Retire At 40 : Here's How

It’s simple, but hard. Take 20% of your gross income every month, invest it in a balanced index fund and leave it there, then retire 20 years later with enough for a lifetime. Do you have what it takes?

By The Simple Dollar

A young, forward-thinking man wrote and asked this simple question:

Right now, I’m 20 years old. I am willing to take a large percentage off the top of my salary for the rest of my working life in order to be able to retire very young and live off of the proceeds of my investments and do volunteer work. How many years would I have to work if I saved 20% of my income?

He went on to name a number of other specifics about his situation, but they’re really not important. If you were to take 20% of your annual income starting at age 20 and put it in a fund following the S&P 500 Index ($INX), that fund continued to grow at the long-term historical rate (12%) and you received a 4% raise each year, you could walk away from your job and live off the interest at age 41 matching your current salary — or quit at 43 and be able to give yourself a 4% “raise” each year from the interest, which is probably the better plan because it combats inflation.

Raise the amount to 25% and you’re done at age 38 and able to live in perpetuity at age 40.

Obviously, some people are going to balk at this and state that it “can’t” be done. The truth is that it can be done if you have the willingness to live below your means and authentically behave as if 20% of your total salary doesn’t exist.

It is challenging, don’t get me wrong. Let’s take the case of someone who makes about $60,000 a year. He brings home a paycheck every month in the amount of $3,200. In order to save 20% of his whole annual salary ($12,000), he would have to be willing to immediately take $1,000 of that take-home paycheck every month, put it straight into an investment and not touch it at all. This takes an amount of financial fortitude and will power that, quite honestly, most Americans don’t have.

My advice to this young man is that if this is truly your goal, then it is achievable, and I offer the following points of advice:

- Make that saving automatic. Figure out what exact dollar amount you need to remove from each paycheck to equal 20% of your total salary, then set things up so that amount is withdrawn automatically. Since you’re planning on retiring so young, it will have to be placed into a non-tax-sheltered investment account, which is fine if you invest it right.

- Buy and hold. Buy into a very broad-based investment, such as the Vanguard 500 Index Fund (VFINX), and just keep adding money to it and don’t move it around. This will set you up to pay only long-term capital-gains tax when you withdraw it, meaning that your tax time in the future when you start liquidating it to live will actually be quite pleasant (just long-term capital gains tax, if that even exists then).

- Learn to appreciate frugal living. With an e-mail like that, I’m already sure that you are more likely to buy a sturdy late-model used car than a new Lexus, but it’s important to state just the same: You can easily save that 20% you’re wanting to save by making good lifestyle choices. You’ll find that if you’ve made the investments automatic, you’ll easily learn to live on whatever is left over.

Good luck, and I hope to hear from you when you’re 40 and retired!

This article was written by Trent Hamm, the founder of The Simple Dollar, a blog offering a peek at his recovery from near bankruptcy.
Published June 12, 2007

Getting Rich Is Simpler Than You Think

Blend three ingredients — a paycheck, discipline and time — and, you, too, can be a millionaire. It’s not always easy, but it’s simple. And you have no excuse not to do it.

By Harry Domash

Here is the single most important thing you will ever hear about investing: Getting rich is simple.

Not easy, but simple.

And here is the second most important thing you will ever hear about investing: You have no excuse not to do it.

Only three ingredients are needed: income, discipline and time. Chances are, you already have two of them, income and time. All you need to do is add the third, discipline. And armed with the following knowledge, that key third ingredient may be a lot easier to find.

Here’s how it works: Say you start with nothing, invest $500 (of your income) a month (a healthy discipline), and let your money ride (over time) in diversified investments. Long term, the stock market returns at least 10% annually. Assuming a 10% return, you’d have $102,000 after 10 years, $380,000 after 20 years, and $1.1 million in 30 years.

Here’s a similar scenario: If you start with a nut of $50,000 and add only $250 per month, you’d have $180,000, $516.000 and $1.4 million after 10, 20, and 30 years, respectively. All this happens through the power of regular investing and a simple-but-powerful concept called compounding.

Compounding

What is compounding?

