Did You Know, You Can Retire Early?
Most people think of retirement as something you do after you’re no longer able to work. Or if you’re lucky enough, something you get to enjoy after a stable 40-45 year career with the same company, with pension in-hand. Few people think of retirement from the concept of FIRE (Financial Independence Early Retirement).
But FIRE is the view of retirement that I subscribe to. Retirement is when you get to a point where you don’t need the money. You can decide to continue to work, but that’s only because you want to. Not because you have to.
I’m sure for most of the people reading this, especially if this is the first time you’ve heard the concept of early retirement, this is drastically different than the typical mindset: of having to work simply because you have to. Because someone has to pay the bills.
I don’t know about you, but this is a very depressing way of looking at life. Zero autonomy, zero freedom, zero say.
So How Can I Retire Early?
It’s simple and it’s basic math. Save 25x your annual expenses, and you can call it quits, forever (it’s also called the 4% Rule within the personal finance / FIRE community). I’m fairly conservative, so to be extra safe, I’d say between a 3 and 3.5% withdrawal rate should sustain you in perpetuity (forever), especially if you’re willing to pull back further during severe downturns. So an oft-cited example of the 4%, or 25x expenses rule, is if you were to retire with $1 million: you’d be able to safely withdraw $40,000 a year from your nest egg, no matter how the market performs, and scale for inflation.
The two biggest variables to retirement are these factors:
How much do you save per year (% of income)?
How much money do you need per year (annual expenses)?
10% Savings Rate = You’ll need to work for 51.4 years in order to retire
The graphs below are based off of a 5% return on your investments, so fairly conservative.
Personally, I use 7% to calculate long-term returns in the stock market, and accounting for inflation.
15% Savings Rate = You’ll need to work for 42.8 years in order to retire
So with a 10% savings rate, you’ll need to work 51.4 years.
But if you bump up your savings rate by just another 5%, you’d end up working 8.6 years less!
50% Savings Rate = You’ll need to work for 16.6 years in order to retire
Now, if you’re a super saver, and you save half your income, you can retire in just 16.6 years!
Stated in another way, if you graduate college at age 22, you can retire by age 38 if you save half of your income.
But I’m living paycheck to paycheck, what do I do?
As I’ve mentioned above, going from a 10% savings rate to a 15% savings rate will reduce your time to retirement by almost 9 years. So that extra 5% goes a long way. But most of us don’t think like that. If you’re making $40,000 a year, 5% is only $167/month. Or stated in another way, just $5.67 per day!
Can you save an extra $5.67 per day? I’m pretty sure you can.
There’s always fat you can trim. We all have fat we can trim. And if you can’t cut back $5.67 per day, you can do roughly 20 minutes of driving for Lyft/Uber per week to make the difference. Don’t tell me you don’t have 20 minutes in a whole week.
In other words: you either increase your savings, or increase your income.
And my point is this: it doesn’t have to be huge to make an impact in either direction.
Forbes: The 25X Rule to Retirement
Charles Schwab: Can I Afford to Retire?
How do you view retirement? Are you saving enough? What are some of the things you’ve personally done to decrease the time to retirement? And what are some of the mistakes you’ve made along the way?