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How To Invest For Early Retirement – Forbes

Summary

By Robert Berger

Forbes

Some of those exits were no doubt due to fear or layoffs. But others happily retired because, with the value of stocks and homes soaring, they could. 

These Covid-19 retirees join a growing group of people. Motivated by stories from the FIRE (Financial Independence Retire Early) movement, some younger workers are aiming to retire decades before they reach 65. 

Is retiring early realistic? Here’s information …….

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By Robert Berger

Forbes

Some of those exits were no doubt due to fear or layoffs. But others happily retired because, with the value of stocks and homes soaring, they could. 

These Covid-19 retirees join a growing group of people. Motivated by stories from the FIRE (Financial Independence Retire Early) movement, some younger workers are aiming to retire decades before they reach 65. 

Is retiring early realistic? Here’s information on what it takes, as well as a discussion of some financial tools to help you navigate the road to retirement and be secure once you get there—whether that retirement is early or not.

Within the FIRE movement, the 4% rule reigns supreme. That rule, developed by financial planner William Bengen in the early 1990s, posits that, with a portfolio invested 60% in stocks and 40% in bonds, a retiree can spend 4% of their nest egg in the first year of retirement and increase their annual withdrawals by the rate of inflation with confidence that their money will last at least 30 years. 

Forbes

Put another way, the 4% rule requires you to save 25 times your annual expenses before retirement. So for a $50,000 annual budget, you’d need to have $1.25 million saved; for $100,000 in spending, you’d need $2.5 million. Using retirement calculator Networthify, you can estimate how long it will take to save 25 times annual expenses. At a 20% savings rate and assuming a 5% after-inflation rate of return for your portfolio, it would take about 37 years; save 25% and the time drops to 31 years. 

Bengen’s original rule was based on historical market and inflation data and on his back-testing of 30-year retirements from 1926 to 1976. Stretch retirement out to 40 or 50 years, as some early retirees do, and the 4% rule breaks down. For retirements to last 50 years, Bengen concluded, the initial withdrawal rate could not be more than about 3%—a finding with significant implications that some FIRE devotees gloss over. At a 3% withdrawal rate and a 20% savings rate, it would take you 41 years to save enough. By then, it would be too late to retire early. 

Forbes

But don’t lose hope. Bengen tested withdrawal rates in increments of one percentage point. More recent research shows that with a traditional 60/40 portfolio, a 3.5% withdrawal rate should …….

Source: https://www.forbes.com/sites/forbesmoneyteam/2021/11/16/how-to-invest-for-early-retirement/