Compounding is the reinvestment of the interest you receive from the money you set aside. For example, if you invest $1,000 and earn 10% interest on your principal at the end of each year, you’ll get in $100 interest at the end of the first year. If you reinvest that interest, the second year you would start with $1,100, and thus would earn $110 interest. If you stay with it, you’d more than double your money every eight years.

“Compounding,” Albert Einstein said, “is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth.” Einstein was a smart man. But you hardly have to be a genius to make this concept work for you.

The real magic of investing comes when you combine the surprising power of compounding with continuous and regular investments — in other words, discipline.

The best way to make these continuous investments happen is by setting up an account with a broker or mutual fund that automatically deducts a fixed amount from your bank account every month. “Automatic” is the operative word here. Trust me, if you don’t set it up that way, it won’t happen. Instead, you’ll end up pouring money in when the market is soaring and skipping payments when it’s heading down. Eventually you’ll get discouraged and give up.

Dollar-cost averaging

The process of continuously investing a fixed dollar amount is called dollar-cost averaging — a term that sounds much more technical than it is. Through dollar-cost averaging, you’ll end up buying more shares when a stock or fund is down, and fewer when it’s up. For instance, say you’re investing $500 monthly in a stock trading initially at $50 per share; so the first time, you buy 10 shares. If the next month the stock moves up to $62.50 your regular purchase will net you only eight shares. However, if the stock drops to $41.67, you’ll get 12 shares (not including any transaction fees).

It’s easy to set up regular-investment mechanisms, thus harnessing the power of dollar-cost averaging. Mutual funds are the traditional way. But there are other outlets, as well, that allow you to apply the strategy with individual stocks or exchange-traded funds, which are baskets of stocks that identically track standard market indexes, such as the Dow Jones Industrial Average ($INDU).

Risk

Sure, investing in the stock market has risk. There’s always the chance the market will go nowhere for the next 20 or 30 years and you’ll end up no better than where you started. But there’s risk in everything, even CDs.

With CDs, your original investment isn’t in danger. Most CDs are insured, and the federal government will step in and make you whole, even if your bank goes belly up.

But a problem crops up when something more sinister surfaces: inflation. At this writing, inflation, running at around 2%, is considered relatively benign. But is it?

Let’s do some math. Your real return is the interest you receive less the inflation rate. If your CD is paying 3% and the inflation rate is 2%, you’re only making 1% in real terms. If inflation takes off, say to 5%, your CD will probably be paying around 4%. In inflation-adjusted terms, you’ve lost 1%.

But it can get worse. Inflation hit 14% in the early 1980s. In such times, CDs and similar fixed-income investments don’t even come close to the inflation rate, meaning you’re losing serious money, in real terms.

By contrast, assets such as real estate and stocks tend to move with prices, and, over time, the stock market has outpaced inflation. For instance, in the 20-year period ending Dec. 31, 2001, the cumulative return of the market, as measured by the S&P 500 Index ($INX), was 1,606%, compared to 88% cumulative inflation over the same period.

What’s the point? Yes, there’s risk in investing in the market, but the odds are that continuous, regular investing combined with the power of compounding will make you rich.

The odds

If you count yourself a member of the “I want it now” generation, the idea of waiting 20 or 30 years to get rich probably sounds like a dumb idea.

Sure, there are faster ways to get rich. You could win the lottery, or pick the next Intel (INTC, news, msgs) or Wal-Mart Stores (WMT, news, msgs). But don’t quit your day job just yet. Your chances of winning big in the lottery run around 15 million to 1, at best.

Meantime, naturally, you would be sitting pretty if you had had the foresight to plunk significant cash into Intel or Wal-Mart 20 years ago. But consider this: You would have lost money if you’d picked Advanced Micro Devices (AMD, news, msgs) instead of Intel, and you’d be broke if you’d picked Kmart (SHLD, news, msgs) (which ended up merging with Sears Roebuck) instead of Wal-Mart. In both instances, your retirement plans would be history.

