Do you want to retire in your early 50s? That is an excellent time to call it quits and focus on family and friends.
But how can you retire this early without a solid financial plan and a massive bank account? One way is to follow the FIRE movement (Financial Independence Retire Early).
The FIRE movement can quickly get you where you’re going, but you may not like the destination. I think a better way to retire early is through income investing.
Bond Investing in Your 20s
I’ll lay out the argument for both programs and let you decide. I retired at age 42 using my military pension and income investing; therefore, you know where my heart lies.
Why retire early at all? People look at me crazy when I tell them I retired at age 42. They can’t fathom how I spend my time. I guess they prefer to have their boss allocate their time and energy.
Who convinced us that we need to work until 65 anyway? It seems this number came out of thin air around the same time 401 (k)s became all of the rage. Social security timelines also push us to believe we must work into our late 60s.
I say hogwash to all these numbers—retire in your 40s and 50s. However, pulling this off will be quite challenging, especially if you are starting from zero (or negative with debt).
Whether using index funds or investing income, the path to financial freedom flows through your household budget. Nothing is more important than increasing your income and lowering your expenses, which creates cash flow.
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My wife and I had $77,000 in debt when we started our thrust toward financial independence. The date was June 2019, and we had had enough of the stress and anxiety of being in debt.
We decided to get roommates, consolidate loans, keep our cars, and work additional jobs to get out of debt as soon as possible.
We retired in October 2023 and never looked back. In fact, our net worth and passive income are considered higher over the last 18 months since retirement.
We used income investing to generate high levels of dividend income. If we don’t need cash flow, we reinvest it to add to our bottom line. But, let’s first talk about index funds and the FIRE movement.
The FIRE movement. The Financial Independence Retire Early movement became a huge hit as passive index funds became popular. Index funds, like SPDR S&P 500 (SPY), allow average investors to capture the stock market’s returns.
Financial Independence through Real Estate 4
The goal of the FIRE movement is to get as much money into the stock market via index funds—leveraging the power of compounding to retire early. On average, the stock market returns roughly 10% annually.
Therefore, we can assume some investment numbers using our handy dandy compound interest calculator. Let’s assume we save $3,000/month for 20 years at 10%, giving us $2 million.
If we started at age 18, we could have that $2 million by age 38. If we continued this plan until age 68, we would have $42 million.
The problem with the FIRE movement, and index funds in general, is that people would have to liquidate their funds to generate income.
The Bear Market is Your Friend
The theory is that since the stock market typically returns 10% annually, the retiree could simply skim 4% off the top and let the portfolio continue to grow. In practice, this method is not that clean or simple.
For example, let’s say the market is down 30% for the year, and you must withdraw $50,000 to live. You would need to sell more shares than usual to generate the same income. If the market recovers, your shares will still be missing.
Many FIRE retirees got caught in this trap and had to return to work after 10-15 years. Can you imagine playing this game from age 38 to 88?
Income investing is much better. I prefer to use income investing to retire early. Income investing is the art of seeking current income from the stock market.
Instead of waiting for the market’s price to jump 10% annually, income investors seek 10% dividend yields from high-paying products.
Bond Buying is Back Baby!
For example, PIMCO Dynamic Fund (PDI) may start the year costing $20/share and finish the year at $20/share. However, it paid $2.66 in dividends, or 13%.
Even if the PDI’s price drops to $18, it doesn’t affect my cash flow. All I truly care about is the dividends hitting my account.
Income investors should reinvest at least 25% of their dividends to ensure their portfolio continues to outpace inflation. If they are heading toward early retirement, they should reinvest 100%.
The best part is that income investors can use their dividends on the fly. This means that if something comes up, they can use dividends to help handle the situation. They don’t need to sell shares.
Over the long run, income investors will continue to add shares to their portfolio, without a need to sell anything. They may rebalance but don’t need to sell shares to generate income.
Live Your Best Life with Dividends
Your FIRE number vs. passive income. It will take longer to reach your retirement numbers with income investing than with index funds. The FIRE movement likes to use a FIRE number to determine success.
For example, someone’s FIRE number may be $1 million. Using the 60/40 rule, $1 million would generate $40,000 in passive income from selling shares.
Therefore, the FIRE retiree would create a life that falls below $40,000/year in income. That doesn’t sound like an enjoyable life. That’s why many FIRE retirees move overseas.
Income investors seek much more pronounced retirements because they aim for a monthly passive income goal. For example, they may set their dividend income goal at $5,000/month.
This monthly goal has nothing to do with the stock market’s price return; it has everything to do with adding new capital and reinvesting dividends.
Saving for a House Down Payment #6
The FIRE retiree could get a couple of lucky years (like 2023 and 2024) when the stock market returns over 25% annually. They retire early with $1 million and lock themselves into the stress of a fleeting bull market.
The income investor achieving $5,000/month in income would reinvest $1,250 into the portfolio every month. In ten years, their monthly payment would be $6,400; in 30, it would be $10,400.
My income investing portfolio currently pays me $2,400 a month in dividends. My goal is to reach $10,000/month and then start paying off my three houses.
Conclusion. In a nutshell, becoming an income investor takes more financial education than simply forcing your money into index funds.
Homeschooling vs. Real Estate Prices
The more you learn about income investing products like closed-end funds, preferred shares, Mortgage REITs, business development companies, dividends ETFs, and high-yield dividend stocks, the richer you’ll become.
Wealth is the difference between income and expenses. Income investing better aligns your monthly budget and savings goals while removing the fear of the markets.
I review the markets simply to ensure my dividends have arrived. The prices going up and down don’t bother me, only seeing my passive income increase every year.
If you are serious about building long-term wealth, not just escaping the workforce as soon as possible, consider income investing. That’s what I did. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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