Sunday, April 8, 2007

A plan

Did some calculating today. I wanted to figure out what type of return I would require to get the amount of money that I think I would need to retire early. I ran two scenarios: 1. invest for 16 years and 2. invest for 21 years. Each is an investment of $550 on a semi-monthly basis. They assume that every year I will increase the amount that I invest by 2% in order to account for inflation as well as a average annual rate of return of 12%. The results are quite staggering.

The first scenario, investing for 16 years results in growth of about $800,000. Not too bad, but not enough to retire on. If I am going to retire early I will need a lot of money to sustain me. I would be spending more years in retirement than I will be in employment.

The second scenario, however, with only an additional 5 years results in an additional $1,000,000 in growth!!! Incredible what 5 additional years of compounding will do. This does mean a few more years of work, but I also need to remember that when I retire, I'm not just going to cash out all my investments.

So, my plan:
1. Put away the required $550 and increase it by 2% each year.
2. Get an annual return over the next 16-20 years of 12%.

All right...implementing the plan:

The first part is easy. I already do this with the exception of the account for inflation, but that is easily rectified. I've been saving for retirement since my first job. They had an RRSP program where they matched me $0.25 for every $1.00 that I contributed. Instant 25% return!! I maxed that out.

The second part will be more challenging. Fortunately, being young I can be more risk-taking than older people. Right now my investments are in various mutual funds. I can't afford stocks. I don't have sufficient capital to be adequately diversified in stocks. My current plan is to invest in mutual funds of various types including index, sector, and various equity funds of both Canadian and international equity. Leveraging may also be an option; interest rates are quite low.

I plan to track my investments on a weekly basis, possibly taking advantage of market corrections such as the one that was seen in February. In corrections, buy more; in depressions, don't buy until it's over; unfortunately it's somehow hard to tell the difference without hindsight.

In some future blogs I'll talk about some of my plans and ideas. Perhaps comment on what's happening in the market. I'll probably update you all on my returns each quarter. Here's hoping for bullish years.

Why retire at 40?

A friend of mine had suggested that people should retire at 23 or so for about 30 years, and at 50, start working and continue for the rest of their life. An interesting thought, but not financially feasible for most people. While that idea is a bit unreasonable, it does bring about an interesting question: Why do people retire at an age when they are less physically able to do things that they would want to do in retirement?

I decided to set myself the goal of early retirement. I want to retire at an age where I am still able to do all the things I like doing. Some of the physically demanding sports (like water polo) that I enjoy playing are not for your average 60 year old! While this goal may seem a little ambitious, I do have a plan, which I will talk about in my next post. It is not some get rich quick scheme, but rather involves working and earning money and investing it in a number of investment vehicles in an attempt to maximize the annual rate of return.

"The greatest danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it." -- Michelangelo