Everyone wants to retire early, but few will achieve this dream. That’s too bad, because retiring early is easier than most people realize. You just need to use a few proven strategies to build wealth.
None of the following tips and tricks are revolutionary. In fact, some have been used successfully for decades. Yet millions of Canadians still fail to take advantage of these methods.
If you want to retire early, these three steps are your most powerful weapons.
Take advantage of your TFSA
If you don’t have a TFSA, open one today. When it comes to free money, this is as close as it gets.
TFSAs allow your money to grow tax free. Withdrawals are also tax free. Additionally, unused contribution room rolls over year to year. The contribution maximum for 2020 is $6,000, but if you haven’t used a TFSA yet, you can immediately contribute $69,500, the total of every year’s contribution max since the TFSA was first introduced.
Many people opt to invest with an RRSP, which allows you to save on taxes today, while your money also grows tax free. Unfortunately, you’ll have to pay taxes upon withdrawal. This is a perfectly fine approach, but if you can afford it, a TFSA should be your first option. If you’re already sacrificing for the future, might as well give your future self the gift of no taxes.
When it comes time to retire, whatever is in your TFSA is essentially how much you’ll be able to withdraw. With an RRSP or traditional investment account, you’ll have to factor in taxes, which could ruin your plans for an early retirement.
Automate your contributions
Once you have a TFSA ready, the key now is to maximize your contributions. The best strategy is simply to remove yourself from the equation.
Humans are odd creatures, often acting against their self interest. Everyone knows it’s important to save for the future, but most of us fail to do so in a consistent manner. By automating your contributions, you can ensure an early retirement without lifting a finger.
For example, you can have $500 withdrawn from your bank account every month, with the balance deposited into your TFSA. This schedule guarantees you’ll hit the TFSA maximum this year. Most investment accounts allow for automated contribution schedules.
Once established, all you have to do is sit back and wait. If you can’t afford $500 per month, start smaller. Even $20 per week can add up, and it’s always easier to boost an existing contribution habit than to start one from scratch.
Choose your stocks wisely
Of course, having a tax-advantaged account like a TFSA and automatic contributions doesn’t guarantee you an early retirement. Your final step is to invest in stocks that can consistently build wealth over several decades. Many investors focus on short-term movements, but keeping a long view is critical to your success.
Whether you’re a growth, income, or value investor, make sure to fill your portfolio with long-term compounders that can generate consistent wealth through age 50 and beyond.
