How a couple retired early on $1 million using a simple two-step investing strategy that most people overlook.
Speed is the name of the game for early retirement, but according to one couple, there’s a lot more to it than that.
Business Insider reported that Kristy Shen and Bryce Leung were aiming for the sunset in early 2012. (1) He founded the Financial Independence, Retire Early (FIRE) movement (2), which aims to retire before the expected age of 65. The couple devised a strategy which they claimed was possible by investing in index funds.
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Initially skeptical, he studied the numbers and realized he could retire on a modest $1,000,000 portfolio. By 2015, they had reached their goal. He quit his engineering job and started traveling the world, making a living from his investments. He earns some income from his two best-selling books, but says it is not enough to sustain his lifestyle.
The pair highlighted an investment strategy divided into two phases: accumulation and income. In the accumulation phase, you invest aggressively in equities. This is consistent with Financial Industry Regulatory Authority (FINRA) guidance, which suggests that financial advisors recommend stocks and mutual funds to people who prioritize growth over stability. (3)
The second phase, income, begins when you reach financial independence and stop working. The goal is to switch from a growth-focused portfolio to one that can withstand economic storms, like bonds and dividend stocks. It’s counterintuitive, but it could mean the difference between staying retired and returning to work.
Switching from growth to income
The paradoxical truth is that reducing growth may benefit retirees in the long run.
Stocks, bonds, and other assets perform differently depending on economic conditions. That’s why investment firm Vanguard recommends rebalancing your retirement portfolio from time to time. (4) For example, during a market downturn, you might shift from a 60/40 position of stocks and bonds to 40/60. Taking money out of volatile stocks can reduce your risk.
Read more: Almost 50 with no retirement savings? This is why you shouldn’t panic
“Volatility is troubling for any investor and can be especially damaging early in retirement,” says Nevenka Vrdoljak, senior investment analyst at Merrill. (5) A sudden recession may force you to buy back stocks at lower prices, derailing otherwise promising retirement plans.
Recessions are more common than you might think. Morningstar estimates that the stock market falls on average once a decade. The worst crash was the Great Depression, in which the stock market lost 79% of its value. Even a 10% decline is enough to shake up a retirement portfolio. (6)
For retirees, the question isn’t whether an accident will happen or not. How much is this?
The U.S. Department of Labor says the average American spends 20 years in retirement. (7) These are broadly two major recessions in the market.
Shen and Leung retired at age 30, giving them a much longer runway than your typical retirees. Converting investments into steady income will be the key to preserving their money during recessions, pandemics and market panic.
Many advisors suggest diversification as a way to protect your portfolio. Instead of relying solely on growth stocks and index funds, consider investments that generate income.
“Instead of relying on capital gains and just looking at the total value of your portfolio, what really becomes important is how much your portfolio is paying out in dividends and interest and other types of income,” says Leung.
Income-producing assets like bonds and dividend stocks let retirees cover bills without having to sell their underlying investments.
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business insider (1); vanguard (2); FINRA (3); vanguard (4); merrill (5); morningstar (6); US Department of Labor (7)
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