Retiring early might seem like a fantasy reserved for lottery winners or tech entrepreneurs, but that's simply not the case.
For regular Australians, the share market could be a surprisingly powerful tool to bring that dream closer to reality.
The secret? Harnessing compounding returns through regular investing and a long-term mindset with ASX shares.
The power of compounding
Historically, the Australian share market has delivered a total return of around 10% per annum (including dividends and capital growth).
While there's no guarantee that this will be the case again in the future, I feel it is fair to assume this will be the case and base our calculations on this.
With that in mind, if you invested $1,000 a month into high-quality ASX shares (and/or ETFs) and achieved a return of 10% per annum, you could grow a portfolio worth almost $725,000 in 20 years. Stretch that to 25 years and the figure climbs to more than $1.2 million.
Then after 26 years you are looking at $1.38 million and after 27 years you would have over $1.5 million.
That's the magic of compounding — your returns earn more returns, and the snowball keeps rolling.
Early retirement: what does it take?
To retire early, you'll need two things: A portfolio large enough to sustain your desired lifestyle, and a way to convert that portfolio into annual passive income to live from.
A common rule of thumb in the financial independence community is the 4% withdrawal rule.
The 4% rule states that you can comfortably withdraw 4% of your total investments in your first year of retirement and adjust that amount for inflation for every subsequent year without risking running out of money for at least 30 years.
If you build a $1 million portfolio, withdrawing 4% translates into $40,000 per year in income. Want a $60,000 annual income? You will be needing a $1.5 million portfolio if you are withdrawing 4%.
How to build a million-dollar ASX share portfolio
While income will be the focus in the future, it won't be to begin with.
In order to build a million-dollar portfolio, investors will want to focus on buying high-quality ASX shares (or ETFs) that can compound for decades.
Top ASX shares like ResMed Inc (ASX: RMD) or Xero Ltd (ASX: XRO) spring immediately to mind. Alternatively, the Betashares Nasdaq 100 ETF (ASX: NDQ) and the iShares S&P 500 ETF (ASX: IVV) could be quality ETFs to buy and hold for the long term.
Foolish takeaway
All in all, retiring early with ASX shares isn't about chasing the next hot stock or trading in and out of the market. It's about building a high-quality portfolio, staying the course, and letting compounding do the big work.
