Walgreens at almost $100 per share but then sold at $10 per share, you could at least use these losses to reduce how much money you owe in taxes. And you can actually use this to your advantage. Whenever your investments have lost money, you can sell your investments and then invest in something else. This allows you to reduce your tax bill while keeping your money invested. This is the principle behind tax-loss harvesting, and it's a powerful way to save more money. That said, there are some rules and nuances that you should be aware of, and I'm not allowed to give tax advice anyway. But there are companies that will automatically do this tax-loss harvesting for you, and they'll help keep you out of trouble. Tax-loss harvesting has already saved me thousands of dollars in taxes, and I expect it to only get even more powerful in the future.
But no matter how much money you have invested, it won't do you any good if you can't access it. And this is actually a big problem for people who want to retire early because to retire early faster, I would really like to take advantage of retirement accounts. They have big tax advantages, and my company offers matching contributions. But traditional retirement accounts are designed for people retiring in their 60s; there are huge penalties for withdrawing money early. But if I want to retire by 30, I just can't wait that long. But that's where this next investment strategy comes into play.
You may have heard of a Roth individual retirement account, or Roth IRA. This is a great account for people who want to retire early, but most people do not realize just how powerful it can be. Here's how a Roth IRA works: first, you contribute money that you've already paid taxes on. After that, you can withdraw your contributions with no taxes or penalties whenever you want to. If you wait until retirement age, you can also withdraw all of your investment earnings from those contributions—again, no taxes or penalties. This is a great account if you want to retire early because you at least have access to your original contributions even before you reach your 60s. But the biggest problem with the Roth IRA is you can only contribute a few thousand per year. But using this next investment strategy, even that doesn't matter.
Because while you can only contribute a few thousand per year, there is no limit on how much money you can roll over into a Roth IRA from another retirement account. So let's say, for example, you have $100,000 in a traditional IRA. If you wanted to, you could roll all of this money over into a Roth IRA. You'd have to pay taxes on this conversion because you're going from a pre-tax account to a post-tax account, but even so, you can contribute any amount of money you want into your Roth IRA. But what's even better is that that entire rollover counts as a contribution to your Roth IRA, which means you can withdraw that contribution with no taxes or penalties at any age. Now, there are some rules here. Whenever you do a conversion, you have to wait at least 5 years before withdrawing that money from your Roth IRA. But this is fine because you probably don't want to roll over all of your money into a Roth IRA in just one year anyway. You want to spread this out over multiple years to reduce your tax bill. This is called the Roth ladder strategy. By setting up a series of conversions from traditional retirement accounts into your Roth IRA, you can get early access to all of your retirement savings. This is a huge deal if you want to retire early, and I will absolutely use this strategy if I do quit my job.
But even with early access to retirement accounts, a lot of people think that early retirement is super risky, and yeah, it can be. But that's why I'll use this next investment strategy to retire early with almost no risk. Here's the issue: even though the stock market has averaged a return of 7% per year after inflation, it can be extremely unpredictable. This is a real issue for people who want to retire early because, whether the stock market goes up or down, you'll need money to live off of that year. Now, if the stock market crashes a long time after you retire, you're probably fine; chances are your investments already built up enough money so you don't need to worry about it. But if a stock market crash happens as soon as you retire, it could wipe out a huge percentage of your nest egg; you could be forced back to work. That is, of course, unless you use this investment approach.
Not all investments are unpredictable; some investments are actually extremely consistent. The issue with these investments is they usually have lower potential; there's always this trade-off between consistency and potential upside. So everyone wants to invest in the next billion-dollar startup, but these companies are extremely risky. If you're about to retire, you might need a more reliable strategy. So during the final few years of your career and during the first few years of retirement, you can transition your portfolio to less risky options like bonds, preferred shares, and real estate investment trusts. I call this investment approach the "yield shield" because it protects your investment returns when you need them to be the most reliable.
But none of these investment strategies will do you any good until you understand one simple lesson. And until you understand this, you will never retire early. Because how you invest is so much less important than what you invest. Your investment approach doesn't matter at all if you don't have anything to invest. And that's why I spend so much of this channel talking about living frugally. Let me show you something to prove why this is so important. If you're only saving 100 bucks per month, it would take 50 years just to save up half a million dollars while earning a 7% return. You would have to earn an insanely high investment return if you wanted to retire early; basically, you would have to get lucky. But if you saved $1,000 per month, which is a pretty good target for beginners, you could save $500,000 in just 20 years of boring stock market investing. After 28 years, you could be a millionaire.
If you want to retire early, you don't have to do anything fancy; you just have to do the basics right. And if you just spend less than you make and invest the difference, you're going to be on track to retire early. And the less you spend and the more you make, the faster you'll reach financial independence. It really is that simple. Simple, and it's easier than you think to become a millionaire and retire early. Let me show you exactly how to do it. I did the math, and all you would need to do is save about $19 a day, or $7,000 per year. If that's all you saved, you would have a million dollars after just 35 years, which, at least for me, is more than enough money to retire. That's definitely doable for most people. And if you started at 20 years old, you would be a millionaire at age 55, even if this is the only thing you did. And even better, if you follow the strategy that I explain in this video right here, you would never even have to pay taxes again for the rest of your life. So check out that video if you want to retire early as a tax-free millionaire.