Retiring before you're 50 on what you've made in the stock market isn't impossible, but it requires substantial monthly contributions to your stock account for many years. It also requires a disciplined, relatively low-risk approach to investing and a certain amount of luck.
Set an achievable goal retirement goal. It's a great way to begin any task. Moving toward that goal, particularly a very long range, ambitious goal, such as making enough money in the stock market to retire before you're 50, requires renewing that goal frequently -- ideally on a daily basis. One way of doing that is to set aside a time every day when you look over your investments to decide what's working and what isn't, then making the necessary adjustments.
Specifying Your Goal
Figure out how much money you'll need each year of your retirement. This is largely a personal matter, but it's worth noting that a 2012 academic study of income and happiness concluded that while it does take a certain minimum amount of money to be happy, more money doesn't make you happier. The authors concluded that the study's subjects needed at least $75,000 a year. For now, let's set that as the amount in constant dollars you need each year of your retirement.
Calculate Needed Contributions
Calculate the total amount you need in your account when you retire. Over the long run, stock-market returns average 11 percent each year before inflation and including dividends. Let's assume that each year of your retirement you'll spend only the gain -- this means that inflation gradually decreases its value. However, at some point your Social Security will kick in. Also, you're not trying to keep the principal amount intact forever -- you just need to last long enough to fund a long happy life. If the yearly gain is 11 percent and you need $75,000, then by the time you're 50 you'll need about $682,000 before accounting for inflation. Assuming three percent annual inflation, the inflation-adjusted amount you'll need is about $1.23 million.
Devising the Plan
Use a compound interest calculator that allows for annual contributions to figure out how much you need to put into your stock account each year to fund your retirement. For example, if you have $50,000 in your account now at age 30, you'll need to contribute $11,000 each year to fund your retirement. If you don't have anything in the account now, you'll need to put in about $17,000 each year. If you're older or younger than 30, put in your present age into the compound interest calculator to see what you'll need to contribute.
The plan described assumes that your return on investment matches the S&P 500 index. Your investment approach may yield more, or less. Also, the plan laid out here omits a lot of real world complications. An 11 percent return is the historical average for the S&P 500 over a 60-year period ending in 2010. The next 20 years may be better or worse. Inflation may be more or less than three percent. You may live longer than 85 years, an underlying assumption of the plan described.
Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.