We all have dreams of being able to retire one day and live off dividends or payouts from our investments. Let's face it, we won't always be able to work for income as the inevitability of growing older is imminent.
I'm 30 years old and my goal is to not have to work for income before I turn 50. That might seem like a long time, but in reality, it's not.
Now thankfully, I started taking my finance seriously from a young age. When I was 15 I knew in my mind I wanted to be wealthy, and I have been very diligent about my approach to making that dream a reality. In my early 20's I made a few money mistakes, but nothing drastic that set me totally off course.
So the purpose of this post is to go over what I believe makes the most sense when it comes to building a robust investment portfolio that can fund your retirement comfortably no matter what the current financial environment looks like.
Now not all of these steps will apply to everyone, and that's ok. But if you work a job that offers a 401(k) plan and better yet, one that offers an employer match, then you need to take full advantage of that.
For anyone who doesn't know what a 401(k) is, a 401(k) plan is a company-sponsored retirement account to which employees can contribute income, while employers may match contributions. There are two basic types of 401(k)s—Traditional and Roth—which differ primarily in how they're taxed.
Investing in a 401(k) is by far the easiest step you can take to ensure you're able to retire comfortably one day, however, it does have a few downsides. The IRS allows penalty-free withdrawals from retirement accounts after age 59 ½ and requires withdrawals after age 72. (These are called required minimum distributions, or RMDs.) So if you want to retire at age 50, well that's fine but you won't be able to withdraw any funds from your 401(k) without paying penalty fees for the next 9.5 years.
Now the biggest pro of the 401(k) has to be the employer match. Most employers who offer 401(k) plans will match employee contributions which basically means the employers will be putting more money into your account for you. This will obviously speed up the compounding process of your account which will help you build a higher net worth quicker.
Investing in a 401(k) is a no brainer. It requires little effort and has many more pros than cons.
Now our next step actually has nothing to do with investing at all. Before we really start focusing on that we need to rid ourselves of unnecessary baggage and that means paying off bad high interest debt.
Any debt that has an interest rate over about 6% needs to be a top priority. If the interest rate is low, it's not as important to focus on paying off at this time. For example, my the interest rate on my mortgage is fixed at 2.8%. The current inflation rate in the US is above 8%. If I began prioritizing paying off my mortgage right now it would actually slow down my process of being able to retire comfortable.
Sure the argument can be made about the psychological effect of having no mortgage payment, but in reality paying extremely minimal amounts of interest on my mortgage every month isn't hurting me. In fact, it's helping because I have excess income that I can put towards other investments that have the ability to grow and compound at a significantly faster rate.
Any interest on things like credit cards or bad auto loans need to be prioritized, but just remember not all debt is bad debt.
Next it is important to begin the process of building an Emergency Fund. As a homeowner, trust me when I say that... stuff happens. As I type this, I am having a $7,000 HVAC system installed because my old one died. Over the summer I had a $1,500 new water heater installed for the same reason.
Life happens and you need to be prepared to pay for whatever randomness hits you. Building up cash reserves of about 3-6 months worths of expenses should be plenty. You can keep these funds in an HYSA so the cash can grow a bit, but don't be tempted to invest it in anything volatile. The purpose of these funds is not for growth, but for protection.
After you've got some cash reserves built up you can take the next step in investing and that is going to depend on how much money you make.
If you make less than $125K a year then you should start investing $6,000 a year into a Roth IRA. If you make more than that, start investing into a traditional IRA and at the end of the year roll over that into a Roth IRA. This is known as the Back Door Roth IRA Conversion and if you want me to make an in depth post on how to do this, let me know!
A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, your contributions and earnings can grow tax-free, and you can withdraw them tax- and penalty-free after age 59½ and once the account has been open for five years.
Again, the downside if needed to keep the funds in the account until your 59.5 to get full advantage of the tax savings, but those tax savings can be absolutely massive and more than worth it.
Now if you earn enough to invest more than $6,000 a year, then after you max out that Roth next you can start putting money into a General Brokerage Account. This is also sometimes referred to as a Taxable Account as it doesn't have any of the tax advantages that retirements have.
I personally use Charles Schwab and Webull for my general brokerage investing. If you want to learn more about either of those accounts be sure to check out some of the videos and blog posts I've made about them.
This step might be mixed in a bit earlier for you and like I said at the beginning, that is totally fine, but eventually you need to own Real Estate.
Some people think owning a home is a terrible investment, but I don't think that is even remotely true. Yes there are costs that come with owning a home and at times it can be very expensive, but it's a real physical asset that has multiple tax advantages associated with it and appreciates over time.
I bought my house when I was 28 years old and I don't think I'll pay it off early, but I also won't refinance my loan either so it will be fully paid off when I am 58 years old. I will never sell my house, but I also don't plan on living here forever. In a few years I will buy a new house and rent out my current one.
Real Estate comes in all different shapes and sizes too. There are apartment buildings, commercial property, trailer parks, raw land, improved land, etc. I plan on making more videos and blog posts about how to earn money utilizing real estate in the future, but without a doubt, it is worth investing in to ensure a quality retirement.
Now this is the part where some really fun things come into play. So far we've invested in generic traditional stuff, but I don't think that will be enough if you truly want to live different and retire early.
So far in 2022 the S&P 500 is down around 20% and overall market volatility is out of control. I am a huge fan of investing a fixed amount into mutual funds for retirement regardless of market conditions, but even doing that isn’t enough to keep pace with the insane cost of living increases due to inflation.
So since things have changed I have decided I need to make a change as well. I can’t just assume I’m doing enough and everything will be ok years down the road. I truly believe now is the absolute best time to invest in an asset class that has historically outpaced both real estate and the S&P 500 during times of inflation. Now is the best time to invest in real artwork with Masterworks.
Masterworks is democratizing the art market and allowing anyone to buy and sell fractional shares in high value works of art from the likes of Banksy and Picasso.
Masterworks has sold 8 paintings to date, 6 of them this year alone. Their most recent sale was literally yesterday November 28, 2022, for a 13.9% net return, and the two before that delivered 17.8% and 21% percent net returns to their investors.
Now for the final step you need to look into investing into businesses and I don't just mean buying stocks in public companies. Angel investing has grown in popularity and if you have a lot of capital to invest you can buy stakes in new up and coming businesses.
Also, you can look at starting your own business. Owning your own business is not easy but if you're willing to put in the work then it can put you on the fast track to an early retirement.
None of this will happen overnight. But if you work hard and make these steps a priority in your life, I know you will have an amazing retirement one day.