Setting up a retirement portfolio is the key to financial independence, but for many putting a substantial amount of money aside isn’t possible when they first enter the workforce. If you’re in your 30’s and you haven’t started building up a nest-egg, that doesn’t mean you have to work forever — in fact, according to disciples of the Financial Independence, Retire Early (FIRE) strategy, you could even retire early.
Those who follow the FIRE plan aim to put between 50% and 75% of their income into savings and investments. In doing so, they are able to create a hefty investment account that they can draw on for decades without relying on traditional employment.
So for 30-somethings who are finally able to start saving, this can be an effective strategy to start laying the foundation to retire comfortably on-time, perhaps even earlier than anticipated. To figure out what kind of portfolio you need to accumulate, you first need to calculate how much you need to live on each year.
In this article, we’ll consider an investor hoping to draw $40,000 per year from their retirement accounts.
FIRE Investors Need to Draw 4% Per Year In Retirement
The ‘safe withdrawal rate’ among FIRE followers is 4%. That’s because an average portfolio divided equally between equities and fixed-income investments is likely to deliver roughly 6%. So withdrawing 4% should keep the value of your overall portfolio constant, with an added 2% buffer for inflation.
So a 30-year old who wants to retire in 20 years needs a $1,000,000 nest egg. That might sound impossible — but keep in mind the more money you have, the more money you make. In a conservative scenario, assuming you made 7% on your investments, you’d need to save $2,000 per month to retire when you’re 50. If you’re a FIRE disciple, that means you need an annual income of roughly $50,000 per year, with half of that going into an investment account.
Aggressive Investment Lowers Savings Need, Increases Risk
Historically, portfolios that allocate 90%-100% to stocks tend to deliver returns of roughly 10%, adding a bit of cushion for those who are willing to take on added risk.
With bond yields below 1%, aggressive investors will want to allocate 90% or more of their savings to equities until yields make their way higher. One way to do that is by buying ETFs that track a particular sector. That strategy offers a great deal of diversity within a single industry. Buying individual stocks has the potential to deliver higher yields, but also carries a higher degree of risk.
With the forward P/E ratio of the S&P 500 at 20-year highs, it’s tough to find value in today’s market. Investors may want to start off building small positions and use volatile dips to add to them.
Technology Sector Offers Growth
The first place to start looking for equities is the technology sector, delivering the most aggressive growth in the marketplace. You can essentially divide the tech sector into two categories — product makers and service providers.
Here you can pick up quality blue-chips that still have aggressive growth ahead. Key among this group is Microsoft (NASDAQ:MSFT), whose advances in cloud computing have given MSFT stock a shot in the arm.
IBM (NYSE:IBM) also makes for a good value play, as the firm appears to be turning a corner toward a total recovery after years of struggling beneath its antiquated hardware business.
And Google parent Alphabet (NASDAQ:GOOGL, GOOG) looks like one of the best bets in the tech sector, as the firm’s rock-solid financials will carry it safely through a prolonged downturn.
Healthcare
The healthcare sector is often considered a defensive sector because even in times of economic strain, people need to go to the doctor. There are a lot of ways to invest in healthcare, from medical device makers to service providers to real estate owners.
CVS Health (NYSE:CVS) is a good pick in this space if you’re looking for something that will hold up over time. While the November elections will likely send shockwaves through the industry, CVS is uniquely positioned to help lower overall healthcare costs because of its all-encompassing business model.
Another play merging healthcare and technology is Teledoc (NYSE:TDOC), whose virtual doctors’ appointments have skyrocketed in popularity amid the pandemic.
PetIQ (NASDAQ:PETQ) is an aggressive pick in the healthcare space. The firm offers a range of animal prescriptions, healthcare plans and veterinary clinics across the U.S. It recently announced the acquisition of Elanco Animal Health (NYSE:ELAN), the leading flea treatment maker in the country.
Business Services
Now is a tricky time to invest in business services, as many firms are cutting spending and that often requires limiting services. But there are some notable companies that are worth watching in this space.
Square (NYSE:SQ) Square has created a compelling online ecosystem for business owners that allows them to control everything from their website to their payroll data in one place. Plus, the firm’s explosive Cash App looks likely to drive growth well into the future.
Payment processors are another good way to play the business services space as cashless transactions continue to rise in popularity. PayPal (NASDAQ:PYPL) is a good pick here because of the firm’s strong foothold in the e-commerce space. The pandemic has accelerated the shift toward online shopping, which should be a boon for PayPal’s bottom line.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.
