Investment moves

Three Investment Moves You Must Make

By Larry Ferstenou

Based on You CAN Retire Young

Here are three investment moves I believe are critical to growing net worth and achieving long-term goals like early retirement:

(1) Maximize Your Tax-Deductible, Tax-Deferred Contributions: Contributions to your 401(k), 403(b), 457, SEP, IRA or any other employer-sponsored plan are tax-deductible (except IRAs if you earn too much income) and lower your overall tax liability each year you contribute. Annual dividends and capital gains are not reduced annually by taxes so your account grows faster. The other primary advantage of a 401(k) or other employer-sponsored retirement plan is that there is often some kind of employer match. That is free money to you, not unlike giving you a raise.

(2) Start Investing as Early as Possible: The power of tax-deferred compounding cannot be over-emphasized. A 25-year old without dependents earning $50,000 per year who starts saving 30 percent annually with a goal of retiring at age 45, will have accumulated $960,000 upon retiring young (considering a 10 percent average annual return).  In contrast, a 30-year old with the same income, savings percentage, and investment return who starts investing with the same goal of retiring at 45, will have accumulated only $539,000 when retirement day comes. By not starting an investment program a mere five years earlier, $421,000 is sacrificed.

(3) Save as Much as Possible of Your Annual Household Income: You saw in the preceding example how saving and investing 30 percent of a $50,000 annual household income ($15,000 per year) can compound into $960,000 after 20 years. But saving just 1.6 percent of a $50,000 annual income (the average savings rate in the U.S. in 2001), compounds to a mere $45,800 after 20 years.

If you don’t want to work the rest of your life, be a prodigious saver, start early, and contribute as much as possible to your tax deductible, tax deferred retirement accounts. Establish spending priorities with a goal of saving money and you will be on your way to achieving your long-range early retirement goal. 

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Larry Ferstenou retired over ten years ago at age 42 and is the author of You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). More information can be found at www.youcanretireyoung.com. Copyright © Larry A. Ferstenou, 2002–2003.