For many people, Monday will be the first day back at the office after a prolonged Christmas break. Others will have started back last week. Either way, returning to work after an enjoyable break with family and friends is often depressing.
If the thought of returning to work fills you with dread, why not make 2018 the year that you push towards an early retirement? By establishing healthy financial habits now, you could potentially retire one, two, five, perhaps even 10 years earlier than you currently plan to.
Here’s a look at four things you can do right now to increase your chances of retiring early.
Pay less tax
Many investors often overlook the tax implications of their investment strategies. If you want to retire early, you should be looking to pay as little tax as legally possible.
Consider this example. Let’s say you bought £5,000 worth of shares five years ago and today they are worth £20,000. You want to sell the stock and lock in your profits. That’s a £15,000 gain right? Not so fast. The tax man will pocket almost £800 in capital gains tax if you’re a basic-rate taxpayer.
The solution? Protect your wealth from the tax man by investing within a Stocks & Shares ISA. Any capital gains or dividend income within this type of account will be tax free. That means an extra £800 going towards your retirement portfolio. Reinvested over the long term, that could make a significant difference to your total wealth.
Buy assets, not liabilities
One of the best books you can read on financial independence is Rich Dad, Poor Dad. The author, Robert Kiyosaki, explains that the key to generating wealth is to buy assets that generate cash flow and enhance your wealth, instead of burning your cash on liabilities that drain your resources.
For example, a £5,000 investment in dividend stocks is an asset. You’ll receive cash payments year after year. Your wealth will increase over time. But if you spend that same £5,000 on a car, you’ll have a liability on your personal balance sheet. That car is going to require registration, insurance, petrol and MOTs. It won’t enhance your wealth.
If you want to retire earlier, buy assets not liabilities this year.
Reinvest your dividends
Speaking of dividends, the key is to reinvest them, if you want to boost your odds of retiring sooner.
Analysts at Hargreaves Lansdown examined the growth of a £10,000 FTSE 100 portfolio invested for 30 years between August 1987 and August 2017. With all dividends reinvested, the portfolio grew to £106,000. Yet without dividends reinvested, it only managed to grow to £35,500.
Reinvest your dividends this year to achieve greater long-term wealth.
Lastly, to grow your wealth faster, it’s worth considering a small allocation to small-cap stocks. The reason being, over the long term, smaller companies often generate much higher returns than larger companies. For example, the Slater Growth fund, which invests in smaller growth stocks, returned an impressive 30% over the last year. That’s almost three times the return of the FTSE 100 index.
Now it’s important to note that smaller companies are more risky than large-caps. Therefore you don’t want to be overexposed. Yet a small allocation to fast-growing companies really could make a large difference to your net wealth over the long term.
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