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| Investing is the way to retire early! |
Warren Buffett: “I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over.”
My wife and I are recent early retirees at ages 51 and 48. Since our early retirement in August of last year, we’ve been traveling with our companion Toby, a 13 pound Pomeranian dog. Places we’ve visited so far include Ocean City (Maryland), Atlantic Beach (North Carolina), Claysburg (Pennsylvania), Ellicottville (New York), the Poconos (Pennsylvania), and other attractions in New York and North Carolina. We look forward to traveling across the eastern parts of the United States in the foreseeable future.
In this post, I’d like to discuss the importance of investing and not saving for early retirement.
Although both words may mean the same thing to most people, investing is the only way to reach financial independence and not saving.
What is investing?
Investing is expending money with the expectation of achieving a profit from things like stocks, bonds, real estate, or commercial venture.
With investing, you’re expecting a return on investment of around 8 to 10% if in the stock market, around 3 to 5% if in bond market, and around 3 to 4% if in a real estate.
One downside of investing is the risk associated with the stock market. However, the longer timeframe you can stay invested, the lower the risk. A good timeframe would be a minimum 10 years, but ideally much longer than that.
What is saving?
Saving is money not spent, or deferred consumption. Methods of saving include savings accounts, money market accounts, CD’s, or cash.
With saving, you’re expecting a return on investment of anywhere from .07% (bank savings accounts), .36% (CD’s), or .05% (online bank savings accounts). *Cash would be negative return as inflation will eat into the value of cash sitting in your home each year.
One positive aspect of saving is the relative safety of methods like savings accounts and CD’s in that most of these are backed by the federal government via FDIC. However, due to the paltry interest rate in today’s environment, the perceived safety of these methods will actually end up decreasing the value of your money, due to inflation.
When you’re asking your money to make money, ‘saving’ as shown in these return on investment rates, just won’t do. You have to invest to be able to retire early.
In the 1980’s, the savings account rates were around 15 to 18%! This will most likely never going to happen again. If you’re expecting this type of return on savings, you’ll have to go back in time!
These days, investing in the stock market/bond market or real estate is the only way to go, to realize a livable return on investment.
For most of FIRE movement followers, the most popular method of investing is via index funds. As boring as these sound, there are early retirees who are retired thanks to these.
Here are the reasons why and how you want to invest for early retirement:
- The power of compounding interest will potentially double your money every 8 to 10 years depending on your investments.
If you have $100,000 right now, you can have $200,000 in roughly 8 years if your rate of return is 10% (if you purchased S&P 500 index funds).
Even if you get 8% rate of return, your $100,000 should double in 10 years.
Let the power of compounding interest work!
If you were to buy safe methods like savings accounts or CD’s paying out around .36% interest rate, then your $100,000 should double in, well, I wasn’t able to find a calculator that can go out beyond 100 years. But basically it won’t help you unless you can live beyond several hundred years...
- Believe in the ingenuity of American companies to constantly innovate and to create markets that doesn’t yet exist.
This is why you’re buying stocks of companies. You’re expecting these companies (or some of these companies) to really hit the ‘jackpot’. Think of companies like Microsoft, Apple, Amazon, and Tesla. All of these companies created a new market that didn’t exist prior to their existence. For Microsoft, it’s the operating system (Windows) that is on most computers in the world. With Apple it’s the iPad, iPod, iPhone, and Mac. For Amazon, it’s online shopping. For Tesla, it’s the electric vehicle.
I don’t have to tell you how rich you’d be if you bought stocks from these companies when they were just starting out! This is why you need index funds. It’ll make sure some of these future jackpot companies’ stocks will be included in an index. Think of index funds as a basket where all the companies stocks exist. Where most companies may not be home runs, some of them will be...Index funds make sure you have exposure to some of these jackpot stocks.
- Believe in the history of the stock market.
Over an extended timeframe of 10 years or longer, the stock market has done well, at the tune of around 10%, if you purchased S&P500 index funds.
The longer timeframe you look at, the less risk you’ll be taking on. It’s true that if your timeframe is shorter than 10 years, then you should at least minimize your exposure to stocks, or allocate your assets to something safer, like bonds.
For our scenario (for retirement that should last decades), you should always invest in stocks for the most part.
- Keep investing simple as referenced by Warren Buffett quote on top.
Warren Buffett was referencing the complicated methods of investing, like hedge funds, derivatives, etc., when he said this. The acronym ‘KISS’ (keep it simple stupid) is apt in the military, but it’s also apt when it comes to investing.
Keep it simple by buying index funds. Look for things like expense ratio, rate of return, how long it’s been in existence, and funds’ ratings by a third party.
When you get better with investing, you can then start to look at things like actively managed funds and/or bonds. Beyond these, I personally don’t think there’s a need to look for complicated investments when simpler options exist...
In conclusion:
What adults told me growing up was all wrong, when it came to retirement. I didn’t want to work until the usual age of 62 or 65, and put away money in a safe savings accounts that paid out 15%.
I obviously wish we still have 15% savings accounts rates! Who wouldn’t want that?!?
In this environment of low interest rates, it’s doubly important to think in terms of stocks / bonds and not savings. Savings rates will NOT allow you to retire, whereas investing will.
Believe in the power of the ‘eighth wonder of the world’ (Albert Einstein), the concept of compounding interest. Believe in American companies to constantly innovate and create new products and markets. Believe in the long term potential to earn 10% per year rate of return with stocks.
I wish you only the best in your journey to financial independence and retiring early! Thank you all for reading!
Jake
Wandering Money Pig
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