Here it is: Early retirement charted out for you. At some point in time, everyone has probably thought it would be nice to retire early and wondered what it would take. Well, I’m going to show you a simple chart that tells you exactly what it requires.
Retirement isn’t dependent on how much you make
The amount of income you earn isn’t the largest factor in how long it will take for you to retire. Someone who earns $100,000 per year but spends $100,000 – or more likely $105,000 – isn’t going to get to retire any earlier than anyone else.
But someone who makes $50,000 and lives off $25,000? Well, that person will likely be able to retire early.
It’s about how much you save
See, it isn’t what you make, but what you save. Specifically, it is how much you save as a percentage of your take-home pay.
If you earn $50k in annual salary but live off $25k, two things happen:
- First, you’ll need less total money to retire. You don’t need to replace $50k of spending in retirement – only $25k. So your target retirement balance will only need to be half as large as someone who spends their full salary!
- Secondly, you’re able to put a LOT of money into the retirement account. Compare to someone saving 10% of their salary – fairly common “expert” guidance. By saving 50% of your income in this example, you can retire in 1/5th the number of years it would take the 10% saver!
So your investments will grow faster through larger contributions, and the target will be lower. That shortens the time you have to work before retirement.
The larger the percentage of your income you save, the faster you can retire.
Want to retire early? This is how to do it.
But “living” is expensive, right?
Yes, your cost-of-living will certainly impact your financial situation. But are changes you can make to control those costs though.
Consider the example of Mr. Money Mustache (not his real name). He’s a very popular blogger who is all about minimalist spending. He’s sort of the superman of frugal. Even with three people in his household – his wife and their son – they’re able to live about 70% cheaper than the average American family.
Just how cheap?
The Mustache family had spent right around $22,000 in 2016. Seriously. And they didn’t just sit around the house staring at each other – they are a very active and happy family.
Your priorities need to be straight to achieve this. Because it takes sacrifice. Something has to give. You can just buy “whatever you want” and expect to maintain a frugal lifestyle.
But perhaps it would be worth it?
Retirement chart assumptions
OK. We’re almost to the cool chart. First, though let me clarify some assumptions.
Starting at $0
For math simplicity, this chart assumes that someone’s current investment balance is zero. Not a single nickel saved. Someone who has money already saved and invested will be able to shorten the timelines.
Investment returns of 8%
Why? Because I don’t like the financial experts who throw around big unrealistic numbers like 12% returns each year. The market has returned between 9 and 10% annually over its history. 8% is a fairly conservative number and not unreasonable.
An inflation rate of 3%
The US government targets an inflation rate of 2% per year. Inflation, when kept in control, is actually a good thing. The long-term historical rate of inflation is closer to 3% though. I’d rather estimate on the more conservative end, so I picked 3%.
Investor returns of 5%
With investment returns of 8% and inflation of 3%, that means the purchasing power of your money will grow at 5%. We’re going to call that our investor returns.
What we really care about is purchasing power. A million dollars in 20 years isn’t going to go as far as a million today. So we need to account for inflation, and we’ll do that by subtracting it from the annual returns.
Following the 4% rule in retirement
I’ve written an entire post explaining the 4% rule if you want to read it.
The short story though, if you are earning 5% (or more) annually on your investments, you should be able to withdraw 4% annually with a high chance of never running out of money.
In fact, many people who only spend 4% of their retirement investments wind up doubling their money before they pass. My wife and I discussed this. If we’re on track to double our money – we’ll probably start spending faster. She’d love to go back to Europe. Hmm…
Early Retirement Charted
I read an article recently on this topic so did the math myself to double-check the results. Based on those results I created the chart below.
The chart starts with someone who saves 10% of their take-home page and calculates how many years they’d need to work before retirement. We then look at 20%, 30%, etc all the way to saving 70%.
Some key takeaways
That popular idea of saving 10% toward retirement? Well, it sort-of holds up. But only if you start at 20 and retire at 71. To me, 10% just doesn’t look like enough to save.
Big gains for saving 20%
Just by increasing your annual savings from 10% to 20%, you can retire about 15 years sooner! Now we’re talking! That’s a huge gain in enjoyable retirement years.
Retire in 17 years
Someone who saves 50% of their take-home pay could actually retire in a short 17 years. What? Why didn’t anyone tell me this when I was 22 and recently graduated from college? A recent graduate who really kept their spending low could retire before they turned 40. That would be awesome!
Just save 70%
Yeah, “just” sounds good but it isn’t easy. It also isn’t impossible though. What if your household income is around $75,000 and you could live off the $22k like the Mustache family? You could retire in a (really) short 9 years.
Would it be worth it? You’d need to decide that for yourself. It’s certainly thought-provoking though, isn’t it?
What do you think?
How much are you saving right now? How long do you think it will take for you to retire? Will you consider scaling down your budget so you can retire earlier? Let us know in the comments below.
PS: Mr. Money Mustache wrote a post back in 2012 that provided inspiration for this post. He has some great articles on his site and it’s definitely worth checking out if you are interested in a super-frugal lifestyle.