Here’s the bottom line, like it or not: The fate of your retirement, your comfort in older age, probably lies in your commitment to the concepts laid out in the paragraphs above. For the vast majority of us, wealth creation is a slow and steady — and powerful — process. The tortoise almost always beats the hare.

It’s not easy. But it’s very, very simple.

At the time of publication, Harry Domash did not own or control shares in any of the equities mentioned in this column.

Domash publishes the Winning Investing stock and mutual fund advisory newsletter and writes the online investing column for the San Francisco Chronicle. Harry has two investing books out, the most recent being “Fire Your Stock Analyst,” published by Financial Times Prentice Hall.

Be A Unit Trust Consultant

WHY WOULD I WANT TO BE A UNIT TRUST CONSULTANT?
Because you would be entering a green field industry in Malaysia with awesome upside potential

As at end March 2004, India’s equity penetration rate (which can be defined as the combined value of all assets managed by a country’s unit trust industry DIVIDED by its total equity market capitalization) was 12% (sources: Association of Mutual Funds in India, and the Bombay Stock Exchange). The UK’s was 34% (sources: London Stock Exchange, and Investment Management Association, UK).



Ours? A meager 10.84% (As at end March 2004. Source: Securities Commission). Couple that with Malaysians having RM6 in fixed deposits for every RM1 we have in private unit trust funds. Translations: There’s room to grow:

source:Bank Negara Msia, Monthly Statistical Bulletin March 2004 : The Edge-Lipper Fund Table, 10/05/2004.

OK, BUT WHY WOULD I WANT TO JOIN PUBLIC MUTUAL?
Because we’re the biggest and best!

We’ve raked up more than two decades of fund management experience in the challenging Malaysian environment. Along the way, we’ve won a string of fund management awards; from just 1999 through to 2004, we brought back 27 of those - including 10 in year 2004.



As at 31 March 2004. Source : The Edge-Lipper Fund Table, 10/05/2004

We’re majority-owned and formidably backed by the solid Public Bank Group.

We enjoy 28% market share of the burgeoning private unit trust sector.

But most importantly because we exist to serve our investors and consultants.

SO, WHAT’S IN IT FOR ME?
A lot! Your success as a Public Mutual unit trust consultant depends upon your desire to excel. The highest annual remuneration ever achieved by our unit trust consultants was RM 1, 542, 441!

The highest passive annual income (residually earned from prior sales while that active agent was busy elsewhere selling to new Public Mutual account holders!) paid out to a Public Mutual unit trust consultant was RM 67, 803.

Other neat perks include free holidays, peer recognition, free insurance coverage, and many more.

HOW CAN YOU HELP ME MAKE IT BIG?
We’ll support you with a suite of financial planning and sales tools, best-in-class training, and the greatest range of Malaysian unit trust investment products available under a single roof.



HOW DO I START?
If you are at least 21 years of age, possess a degree or at least SPM qualification and have strong business contacts, you have already met the basic requirements.

For more details, ask to read our NEW Recruitment Booklet or contact any of our agents or our Branch Office nearest to you and speak to the Manager.

Can You Retire ?

Trends
> People are living longer - life expectancy for women is 76 years and men 72
> They are marrying and having children later. At retirement age, the children are still in school or university
> 70% of retirees use up all their EPF money within three years after retiring

Living costs and inflation
> Inflation rate is 6% in urban areas
> 3 meals a day at RM20 now may cost RM64 in 20 years
> RM500,000 in your EPF or bank account at retirement may have the purchasing power of RM45,053 in 20 years
> Medical inflation is 15% each year

Case study

If a family in Kuala Lumpur with two kids and two cars need RM5,000 today, at retirement, expenses should go down to RM3,500 or 70% of one's current lifestyle.

One would need RM747,000 if one were to live for 25 years, but the average contributor has only RM106,000 in his EPF account when he retires.

Most Malaysians do not have financial security

Only 5% of Malaysians are prepared for retirement. Despite a growing awareness for the need to prepare for one's retirement, many do not translate their plans into action.

Those in their 20s think they are too young to think about retirement, while those in their 30s and 40s tend to believe they are doing enough because they have EPF savings. By the time they are 55, it is just too late.

