Recently I got this question from a reader: “I’m 25 and am wondering whether shares are the best avenue to getting rich enough to retire early.” My answer was “no” and here I’ll elaborate on the reasons why.
First, let’s run through how much money you need to retire early. If you ask 100 different people, you’re likely to get 100 different answers on this issue. Here’s my take on it.
My definition of ‘rich’ is this: having enough that you don’t have to worry about money. You are free not to work and do with your time as you wish. You can go on nice holidays when you like. You can live comfortably and say yes and no to things as you please.
Others may think of being rich differently. They may want a mansion. Or the latest Ferrari. Or own a yacht and spend six months living on it in the south of France each year.
Taking my definition of being able to live comfortably and not worry about money, how much would you need to retire early?
I ran a lot of numbers on this but it’s more complex than you might think. It depends on your time frame, circumstances, location, needs, and the time value of money.
To give you some idea though, a Praemium and Investment Trends report found that there are 690,000 high-net-worth individuals in Australia – defined as those who have at least $1 million in investable assets, clear of debt and excluding their own home, business, and super (but including SMSF assets).
The issue is, this is in today’s dollars. Let’s say our 25-year-old reader at the top of the article wants to retire at age 50. They’ll need more than $1 million in investable assets by the time they retire as today’s money buys less in future. Assume that inflation averages 2.5% over the next 25 years, the reader would need the equivalent of $1.85 million by the time they retire.
That’s not including owning a home. The median house price in Australia is just above $1 million. Assume that by the time the reader retires, house prices go up 5% per annum. It would mean the median house would be worth $3.4 million by the time they’re 50 years old.
Add the $1.85 million in investable assets to the $3.4 million required to buy a house debt free and the reader will need $5.25 million by the time they’d like to retire.
These are ballpark figures, though they can give you a rough guide for what kind of numbers are required to become rich and retire early.
It leads to the next question of the best ways to make enough money to fund an early retirement. For most of you, you’re not going to get there by working nine to five. You might – but you’d be in a distinct minority.
Most people must find other ways to make enough to retire early.
Can shares make it happen?
I’ve worked in equities in different capacities for a few decades and have a natural bias towards them. However, even I think that shares alone can’t make you rich in a relatively short space of time. That’s because shares work best over very long time frames that allow for compounding to work its magic.
Let’s run some numbers. Say you have an iron will to get rich and retire early, and you put $20,000 of savings into the share market each year for 25 years. Let’s assume that you put that annual $20,000 into an ASX 200 ETF that will earn 9% per annum. Can shares get you to an early retirement?
That’s doubtful because it would only get you to $1.7 million in total assets in 25 years’ time.
Of course, if you can earn more than the average broad market share ETF, then you can speed up the journey to early retirement. Doing this requires skill, possibly taking on more risk, and undoubtedly having some luck. I recently wrote of 9 common investment strategies used to beat the market.
However, shares alone aren’t likely to get you to an early retirement.
How about property investment?
Given residential property has returned close to 10% per annum for decades, surely investing in real estate with leverage can get you to an early retirement. I’m going to take the contrarian view that residential property could be one of the poorest returning asset classes in future decades and one of the least likely to get you to your ‘early retirement number’.
Why do I say this? Because housing is already so unaffordable and Australians are so indebted that it is going to cap any increase in prices. I think it’s part of the reason that despite recent interest rate cuts, property prices aren’t bouncing hard. And it may also be why rental price growth is tepid despite rental vacancies being near decades-long lows.
Basic math supports the argument for tepid growth ahead. If we assume that wages increase by 3% per annum over the next 25 years, it would be optimistic to believe that house prices will increase by +5% a year. It would mean the national house price to income ratio of 9.7x – already the second highest in the world – increasing further from here.
With pathetic rental yields and the prospect of low capital returns, I can’t see many people retiring early via residential property investments. What was once a sure thing is now anything but.
Of course, there are other forms of property investment – retail, office, industrial, storage, healthcare and so on. Some of these have potential though you’ll need a lot of upfront capital and the skills to make it work.
What about having your own business?
This gets us to what I consider the best way to earn enough to retire early: having equity in a business (hopefully 100%).
Take a look at this list of the world’s richest people:
|
1. Elon Musk – US$401 billion
2. Larry Ellison – US$300 billion
3. Mark Zuckerberg – US$267 billion
4. Jeff Bezos – US$246 billion
5. Larry Page – US$158 billion
|
6. Jensen Huang – US$155 billion
7. Sergey Brin – US$151 billion
8. Steve Ballmer – US$149 billion
9. Warren Buffett – US$144 billion
10. Bernard Arnault – US$143 billion
|
Note: as at August 1. Source: Forbes
What do you see on this list, besides a lot of money and egos? What these ten people have in common is that all of them own equity in a business or businesses. That’s how they’ve generated their wealth.
The same goes for the top 10 wealthiest people in Australia:
|
1. Gina Rinehart – A$29 billion
2. Harry Triguboff – A$19 billion
3. Mike Cannon-Brookes – A$18 billion
4. Scott Farquhar – A$18 billion
5. Andrew Forrest and family – A$16 billion
|
6. Cliff Obrecht and Melanie Perkins – A$12 billion
7. Richard White – A$10 billion
8. Anthony Pratt – A$9 billion
9. Bianca Rinehart and siblings – A$8 billion
10. Frank Lowy – A$8 billion
|
Note: as of February 2025. Source: AFR.
The downside of owning a business is that it involves taking outsized risks compared to investing in shares and property. After all, 20% of new businesses fail in the first year in Australia, and 60% of them are gone after year three.
Because of this, it’s much easier to own a business when you’re young and broke than when you’re older and married with three kids.
Put simply, while business ownership is the best way to retire early, it isn’t for the faint hearted.
Are there other ways to get rich?
I’ve gone through the three main ways to get rich enough to retire early. It doesn’t mean you have to do one of these exclusively. You could have your own business and invest excess cash in shares and property. Or you could have a good-paying job, have a side hustle, and invest spare cash in the stock market.
And potential investments aren’t just confined to shares and property. For instance, there are alternative assets like hedge funds, private equity, and venture capital that can offer the potential for decent returns.
It requires a certain mindset
While the means of getting rich and retiring early are important, just as crucial is the mindset to reach your financial goals. Being in the finance industry, I’ve known wealthy individuals. If I had to narrow down the two most important qualities that these people share, it would be these:
- A singular focus on getting rich
- A willingness to take risks, often large ones
A lot of people say they want to be rich and retire early but they don’t really mean it. That’s because they don’t have the relentless focus that’s required to make money. The rich that I know are obsessed with making money and the best means to do so. It’s all they think about 24/7, often to the detriment of everything else, including their families.
The second point is that the rich aren’t afraid to make outsized bets on things. They have little fear of failure. Their attitude seems to be that they can always come back after a fall.
That’s not normal. Most people are risk averse and are unwilling to make one bold move, let alone many of them.
In sum, before you embark on the journey to get rich and retire early, you need to look earnestly in the mirror and decide whether you have what it takes to make it happen.
James Gruber is Editor of Firstlinks.