Have you ever sat and wondered what it REALLY takes to retire early?
Contrary to popular belief, the stars do not need to align, your lottery numbers do not actually need to come out, and a long lost relative does not need to leave you their entire estate in their will.
There is actually some incredibly uncomplicated, almost effortless math behind the question ‘What does it take to retire early?’, and it all comes down to one simple thing… your Savings Rate.
Your Savings Rate is the key to unlocking early retirement. Still not sure? Let me show you.
For this example, I have chosen to use round numbers just to keep it simple and straight forward. I have chosen the annual Income to be £60,000. This annual income could be for an individual salary of someone who lives on their own, or it could be for a couple who live together with their 2 salaries combined. Now, assuming this person/s can keep their annual expenses to £20,000 which is 34% of their overall income, this would leave them £40,000 leftover, which equals a 66% Savings Rate, to invest towards the goal of early retirement, and the wonderful thing about money that is invested is it then starts to earn money all on its own. Then, through the magic of The Compound Effect, that New money, which was created by you investing a certain amount of money in the beginning, starts to earn money by itself too, and then that even Newer money earns even more money on top of the old money, creating a never-ending stream of exponential growth! I think by now you get my point, but the power of The Compound Effect cannot be over-stated.
Thanks to networthify.com for the screenshots below.
Now if we take a look at the graph above which I generated by using a retirement calculator, the answer to ‘When can I retire?’ becomes quite simple. If we assume the investments can earn a minimum of 5% throughout the time they are saving, and also assume that once the person/s retire’s they will withdraw a maximum of 4% of their total pot of money per year (as this is widely regarded as a safe % to withdraw to ensure the money never runs out), then after investing the remaining 66% of the person/s income for exactly 10.2 years, the person/s would have built up their investment to a total value of more than £515,696, as shown in the image below. Therefore, at this exact moment, the person/s can consider themselves Financially Independent and retire, as 4% of their overall investment pot would equate to £20,627.84 which is above their annual expenses of £20,000, meaning from that point on, they would be able to live off their investments for the rest of their lives and their money pot would never run dry.
Now, if you’re wondering what it might look like if you changed the savings rate slightly, then check out the table below, as this highlights the relationship between your Savings Rate and your Working Years Left Until Retirement.
Thanks to mrmoneymustache.com for the screenshot below.
Now do you see why your Savings Rate is so important?
It really is the key to unlocking early retirement. If you are a rare breed of human who can live of just 15% of their take-home pay, then you can retire in as little as 4 years! Or maybe that example is a little too extreme, after all, the average Savings Rate in the UK is below 10%, and that right there is the reason the majority of people have to work 50 years or more before retirement seems like a viable option.
However, if you can aim higher than the average Joe, if you can strive for a better than average Savings Rate, let’s say 35%, then you could half that normal 50+ year working life straight in half as you would then only need to work 25 years to hit Financial Independence. Seems achievable, right?
Knowing this incredibly simple but also incredibly powerful information is what leads individuals to achieve Financial Independence and Retire Early, or F.I.R.E as its also known. It is very rarely a lucky lottery win or an inherited windfall. Therefore, now you know this, I challenge you to take a look at your own Savings Rate and work out when you could retire, and if that retirement number isn’t looking too pretty, then its time to take action RIGHT NOW and do something about it.
Just remember, your Savings Rate is the key to Early Retirement.
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