The sad truth is that at 55, most people cannot retire with financial security.

Based on EPF's 2005 annual report, about 90% of EPF contributors have less than RM100,000 in their accounts - not enough to see them through 20 years past retirement.

To Get Rich, Start Saving In Your 20s [Part 2]

Be aggressive with your investments

Make sure to invest your money shrewdly. According to Hewitt, workers 18 to 25 typically invest 35% of their retirement savings in bonds. Yet bonds have historically returned 5.4% a year -- right around the risk-free rate and just ahead of inflation. That's practically sticking it in a jelly jar! Stocks, meanwhile, traditionally have grown at an annual clip of 10.4%, according to Ibbotson Associates, an asset allocation service that's part of investment ratings agency Morningstar.

Instead, play it aggressive, and put 90% of your investments in stocks, says Ellen Rinaldi, executive director of investment planning and research at mutual funds giant Vanguard. Stocks are interchangeably referred to as equities, since as a stockholder you own a slice of the company's value in the market, its equity.

"From an allocation viewpoint, someone in their 20s has a very long horizon, so they can handle the ups and downs of the market," says Rinaldi. "They can recover from a downturn. As a result, they should be heavily invested in equities."

You can hedge against the risk of loss by diversifying your investments. That's a fancy way of saying you want to own as many different types of stocks as possible, and it's a message that will hold true throughout your lifetime. That means steer clear of buying a single stock and look to mutual funds, a tradable vehicle made up of sometimes hundreds of different investments in widely varying quantities. They could be made up entirely of stocks, bonds, a combination of both or simply track the market by holding equal amounts of all shares in a given index, known as an index fund.

So-called lifestyle or life-cycle mutual funds make it especially easy for novice savers to buy a diversified array of stocks that are tailored to their age and retirement goals. That's because these funds are set up to automatically pick and choose the equities in the fund, and to rebalance those holdings over time, buying and selling shares in order to maintain the advertised mix of risk and return (or caution and predictability) by age bracket.

"Look for retirement funds targeted to your age bracket. They'll be much more aggressive for someone in their 20s," says Rinaldi. "If you just look for a balanced fund, you may wind up with 40% of your money in bonds, which is a typical mix for these funds."

Get educated

Meanwhile, don't be embarrassed to admit that financial talk can seem confusing. After all, financial know-how is not genetically encoded and, unless someone has taken the time to teach you about finance, you'll need to do a little learning. And now that you're starting to make and save money, this is the perfect time to educate yourself.

More than a third of companies now offer employees access to advisers who can help choose investments that will be most appropriate, according to Hewitt. These advisers can explain what holdings are in a particular fund and why they'd recommend one investment over another. Read books, articles or financial Web sites. The more you know, the easier it will be throughout your career to make solid, informed decisions.

"I think the reality is most parents are more inclined to talk to their kids about sex education than talk to them about finance or saving for retirement," says Jones. "That's just not a conversation people have, so a little Finance 101 is probably a good idea."

Build a strong defense with an emergency stash

What's next? Start amassing an emergency fund so you don't have to rely on credit cards -- and possibly bury yourself in debt -- in the event that your car dies, your roommate comes up short on rent or you suffer some other financial mishap. Ideally, you'll stash up to three months living expenses, but the important goal is to save something. You can help stay on track by having automatic deposits made to your emergency account.

In the meantime, keep an eye on spending. Those splurges can add up fast and will prove to be a huge drain on future savings. What's more, if you pile on debt, you'll wind up wasting a lot of money on interest and fees that could be better spent elsewhere.

Avoid debt

If you're really struggling to stretch the paycheck to set something aside for retirement, this is the time to make some changes.

Give your budget needs a major overhaul. Consider getting a roommate or picking up an extra job for the time being. Big changes now, coupled with consistent saving over time, will reap huge rewards down the road, says Jones. He speaks from experience. Jones took a year off from college to work so he could pay off credit card debt. It wasn't easy but, he says, "I graduated debt-free."

Lamb has already seen how a little financial discipline reaps big rewards.

