Tired of the nine-to-five grind and dreaming of early retirement? The right investments could set you free much sooner than you think. In this article, we’ll show you how to invest to retire early, whether you’re starting from scratch or already on track for FIRE (Financial Independence, Retire Early)!
Summary:
If you’re interested in personal finance and investing, you’ve probably heard of terms like FIRE (Financial Independence, Retire Early) and FI (Financial Independence). Both terms indicate that you have enough money invested that you are no longer dependent on the income you earn from your job. Those pursuing FIRE have a more specific goal of retiring early.
62 is the average retirement age in the US, but don’t let that number trick you into thinking you can’t retire in your 50s, 40s, or even 30s. With the right strategy and a focus on smart, safe investments, you could retire decades earlier than you would otherwise.
All of these assets are either semi-passive or completely passive, making them optimal for early retirees who want more time.
|
Returns |
Tax Benefits |
Passivity |
|
|
Rental Properties |
High (appreciation + cash flow) |
Strong (depreciation, 1031 exchanges, interest deductions) |
High (if turnkey rentals) Moderate (if regular rentals) |
|
Index Funds |
Moderate |
Low (capital gains applies) |
High |
|
Treasury Bonds |
Low |
Moderate (interest is exempt from state/local taxes) |
High |
|
REITs |
Moderate |
Moderate (qualified dividends) |
High |
|
Syndications |
Moderate-High |
Moderate (depreciation) |
High |
Rental properties are single-family homes or multifamily buildings you rent out to tenants. This allows you to earn regular monthly income, while tenants pay down your mortgage for you. What’s more, property values tend to increase over time, growing your investment!
Rental properties offer many different benefits for the early retiree:
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Rental properties combine the benefits of almost all major asset classes—cash flow, appreciation, tax benefits, leverage, and more. However, only turnkey properties come with tenants and management in place, giving you an investment with fewer headaches and more time in retirement!
Invest in headache-free turnkey rentals with tenants and property management in place!
Index funds are exchange-traded funds (ETFs) or mutual funds that follow a specific market index. Over the long term, these “baskets” of stocks tend to appreciate, and many of them pay dividends to shareholders, which you can reinvest or distribute as cash for additional income in retirement.
Index funds are a staple in many retirement portfolios for these reasons:
Index funds have a long time horizon due to their moderate returns (roughly 10% per year, not adjusted for inflation). To build wealth for retirement, you either need to start investing early or invest a lot of money. If your goal is to retire early, make sure you have an after-tax brokerage account you can withdraw from before traditional retirement age without penalty!
Treasury bonds (or “T-bonds”) are long-term securities issued by the US government. You are essentially giving the government a loan, and in return, they pay you interest every six months, providing you with predictable income until they reach maturity (typically 20- or 30-year terms).
Note: Shorter-term Treasury notes (or “T-notes”) range from two to ten years, offering investors a medium-term option compared to both short-term Treasury bills and long-term Treasury bonds.
Looking for a safe, low-risk investment? Treasury bonds provide the following:
Bonds are some of the safest assets, but with low yields, they’re best for people who have a large nest egg to deploy and are primarily concerned with preserving their wealth. If you’re younger or don’t plan to retire for some time, you might consider an investment that involves a little more upside instead.
Get passive income, tax benefits, and long-term appreciation with turnkey rentals!
REITs (real estate investment trusts) are companies that acquire and manage investment properties. Like stocks, you can buy shares of these companies and receive fully passive income through dividends. What’s more, as the company appreciates, your investment typically grows!
Here’s why REITs are some of the best retirement investments for passive income:
REITs are a great option for those who are interested in real estate, and pairing them with turnkey rentals gives you industry diversification and tangible assets. While REITs can provide passive income in retirement, keep in mind that they don’t offer the same tax benefits as direct ownership.
A real estate syndication is a group investment where multiple people pool their money together to buy one or more large commercial properties. This investment is usually managed by an “operator” (or “general partner”), with other investors acting as “limited partners” (LPs).
Note: Syndications can be risky, so investors must do their due diligence on the general partners and the deal itself before investing.
A syndication could be a worthwhile investment if you want the following:
Many syndications require you to be an accredited investor, meaning you must earn $200,000 a year (or $300,000 with a spouse) or have a net worth of $1 million (excluding your primary residence). This makes them a popular investment option for high-income earners, real estate-educated retirees, and early retirees.
The below calculations are merely to serve as an example. Returns and initial investment can widely vary.
First, determine how much income you’ll need in retirement based on your monthly expenses, lifestyle, and goals. You can then back into the number of rentals you’ll need using the retirement income formula:
Income = Money x Cash-on-Cash Return
For example, let’s say you need roughly $5,000 a month ($60,000 a year) to cover all expenses and maintain your desired lifestyle in retirement. Turnkey rentals often target 10% cash-on-cash returns, so plug these figures into the inverted formula below:
Money = $60,000 (Income) / .10 (Cash-on-Cash Return) = $600,000
With turnkey properties that cost roughly $250,000 each, you’ll need 12 rentals at 20% down ($50,000) to meet your retirement income goal!
For an even more detailed breakdown, check out our full guide on how many rentals you need to retire, or try our simple retirement calculator!
While rental properties are some of the best investments for early retirement, it can take a while to build your portfolio by continually saving and putting down 20% on each property. But it doesn’t have to!
With Rent to Retirement’s new build investments, you can put as little as 5% down, which could allow you to buy multiple rental properties much faster. Better yet, these turnkey properties are professionally managed, so you get a more passive income stream and all the other benefits of direct ownership!
There’s no one “best” investment for early retirement, as this largely depends on your retirement income goals and timeline. Rental properties (especially semi-passive turnkey rentals), index funds, treasury bonds, REITs, and syndications are some of the top options for early retirees.
There’s no set amount of money that every person can retire on, though many investors aim for a nest egg in the range of $1-$3 million. The amount you need will depend on your retirement timeline, the income required to fund your lifestyle and monthly expenses, and the levels of returns from your investments.
Yes, with a safe withdrawal rate of 3%-4%, you could potentially retire at 40 with $2 million. However, this ultimately depends on several other factors, like your expenses and retirement lifestyle.