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Many people like the idea of bringing their retirement forward. But if one manages to save enough money to do so, it can help shorten one’s working life. One way I try to do this is by investing in stocks that I think will pay me a profit. Here are three steps I take to try and retire early by investing in income stocks.
1. Start now
Time to invest is very important. The more shares I own, the more time I have to pile up for any dividends. The difference can be significant.
As an example, suppose a 30-year-old invests £10,000 today Legal and general Stocks, with a current yield of 7.2% She does not invest more into stocks but compounds the shares annually. At 65, she will own £114,000 in legal and general stocks. Her friend follows exactly the same course, but she’s 40, not 30. By the time she’s 65, the Legal & General stock she owns will be worth £57,000.
In other words, even if he invested the same amount and held stocks for a quarter of a century, at age 65 he would still be making half as much as his friend.
This shows how starting to invest for retirement early can make a big difference to your returns and help you reach your retirement date. But how early is it? After all, most people plan to invest in income stocks after they grow up a bit or have some extra cash.
My take: Why wait even a day? The sooner I start, the sooner I can hopefully retire.
2. Composite divisions
The above example involves a few assumptions. For example, I assume that Legal & General’s share price and dividend will remain constant. In practice, you can go up or down. But the principle is clear: starting early gives you a longer timeframe for wealth accumulation, which can help you retire earlier.
But why am I assuming I’m adding my dividend to the example above? Because integration is like pushing a snowball downhill. The dividends themselves can be reinvested into more shares and generate additional profits, which can do the same. That’s why compounding is so powerful: it can mean I have more money than I put into my retirement account.
3. Buy a variety of income stocks
One of the stocks in my retirement plan is a fund manager. Jupiter. The dividend yield is 16.7 percent. It may help me retire after decades!
But can it last? Such a high dividend is usually a sign that the city expects a company to reduce its dividend. That may not happen, but it’s always a possibility. If I gave all of my pension to Jupiter – or some other income share – just to cut the dividend, my retirement plan would be in disarray.
That’s why, as well as hunting for quality at attractive prices, I always make sure to diversify my retirement funds.