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My 4-step passive income plan for early retirement

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop

My ultimate investment aim is to be able to support myself in retirement. That means building passive income streams that can provide me with cash I don’t have to work for.

I’m not in a tearing hurry to retire early. But it would be nice to be a bit more comfortable when I get there and maybe take a couple of years off before I reach my 66th birthday.

I therefore need to be thinking now about how to generate passive income. And I have a plan for how to get there.

Step 1: Save

The first step involves saving as much money as I can as early as I can. The more I put aside today, the more time I can buy myself in retirement.

If I save 10% of my salary, it’ll take me nine years to buy a year of retirement at my current income. Saving 25% means I get one year of retirement every three years of saving.

Unfortunately, it’s not so straightforward – the value of the cash I save today will be lower when I reach retirement due to inflation. That’s where step two comes in.

Step 2: Learn

In order to maintain the value of my savings and increase them over time. I’ll need to invest. But it’s important that I only invest in companies I’ve researched thoroughly.

If I invest in the wrong places, I’m in danger of not protecting the value of the money I invest. Worse yet, the value of my savings might decrease.

Warren Buffett says that the best investment I can make is in myself. Accordingly, the second part of my plan involves learning as much as I can about investment opportunities.

Step 3: Invest

Once I’ve figured out the stocks I’d like to buy, it’s time for me to get investing. There are a couple of ways I can go about this step.

The first involves buying dividend stocks from the outset. This approach would generate passive income from the outset, which I could reinvest in order to grow my investment.

Alternatively, I could start with shares in companies that retain earnings and reinvest them internally. I could try to increase my wealth like this before buying dividend stocks later. 

Step 4: Repeat

The last part of the plan involves putting as much into the first three steps as I can on an ongoing basis. Continuing to save, continuing to learn, and continuing to invest.

Following the steps of the plan again and again should allow me to build a bigger portfolio by compounding my returns. It should also help me become a better investor, and ultimately boost my returns.

Exactly where I end up depends on a number of factors that are out of my control. But repeating the first three steps gives me the best chance to set myself up for retirement.

The post My 4-step passive income plan for early retirement appeared first on The Motley Fool UK.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.