Hopefully if you’ve browsed the site, you’ve seen and picked up quite a bit of information about investing and how to plan for (and reach) an early retirement. In this post, I’m consolidating that information into a useful checklist for anyone deciding to get started toward their retirement goals. The intention is to help you, the reader, navigate the information on this site as you put together a plan to save and invest.
One: Getting Started
The first step is maybe the most obvious but the most challenging, and that’s deciding that you’re ready to start setting aside a chunk of your paycheck for investment in the stock market. Why is this the most difficult step? Because you’ve decided that you’re ready to start making a trade-off in your current lifestyle; namely, you’re preparing to forego consumption now in exchange for freedom later. The fact that you’re even considering this is a big step, but what’s more important is to take it from idea to reality.
Two: A Place to Invest
To do any of this, you have to start by opening a brokerage account. Now that you’ve decided to invest and save for retirement, you have to set up a way to do it. This is a simple hurdle that makes a big difference. There are plenty of options out there, but here a few things you want to look for:
- No account balance minimums
- No fees
- No commission on standard stock trades or ETF trades
- Easy online access
- A workable App
- The ability to fund the account without fees (i.e., no charge to deposit money from a checking account)
This is also the time to consider whether you’re eligible to open an IRA or Roth IRA. While the contribution limits to these are low, if you’re eligible for one of these accounts, they can be a good way to reduce taxes in the long-term. And if you start early enough, you can still accumulate some sizeable holdings despite the low contribution limits. If you do open an IRA or Roth IRA, doing so would be in addition to your standard brokerage account. Remember, you likely need a standard account so you can invest more than the IRA contribution limits and because you’ll need money to live off before age 59 ½.
Three: Your First Trade
Make your first deposit into the brokerage account and execute a trade. This is the true test of whether you’re ready to start investing. Believe me, putting aside that first investment will get you past the major psychological barrier of whether you’re ready to wade into the world of investing. It doesn’t have to be much, but I would suggest at least a few hundred dollars. You need to get a feel for putting some tangible money at risk and see it moving around with the market. An ETF is a good start because it actively trades during the day, so you’ll be able to see your account balance fluctuate with the market.
Four: Determine How Much to Deposit
After making your first trade, you need to figure out how much you can afford to invest with every paycheck. Naturally this is subject to refinement, but it’s good to assess your income and expenses to determine how much you can actually set aside and still be able to cover your expenses. If you’re just starting out, you’ll also want to consider whether to have an emergency fund separate from your investments. Remember, while investing toward early retirement requires taking on some risk, you still want to have some low risk cushion in case you need liquidity for an urgent expense. As your account balance grows, you may reconsider how much you actually need in an emergency fund.
Five: Contribute and Invest
Next is to make regular contributions and establish a consistent pattern of investing. Choose the allocation best suited to your risk tolerance. Personally, I prefer ETFs that track the exchanges with a few individual stocks scattered in for a little more risk/reward potential. When you’re a ways out from retirement, bonds are a less attractive option given that they tend to offer lower returns and result in higher taxes.
Six: Determine What You’ll Need
Once you have a consistent pattern of contributing to your brokerage account and an established routine for investing your money, you want to give some thought to planning for the future, including by starting to calculate when you might retire, how much you’ll need in retirement, and whether to make any adjustments to your contributions. If you’re one year into a twenty-year plan (or wherever you are individually), it may seem early to do this, but the reality is that the further out you are, the easier it is to make adjustments. If you have nineteen years until your target retirement and start to realize you won’t make it based on what you’re contributing, you won’t have to make as significant of an adjustment because you’ll have longer to make up the difference. Plus you’ll reap the benefits of compounding returns.
Seven: Keep It Up
Once you have a set pattern of investing and you’re relatively comfortable that you’re on the right track toward a particular age or year for retirement, now comes the laborious part: not doing anything different. Continue investing in line with your established pattern, but otherwise resist the urge to tinker too much with your investments. The difficult part of a long(ish)-term investment horizon is that returns take time to accrue. Patience, while challenging, is absolutely vital. Resist the urge to start taking on too much risk. Stop thinking you’d be making a killing by day trading. Stay the course.
If, and only if, you’re at a place where you’re ahead of your goals, or have some idle cash that won’t impact your retirement projections, should you consider riskier investments. But always remember that buy and hold has traditionally proven to be the best strategy for long-term gains.
Eight: Brace for the Occasional Impact
Along the way, you have to weather any storms. Another downside to long-term investing is that you have to experience the bumps in the road that come with stock market investing. There will be days, months, even years when it seems like all the market does is fall. That happens. Remember that the market falls faster than it gains, and remember that historically, it also comes back. A longer-term horizon is quite possibly the best way to balance risk. Remember that panic selling is the one way that absolutely guarantees you take a loss. If there is a downturn, and you do have some available cash, remember that buying the dip can help you take advantage of temporarily depressed stock prices.
Nine: Taxes
Be smart with taxes. As your portfolio grows, so too will the associated taxes. Because the goal is not to sell investments and use the cash to pay for taxes, the tax burden might start to eat into your other disposable income. To help with this, harvesting tax losses and other strategies can help reduce taxes.
Ten: Resist Excessive Temptation
Resist the urge to start spending extravagantly before you retire. As your portfolio grows, so too will the temptation to spend and consume. Likewise, you may find yourself thinking you can skip a scheduled contribution or two – what’s the harm, you say with a devious smirk. Well, the harm is that you’re pushing back your timeline. Remember, FIRE and even standard retirement are all about trade-offs. You have to make sacrifices now in exchange for rewards later. We’re all tempted, but it takes willpower and temperance to get to why you started doing this in the first place. Don’t deprive yourself of everything, but remember to stay in balance.
Eleven: Re-Assess
If you’re closer to your intended retirement goal, it’s a good time to start looking everything over and assessing whether it’s realistic to retire. Will you have enough money, have you anticipated your likely costs, how long will your money last given your projected spending? Also, as you approach retirement, consider whether you want to adjust the risk of your investment portfolio. This is when you want to start thinking about a potential shift to bonds and/or dividend producing stocks.
Twelve: Do it – Retire
If you’ve got the balance and you’ve figured out your spending, it’s time to retire. This step in and of itself is quite complex, representing a major shift in lifestyle. You’ll be transitioning from years and years of saving and investing to living off those funds. If you’ve done it right, you haven’t tapped those funds since they first hit your account, so making a withdrawal might be an entirely new experience – and a good one.
Thirteen: Stay Invested
Remember that you still have to invest when you’re retired. This is not the time to “cash-out” by liquidating all your holdings and hoarding them as cash in a checking account that earns practically zero interest. In fact, selling all your investments at once will result in a huge tax bill that will take a chunk out of everything you’ve been working toward.
While you may consider adjusting the risk or the type of assets you primarily hold, you still have to stay in it. Remember, you’ve got to make it to…well, the end. Inflation will eat away at your spending power as the years go by and you’ll be making withdrawals that diminish your account values. You need to stay ahead of that by continuing to earn. And the best part is that with a balance large enough to retire, even small rates of return should still be relatively significant.
Fourteen: Enjoy
The final step is the best: enjoy your freedom. Why did you do this in the first place? Was it to escape monotony, or pursue a new vocation, travel, or simply to sit around for a while. Whatever the reason, if you’ve made it, then you’ve done it right. Hopefully you’ll use the newfound gift of time wisely. Monitor your investments but don’t spend the rest of your life fixated on them or you’ll never have a moment of peace.
The FIRE Investor's Guide to Early Retirement 