Another Reason to Plan for Early Retirement
By Chad on Jun 26, 2008 in Retirement, Uncategorized
“…most companies are reluctant to retain or hire older workers. At the top of the corporate ladder, executive recruiters are routinely told not to seek anyone over 50, notes Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School.” - NYT
If this is the case planning for early retirement is not an option. You do not want to end up being a greeter at Wal-Mart do you?
Tips on how to retire early:
- Save, save, save - The amount you save is the biggest factor in the size of your retirement. Most people struggle to retire if they have only saved 10-15% (rule of thumb) of their salary in their retirement accounts. Shot for a much higher number to ensure you will have enough, and give yourself a chance to retire early. Currently, I am saving roughly 41% of my after tax dollars for retirement. I am including money earmarked for my small business, as the business will hopefully help me retire.
- Asset Allocation - I’m not saying everyone should run out and buy oil futures or that option trades should be routine dinner conversation, but be conscious of your asset allocation and try to stay away from bonds. You have long time to retire, so volatility is not a concern….high returns are.
- Do more research - Take a more active roll in selecting specific funds for your retirement. There is a ton of research out there on actively managed funds and ETFs. Use this information to pick funds/ETFs that have a good chance of outperforming the market.
- Pick a few individual stocks - This does add some risk to your portfolio and it will increase the amount of work required to manage your portfolio, but it can also drastically improve your returns. Do your homework by educating yourself. Four must read books on investing are Jim Cramer’s Real Money, The Warren Buffett Way and Peter Lynch’s One Up on Wall Street and Beating the Street.
- Create new streams of income - Blogs, rental properties, small businesses, etc.
- Only have mortgage debt
- Never have a car loan
For people interested in picking a few individual stocks:
On the advice of a friend I read The Warren Buffet Way and decided that I should just let Buffet do the stock picking for me. His company Bershire Hathaway is the only individual stock I own.
Stock picking is just not something I want to sink a lot of time into. Life is too short unless it’s fun for you.
Even if you spend a lot of time learning stocking picking strategies remember that you are at a disadvantage compared to the well-connected traders on Wall Street.
Dale | Jun 26, 2008 | Reply
@ Dale - I have to disagree with you on the “well-connected” trader myth. Day traders and short-term traders are at a disadvantage, but long-term investors can get 99% of the same information and aren’t constrained by company relationships.
Chad | Jun 26, 2008 | Reply
Chad,
You are correct that in theory individual investors could outperform anyone and anything. But in practice very few of them do above average..
Dividend Growth Investor | Jun 27, 2008 | Reply
@DGI - Most don’t because they do foolish things like buy when it’s going up last summer and sell when it’s going down this summer. They do it on emotion, not facts. Plus, most don’t really do their homework. Picking a stock because you think it will do well is foolish.
Everyone needs to determine their desired level of activity and match this with their investment decisions. If you are willing to do the work, most people can beat the market. However, as we all know, most people aren’t willing to do the work. Most people make a bet, not an investment, when they buy individual stocks.
Chad | Jun 28, 2008 | Reply
@Chad - I agree with you that most people make poor stock selection and timing decisions based on emotion when buying individual stocks. The performance of my investments during the dot com bubble proves that I’m one of them.
If you believe that most people will under-perform the market for these reasons, why do you advocate buying individual stocks? It was the wrong decision for me and it’s the wrong decision for most people.
You were wise to qualify your recommendation by warning people to do their homework first, but I think most people underestimate the effort required to beat the market with individual stocks.
You were also wise to imply that there is no one-size-fits-all investment strategy. Personally, I believe that most people are better staying out of the stock picking game and investing in low-cost index funds. The problem with this advice is that it’s boring and too simple for most financial advisors to make a decent living. They need to justify their high fees by offering complex advice to people who aren’t willing to put in the effort to understand it.
I’m curious if you’ve thought about who you would like to make up the audience for your blog: people who, like me, actively study investment strategies OR people who need financial advice, but are less interested in spending time managing their money?
Personally, I don’t think anyone has the option to let someone else manage his money for him, but we all know that most americans don’t actively manage their finances/investments.
Dale | Jun 28, 2008 | Reply
@Dale - First, thanks for commenting so much.
I agree that most people underestimate the amount of work needed to pick individual stocks. Though,the work is long, it isn’t overly difficult once you know what you are doing. It only requires basic math skills and knowledge of the terminology, so I think the majority of people could do it if they really wanted. Which was why I suggested everyone read Real Money, as Cramer does a good job of simplifying and explaining the work.
Another reason I suggest picking your own stocks and actively managed funds is that I don’t think index funds will be great over the next 10 years. I agree they have historically been a good place for people to invest, but I fear that may be changing. I would be surprised if they beat 6% over the next 10 years. This will be a topic of a post at some point.
My target audience? To be honest I haven’t thought about it too much. I basically started writing what I liked and figured I would eventually find my voice. If I had to say right now, I’m aiming more for people like you. People who actively study investment strategies and are more active in managing their investment accounts than most. They don’t have to agree with me, but they need to be willing to question common wisdom.
There are plenty of good blogs (Get Rich Slowly, The Simple Dollar) for people who want the basics (indexing, 401k, etc.). I’m not saying I won’t write those, but I plan on writing them with a bent for the active investor (ex.: When a 401k Isn’t a Good Idea).
Also, any suggestions on articles or constructive criticism on the articles, the blog, etc. are always welcome.
I would completely agree with you, that most people don’t really have the option to hire a money manager, nor should they. Most are worthless, as they are not properly trained and they don’t have the time run 200 different portfolios.
Chad | Jun 28, 2008 | Reply