How Millennials Are Retiring Early

Who doesn’t love the idea of retirement? A life with no deadlines, meetings, commutes, or limited vacation days sounds heavenly to the North American population that is overworked, stressed, and chronically indebted; but, sadly for most, it will be decades before such freedom is possible.

Most people work until their late 60s or early 70s in order to fund their lifestyle in retirement, but unfortunately this often corresponds with a decline in physical health that makes it difficult to enjoy their new free time and money.

Millennials will live even longer than past generations. Each generation continually outlives the last. And while there may not be a huge difference between 85 and 95, when you're thinking about retiring at 35 there is. At 35, 40, or even 45, there is just no way to know how much money you'll need. Yes, you could just bank on having millions (who wouldn't want this), but you could have unforeseen medical issues, family emergencies, or simply retire one year before a massive financial downturn. The important thing to remember is that money will be a challenge if you retire early. You need to plan to have much, much more than a normal retiree, and you still need to be careful.

Your paycheck now is the centerpiece of your investment plan. Anything you can do to hike your salary or add other income (a second job or rental property, for example), will dramatically advance your objectives.

Study after study have shown that Millennials are a bit impatient. They want raises, they want mid-level jobs after graduation. They don't want to wait. This translates naturally into retirement because after 5 years of working, they may not want to wait any longer to experience retirement.

So how do you retire early?

Let's first look at your existing situation.

Appropriate asset allocation is key: NerdWallet recommends an emergency fund of three to six months' worth of living expenses. Once that fund is established, an investment portfolio with 40% cash will not provide the kind of return that most people in this age group need to meet their retirement goals. And with retirement a long way off, new graduates can tolerate the ups and downs of the stock market. Most experts would suggest that a 23-year-old invest 80% to 90% of retirement funds in a well-diversified stock portfolio.

Make big financial moves. For example, lower your rent by adding another roommate, say you'll only meet friends for brunch, coffee or drinks (as opposed to more expensive dinners). Consider living outside of pricey areas like LA or DC.

As with retiring early, budgeting and minimizing costs are key; this will let you live off the income from fewer hours of work and afford any expenses associated with your non-work activities. Your long-term saving and investment strategy should be based on whether you want partial retirement now plus working forever – or partial retirement now plus a conventional retirement (or if you’re really extraordinary, partial retirement now and early retirement).

Now for investing.

No longer are stock tips being passed along on the golf course. When Millennials want to purchase shares, they do not reach for the telephone to ring up a broker (they tend to be somewhat distrustful of financial professionals anyway). Today, all it takes are a few clicks on an app for Millennials to review a prospectus, get advice, and even commit funds, and they reward companies that let them do so. According to The Wall Street Journal, more than 30% of Millennials surveyed recently stated they are more loyal to brands that are up-to-date in regards to technology. Factors such as social responsibility and environmental responsibility also frequently play a key role in where Millennials place their money.

“The value of compounding means you’ll have to contribute less later,” said Maria Bruno, a senior investment strategist at Vanguard, the investment management company. She recommends that people open retirement accounts as early as they can — that way, the savings have more time to build and be reinvested. Eventually, the interest an account accrues will begin to earn interest of its own.

And, of course, there's cryptocurrency.

The IRS tax treatment of virtual currency has created a favorable tax environment for retirement account investors. In general, when a retirement account generates income or gains from the purchase and sale of a capital asset, such as stocks, mutual funds, real estate, etc., irrespective of whether the gain was short-term (held less than twelve months) or long-term (held greater than twelve months), the retirement account does not pay any tax on the transaction and any tax would be deferred to the future when the retirement account holder taxes a distribution (in the case of a Roth IRA or Roth 401(k) plan no tax would be due if the distribution is qualified). Hence, using retirement funds to invest in cryptocurrencies, such as Bitcoins could allow the investor to defer or even eliminate, in the case of a Roth, any tax due from the investment.

Note – retirement account investors interested in mining Bitcoins versus trading could become subject to the Unrelated Business Taxable Income tax rules if the “mining” constituted a trade or business.

For the average investor, folks with mortgages, student loans, credit card debt or regular jobs they can’t afford to lose, cryptocurrency is highly risky — more akin to gambling than investing. Stay away unless you have the stomach for speculative investing and cash to lose your money without tears.

So the solution is the same as it's always been: diversify, live within your means, and, since you're probably young, take some risks. You'll live too long to regret them.

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