The Simple Dollar posted a great article that is helping a member who is young figure out if he starts early, then when can he retire. If he start at the age of 20 years old, then he can retire early basically at about 42 years old. That will only mean that he will be getting the same salary that he has right now but he will be work free but still far from retiring rich.

If you were to take 20% of your annual income starting at age 20 and put it in a S&P 500 index fund, that index fund continues to grow at the long-term historical rate (12%), and you received a 4% raise each year, you could walk away from your job and live off the interest at age 41 matching your current salary, or quit at 43 and be able to give yourself a 4% “raise” each year from the interest, which is probably the better plan because it combats inflation. Raise the amount to 25% and you’re done at age 38 and able to live in perpetuity at age 40.

All he has to do is save 20% of each pay check and then invest into an index fund like the S&P 500 index fund, I prefer to use Exchange Traded Funds (ETFs) but all the same.

The hardest part is saving that 20% or heaven help you if you can 25% per paycheck.

But like snow-flaking debt, why can’t you snowflake to a rich retirement? And of course, once you start to save and that compounded interest really kicks in, then you can be saving an extra couple thousand per year just on interest alone.

If you can save $20,000 and get 5% in interest, then you just gained an extra $1,000 for having your money sit there. That $1,000 will then help you reach another $20,000 that much quicker then before you know it, you are now getting an extra $2,000 per year.

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Now this is a hard question that will rely 100% on your point of view and preference. Do you want to own the real estate property and/or house in a shorter period and pay less interest or in a longer and instead invest extra money into the stock market to gain compounded 7%-12% gains or more. Lets test some theories.

Fixed-Rate Mortgage Term Viewpoints

• Shorter Term is Key – You will have higher monthly payments but equity will grow faster. You will actually own the home faster and would have had paid much less in interest.
• Longer Term for Well Rounded Benefits – With a longer term you pay way more accumulated interest and equity builds slowly. You also have cheaper monthly payments money left over for other things.Prepaying a mortgage versus investing money in the stock market. You can invest the additional money that you save per month into the stock market by investing in Exchange Traded Funds (ETFs). You will gain around 7%-12% compounded annually and this will dwarf the 5%-7% interest rate that you are willing to knock down. In 10 years you would have accumulated far more money in return on investment (ROI).Another factor is that paying interest is a huge tax reducer that many individuals use. Even though you can pay off in full for your house, don’t, you will give up this huge tax reducer if you do.
• Flexibility – As long as you don’t have any prepayment penalties, you can pay off you mortgage loan in much less time. If you get a 30 year, pay 10% of your monthly mortgage payment in principal and reduce your mortgage significantly. You can knock down a 30 year or 40 year down to 20 years or 15 years without problems.My Money Blog has a great post about choosing a fixed rate mortgage term. They even show the difference that extra payments towards principal will make.

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The tax benefits of Exchange Traded Funds (ETF)s are clear once you know. They are an improvement on traditional index funds because they delay capital gains taxes because when the ETF stocks are traded they are not bought and sold over and over. They are instead held in waiting until someone else buys them. So you are not really taxed until the day you actually sell your stocks.

Tax Efficient ETF Investing Benefits

Delayed capital gains taxes – they allow an investor to pay most of his capital gains upon final sale of the ETF, delaying it until the very end.
In this respect your wealth accumulates a lot quicker then constantly being knocked by capital gains taxes from the start to the end.

Simple Balanced ETF Portfolio for high gains that actually can beat the market can make up your entire investment portfolio. ETFs outperform traditional mutual funds by as much as 33% more in realized wealth gains towards your retirement.

Personally I try to invest about 90% in ETFs and I even invest in ETF Bond Funds such as iShares Lehman Aggregate Bond (AGG). They are well diversified, management costs are dirt cheap and they are capital gains optimized. What more can you ask for in headache free investments?

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Being frugal should always be top on your list in order to be retire early.

Steps for early retirement

• Be very Frugal. Live below your means and don’t pay for anything that you don’t have to.
  • Use coupons for everything.
  • Ride a bike to your destination or car pool.
  • Send your child/children to public school instead of private school. Major money saver here.
  • Use credit cards with cash back rewards like Citibank, Chase and CapitalOne.
• Save at least 20% of every paycheck. After five paychecks you already have saved a whole paycheck without thinking about it. If 20% sounds like too much, then by all means start by 10% or even 5%.
• Learn how to get multiple streams of income. Get another job, start blogging, fix computers or cars in your spare time. Start somewhere and then that whole paycheck can become 100% saved.
• Invest for the long term in the stock market and always buy low. Try hassle free methods like investing in Mutual Funds and Exchange Traded Funds (ETF). These help you because you don’t need to buy individual stocks and they are well diversified.

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