"Making my bills is my No. 1 priority before anything else. I don't buy new clothes. I cook at home. And I don't drink, which is a big money-saver. People go out and will spend $100 on alcohol in one weekend. I don't do that," she says.

Yet she does let herself have occasional "big purchases," like a house recently bought with her fiance.

"I really wanted one," she says. "And I made it my goal."

This article was reported and written by Leslie Haggin Geary for Bankrate.com.
Published May 25, 2007

To Get Rich, Start Saving In Your 20s [Part 1]

Even if money is tight, this is the time to start stashing away money. Start small, start now.

By bankrate.com

It's easy to understand why retirement doesn't loom large on the horizon for 20-somethings. Young workers are more concerned with kick-starting careers, not ending them in the long-distant future.

But it's worth noting that the very fact that you're young gives you a huge edge if you want to be rich in retirement. That's because when you're in your 20s, you can invest relatively little for a short period and wind up with far more money than someone older who saves much more over a longer period.

Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you'll have around $560,000, assuming earnings grow at 8% annually. Now, let's say you wait until you're 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8% a year. When you're 65 you'll wind up with around $245,000 -- less than half the money.

Seems like a no-brainer, right? Save a little now and reap big rewards later.

Unfortunately, many of today's youngest workers pass on the opportunity to save for retirement early, when the beauty of compounding interest can work its magic and maximize savings. A recent study by human resources consultant Hewitt Associates found that just 31% of Generation Y workers (those born in 1978 or later, now in the thick of their 20s) who are eligible to put money into a 401(k) retirement savings plan to do so. That's less than half of the 63% of workers between ages 26 and 41 who do invest in employer-sponsored savings accounts.

Start saving ASAP

There are plenty of reasons you may have yet to save, such as cash flow. If you're struggling to pay off student loans or cover rent, funding a 401(k) may seem difficult if not downright impossible.

But be wary of letting expenses become an excuse, says Brian T. Jones, a certified financial planner and the author of "Getting Started: The Financial Guide for a Younger Generation."

"These years of saving in your early 20s are your prime years. If you deny yourself the opportunity, it will just set you back with retirement planning in the long run," says Jones. "You've got to have balance."

Sign up for that 401(k)

Make the most out of those few dollars you can get hold of by allocating them wisely. Don't squirrel them away under the mattress. You will want them to be invested in a way that will encourage your assets to grow as quickly as possible.

Where to start? If you're eligible to participate in a 401(k) at work, do so. There are plenty of reasons to love these plans but No. 1 by far is that most employers match your contributions in order to encourage your participation. The hitch: Oftentimes, you'll need to save enough to trigger the match.

In a typical plan, employers match up to 3% of your salary, according to the Profit Sharing/401(k) Council of America. When you do sign up, the money you save will be automatically deposited into the plan before it's taxed, so less of your income will be taxed now. That saves you money, too.

That's what Rebecca Lamb has discovered. The 28-year-old Connecticut resident works in a nonprofit organization so she saves in a 403(b), which is similar to a 401(k) though they often don't allow company matching. These days, Lamb can't afford to plow huge sums into the plan, but she saves what she can. She also has a savings account that she opened when she got her first job at 15.

"I'm a disciplined person. I put in little amounts and save what I can. If it's $20, I put that in. If it's $100, I put $100. I've always done that," she says. "I'm just trying to save what I can right now. Hopefully, in years to come, I'd like to think I could put more way. But right now I'm just trying to save what I can because every little bit counts. I don't get caught up in the numbers."

No company retirement fund?

Use a Roth instead If you aren't eligible for a retirement fund at work that gets you matching funds, sign up for the next best thing: a Roth IRA. You'll fund this with money that's already been taxed as part of your normal paycheck. But money in a Roth IRA withdrawn later is tax-free.

This year, you can put up to $4,000 in a Roth, but don't let that number scare you off if it seems far too rich for you today. Save what you can. It will add up. If you are able to sock away $4,000 a year into a Roth for 40 years, and if it earns 8% annually, you'll be a tax-free millionaire at retirement.

To make sure you stick to saving, have a portion of your paycheck or payments from your bank account automatically deposited into the Roth each month or every few weeks.