Retiring early, or at least having the option of ditching your job decades before the age of 65, is a nice option to have. But if it were easy to achieve, there'd probably be a slew of retirement homes for millennials.
While having a seven-figure nest egg at your disposal may seem like a distant dream, achieving it isn't impossible. Michael Quan fulfilled his dream of retiring early at the age of 36 after spending more than a decade saving and investing. He had amassed $1.28 million, according to records viewed by Insider, which allowed him to walk away from a 9-to-5. In 2000, he started his career as a network administrator, making $42,000 a year before he spun off into his own IT consulting firm. Over the span of his working years, he told Insider he averaged about $80,000 annually.
It wasn't that he only had luck on his side, but rather, a combination of planning early in his career and remaining consistent in achieving his goal. He was also intentional about the types of investments he made, knowing they'd need to last him throughout his adult life.
7 tips for investing with the intent of retiring young
First on his list is understanding how different assets create cash flow through monthly or quarterly payouts, he noted. For example, some stocks pay dividends while others don't. Investing in the latter means the only way to access cash is to sell shares. This also might not be ideal if you need to be liquid during a bad time in the market, such as when stocks are in a correction.
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If you have a lot of time before retirement, you can ride out volatility and make bets on high-growth stocks. However, if you plan on retiring early, consider assets that create cash flow for a sustainable balanced portfolio, he added. For Quan, this meant investing in dividend-paying stocks such as JPMorgan Chase & Co (JPM), Coca-Cola Consolidated Inc (co*kE), Bank of America Corp (BAC), and Exxon Mobil Corp (XOM). He later consolidated his equities into broad market index funds, the majority of which also pay dividends.
"If you're going to retire early, you want to make sure that you have enough passive income coming in to take care of all of your expenses," Quan said. "So when you're not working, you still have income coming in. Different asset classes, such as dividends coming from the stock market or cash flow from real estate investments can really help generate that passive income for you."
Investing in real estate is another way to add assets which cash flow. In particular, Quan likes single-family homes because they will always be in demand. He told Insider he owns two single-family homes in Las Vegas because the homes were more affordable than those in California, where he lives. He purchased the first in 2010 and the second in 2012. He said his properties are paid off, one of which a four-bedroom nets him $1,800 a month, and a three-bedroom nets him $1,300 a month.
In 2021, he also invested in a short-term rental property that he posts on Airbnb because it can generate higher cash flow. This property is a condo in Las Vegas which is paid off and nets him about $2,600 a month. Additionally, he said he has a small ownership in a multi-family unit which he inherited and earns $350 a month.
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The sweet spot for Quan is buying long-term assets that keep up with inflation and have a compounding effect. When he began investing at an early age, he used the DRIP method, which stands for "dividend reinvestment plan". This means any dividends he received from equities would automatically be put back into that fund so that the returns could compound over time, allowing them to get a bigger payout at a later date.
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Automating investments is another key tip he highly recommends. There are two benefits that come from automating this process. The first is that you're dollar-cost averaging into the market, which helps smooth out the impact of volatility since you're buying in at different times. The second is it creates consistency which is key to compounding over time.
"Automating investments is super important because then it gives you back your time and it also allows you to invest in the stock market without getting your emotions into it," Quan said.
Prior to retirement, Quan automated his investments by allocating a chunk of his salary to his 401(K) every month and made sure he matched his employer's contribution. He also had his accounts set up to automatically allocate a certain amount to a savings account as well as a brokerage account.
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Additionally, if your goal is to ditch your job early, you definitely want to be more aggressive about how much you allocate each month, he said. The standard or recommended 15% of your salary probably won't do the trick. Quan told Insider that after contributing to his 401(k), he allocated about 40% of his post-tax income each year for over a decade towards saving and investing.
He did this by living frugally, he said. He kept roommates for about eight years, which kept his rent below $1,000 until he purchased his first home. When he bought a new car, he expensed it under his company to significantly offset his auto expenses. He also avoided eating out often or spending too much on entertainment. Instead, he spent a lot of time in the library where he could get material for free.
Know your target number so that you have an idea of how much you need to save. Quan recommends using what's known as the rule of 25, which helps you gauge how much money you'll need during your retirement years. Simply multiply your estimated annual expenses or how much money you think you'll need during retirement by 25.
For example, if your annual expenses add up to $100,000 a year, then you'll need a $2.5 million retirement fund. This then follows the 4% rule which states that you can safely withdraw 4% of your savings annually without running out of money.
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Get exposure to the broad market while minimizing risk. Quan's approach is to access the growth in value that comes from being invested in the stock market, without the hassle of trying to time or track the market.
A few years after Quan retired, he decided to sell his individual stocks to lock in profits and reinvest into index funds, which combine a basket of stocks that track a sector of the financial market. This allowed his portfolio to continue to grow, but he no longer had to be concerned about the performance of each company.
Today, his investment portfolio is overwhelming in index funds. His top holdings are:
- Vanguard FTSE Developed Markets ETF (VEA), which gives him access to large-cap companies outside of the US.
- iShares Core MSCI Emerging Markets ETF (IEMG), which gives me access to growth stocks in emerging markets.
- iShares Core S&P 500 ETF (IVV), which gives him low-cost exposure to 500 of the largest cap US stocks.
- DFA U.S. Small Cap Value Portfolio Institutional Class (DFSVX), which gives him exposure to US small-cap value stocks and the potential for higher growth.
- Vanguard Total Stock Market Index Fund ETF (VTI), which tracks the entire US stock market.
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Finally, diversifying assets isn't the only way to spread out your exposure: consider the accounts you're allocating to. If you plan on retiring early, you'll want to have access to your retirement funds before the age of 55. This means you don't want to have all your equities in a 401(K) because it incurs penalty fees if funds are withdrawn before the age of 55. Quan also invested in an after-tax ROTH IRA and a regular brokerage account so that he could access his funds when he needed them.
