Capital GrowthCapital ReturnFinancial Strategy

How To Retire Early, With Only $5

Many people look at retirement, especially teens as some big, unreachable goal. Because it’s 40-50 years away, many don’t stop to consider it. They are only awoken when they enter the workforce (age 25-30ish) and an employer offers a Roth IRA, where they stop and think, “Hmm, maybe I should start to save for this”. So month after month they painstakingly save thousands of dollars, and eventually retire and live the good life. But the road there isn’t easy.

What if there was a simple, painless way to retire, that required minimal thinking and allowed you to live the good life? Well, there is. Here’s how to do it.

How Much Do You Actually Need To Retire?

Before I tell you how to do this, let’s find out how much you actually need to retire. I find that setting a concrete, numerical goal to reach (for whatever cause) makes it a lot easier to actually reach that goal.

Well, there’s no one number fits all, but there are some ways to figure this out. Financial planner Bill Bengen created the time proven 4% rule in 1994 that’s a good way to figure out how much you need to have saved for retirement.

For example, if you need to generate from savings $40,000 to cover expenses in year one, you’ll need to have $1 million saved for retirement ($1 million x 4% = $40,000).

Now the real question is how do you get to the big $1-2 million that you need to retire?

Here’s where my simple, easy, method comes into play.

Simply invest $5 a day. It’s not a lot, especially if you have a job. If you don’t have a job then you can easily get this money by doing odd jobs or chores. If you invest $5 a day, disregarding expenses or taxes, you would walk away with $1,124,560.70 after 50 years. That’s assuming you have 8% compounding growth for these years. This is the middle of the road average return of the S&P 500, and is it good Benchmark to base your returns off of, if investing in index funds. From 1987 to 2016 the avrage return was 11.66%. If you invested $5 a day, for 50 years under this return, you would then have $4,179,656.05.

Invest, Don’t Save

People always say, “save for your retirement”. But why save when you can invest? Investing is the easiest and most effective way to make money without working, so it’s perfect for your retirement. This article assumes that you invest these $5, because no savings account can have 8-12% annual growth.

Even if you plan on making it big, and being a millionaire by 25, you should still save for retirement. This method can and should be scaled for any paycheck. Starting off with $5 is a great point, and can build you a nice nest egg, but as your earnings increase, so should your contributions. Instead of that million dollars, if you increase your investment a little bit every year, you could easily have 10 to 20 million dollars.

Also, the retirement figure of $1-2million to retire doesn’t account for inflation, nor does it take expenses into the account. As time progresses, money loses value at an annual inflation rate of about 2%. In theory, wages should increase as costs do, so you should be able to account for this inflation in your investment contributions. While today you may invest $5, in ten years this figure may be $6 (if your earnings don’t increase)

If you’re investing in a Roth IRA, the annual contribution limit is $5,500 ($6,500 for 50 years or older), so try to work up to that number. It breaks down to roughly $15 a day. Not that bad if you think about it – and if you save that amount for 50 years, you’d walk away with $3 Million (and if it was a 12% return, it would be $15 million!).

So how do you actually invest this cash? And in what?

It would be great if you could simply send off $5 every day, but this isn’t really the case. Unfortunately, mutual funds often cost a lot more than just $5. To buy in, you need a minimum of about $2,500, and share values cost anywhere from $10 to 200.

Here’s what I do. I collect $5 cash every day and put it in a lockbox. At the end of the month, deposit these funds into your bank. Then, you invested $5 every day, and now have $150 in the bank to buy shares in your mutual fund. Whatever is left over, just use it next time you buy.

Well, you ask. Just what do I invest in?

In this case, I would follow the herd. Invest in index funds. As late as 2016, more than $1 out of every $5 invested in the equity markets here in the United States was believed to be invested through the conduit of an index fund. [In case you don’t know what an index fund is, here’s a quick briefing: Index funds hold every stock in an index such as the S&P 500, including big-name companies such as Apple, Microsoft and Google. Because this type of fund is highly diversified, it stays relatively constant and avoids the risk that comes with picking individual stocks. It also tracks the returns of the average stock market. For example if the average stock market return is 8% next year, your index fund will probably return 8% or something very close to that figure.]

As Blake Ross, the founder of Firefox, writes on Medium: “If you open a retirement account, and you invest some of your paycheck each month into a Vanguard Target Retirement Fund, and you just … leave it … you just leave it right there until retirement … If you just leave it there to compound over decades … then you will probably make more money than if you hired the guy from Edward Jones, and even that Senior Executive Double-Stuff Vice Managing Director from Goldman Sachs.”

I’m a strong believer that Vanguard mutual funds are the best funds for retirement. This is because of their low expense ratios to high returns. And when I say low expense ratios, I mean extremely low expense ratios. Nobody else in the business compares to them.

Blake Ross agrees: “As a non-profit that is owned by you and other shareholders, Vanguard is the only company in the financial industry that is not trying to make a huge profit off of you. Everyone else is talking their book. EVERYONE.”

If you ask me for a fund to invest in, I’d recommend the Vanguard Total Stock Market Index (ticker: VTSAX) This mutual fund gives you exposure to the entire U.S. stock market for the minute expense ratio of 0.04% annually. VTSAX tracks the CRSP U.S. Total Market Index and most of its assets are in stocks of large companies, but about 28% of assets are in small and midsize stocks.

As your capital grows I’d also think about investing in more than one Index Fund. In fact, I’d recommend 4, all Vanguard: VTSAX, VSPMX, VSMSX and VTMGX Balance the portfolio however you see fit, but I’d weigh American stocks more heavily.

Think about it: It’s basically a money machine: put $1000 in a year now, and get $40,000 back later. Why would you not do it? 

Let me know your opinions down below, if you’re already saving and what strategies you have/suggest.

“Consistently buy an S&P 500 low-cost index fund. I think it’s the thing that makes the most sense practically all of the time.” – Warren Buffett

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