Retire at 40: Here's how

Here's an article I read from MSN Money (think it's contributed by The Simple Dollar) about how to retire at 40 through working hard and invest on Indexes, starting from age 20!

--

It's simple, but hard. Take 20% of your gross income every month, invest it in a balanced index fund and leave it there, then retire 20 years later with enough for a lifetime. Do you have what it takes?

A young, forward-thinking man wrote and asked this simple question:

Right now, I'm 20 years old. I am willing to take a large percentage off the top of my salary for the rest of my working life in order to be able to retire very young and live off of the proceeds of my investments and do volunteer work. How many years would I have to work if I saved 20% of my income?

He went on to name a number of other specifics about his situation, but they're really not important. If you were to take 20% of your annual income starting at age 20 and put it in a fund following the S&P 500 Index ($INX), that fund continued 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.
Obviously, some people are going to balk at this and state that it "can't" be done. The truth is that it can be done if you have the willingness to live below your means and authentically behave as if 20% of your total salary doesn't exist.

It is challenging, don't get me wrong. Let's take the case of someone who makes about $60,000 a year. He brings home a paycheck every month in the amount of $3,200. In order to save 20% of his whole annual salary ($12,000), he would have to be willing to immediately take $1,000 of that take-home paycheck every month, put it straight into an investment and not touch it at all. This takes an amount of financial fortitude and will power that, quite honestly, most Americans don't have.

--

In fact, when we put our money into the index (whether it is S&P 500 or Straits Time Index for Singapore), it's safer since putting your money into any stock. Reason is simple (but not that obvious):

1. Many people think that stock is risky, so investing in index may be in the same league.
2. Index doesn't rise everyday, just like stocks.
3. Index doesn't even rise every year, just like stocks.
4. But, the not-so-obvious fact about Index is that it tracks the best-performing stocks in a certain category. There will be new performing stocks added to the index and lousy performing ones removed from the index every now and then.
5. You can safely assume that over time the index will rise in value. But you must be thinking how long will the index will confirm rise?
6. Index rises 10% (for STI) and 12% (for SPX) on average every year. But, it is only the average; sometime the indexs do fall on a yearly basis (due to economic recession or correction, 9-11 kinda' incidents, Iraq war, dot-com burst etc etc).
7. But through research, over 5 years, putting your hard-earned money into the Index will confirm generate the guaranteed returns for you!
8. And over 10 years, you can SAFELY get back the compounded average returns (for 10 years) on your money.
9. If we put it in mathematically terms, money + 10 years' compounded 10% to 12% per annum = 2.5x to 3x your money.

If you compare with putting your money in your savings account, think again! With a measly 0.25% per annum, you money will only grow less than 30% (almost 10x slower)!