I believe it is possible to retire at 40 with ASX shares.
If you’re 39 then retirement by 40 is a bit of a stretch, but if you have 15 or more years on your side it’s achievable.
Most Australians looking to retire earlier than the pension age have it pretty tough. We can’t access our superannuation until our late 60s and the average household is paying a lot more for their housing costs than a typical American household.
If you don’t prepare by saving for retirement there won’t be a retirement. To retire early, at say 40, you have to do things most people don’t.
According to ASIC’s Moneysmart it takes an after-tax income of around $60,000 for couples and $42,700 for a single person to live comfortably, assuming you own your home.
Assuming the portfolio you create will grow its income payments over time, I think a good target for a couple is $1 million for a retirement portfolio to start at.
Don’t get me wrong, $1 million is a lot of money. However, if you give yourself 15 years to hit the target and benefit from compound interest it suddenly seems more realistic.
For example, using the ASIC compound interest calculator, if you start with $10,000 and add $2,500 a month to your portfolio which compounds at (the market average of) 10% a year for 15 years, you pretty much have a $1 million portfolio. A single person wouldn’t need to hit as high numbers to reach financial independence.
Investing $2,500 a month isn’t an option for everyone. Some budgets can only just stretch to saving for an emergency fund. But, for couples earning the average wage or higher I think it’s achievable. It might mean living in a much cheaper house than you can afford, owning much older (second hand) cars, not eating out a lot and not going on many holidays to make it work.
The other way you can get to your portfolio goal quicker is by making your investment money work as hard as possible. If you can achieve investment returns better than 10% a year then you can retire earlier. If you could earn returns of 12.5% a year it would shave a year off your 15-year plan, or make you even richer at the 15-year mark.
How do you get better investment returns?
Well, you aim for businesses with good long-term growth prospects and buy them at an attractive price then be patient to allow your idea to unfold.
Some of the shares that I think can deliver returns of 12.5% per annum or more over the next decade are: Altium Limited (ASX: ALU), REA Group Limited (ASX: REA), Challenger Ltd (ASX: CGF), Vanguard FTSE Asia Ex Japan Shares Index ETF (ASX: VAE), BetaShares Asia Technology Tigers ETF (ASX: ASIA), WAM Microcap Limited (ASX: WMI), Costa Group Holdings Ltd (ASX: CGC), InvoCare Limited (ASX: IVC), Paragon Care Ltd (ASX: PGC) and Citadel Group Ltd (ASX: CGL).
Ultimately, you can generate the best returns by finding the blue chips of tomorrow like CSL Limited (ASX: CSL) whilst they’re still small caps or mid-caps.