How to Retire Early
How to Retire Early
Want to retire early? It’s actually pretty simple math. The goal here is to invest your money, so that it earns more money.
How do you do that? You invest in stocks, bonds and real-estate to name a few.
We want to get to a point where the return on our investment pays for our expenses. Conservatively, your investment should yield you a 4% return each year. So if you have a million dollars in investments, you’ll have $40,000 to live on. Now the goal is to get your expense to less than $40,000 and you can retire. This way, without touching your investments, you’ll have enough money every year for the rest of your life.
Video by Video School Online
Hi, my name is Phil. I’m a video creator and online instructor. I’m also a personal finance nerd. Because of that, I want to create a series of videos that breaks down some of the most mystifying topics that plague our society.
In a world where people’s finances are typically locked away and not-talked about, I believe opening up the gates of financial conversation will help everyone live a better and smarter life.
In this first video, I want to explain the shockingly simple math behind early retirement- thanks to one of my biggest heroes, Mr Money Mustache.
While the ability to retire may seem like a distant and unreachable goal for many, the premise comes down to one thing. You need to invest money so that it earns more money.
This could be investing in stocks or bonds, real estate, or any other of investment vehicles. As soon as your investments earn enough money for you to live on each year, you are able to retire.
Let’s break it down further to know when you can retire. The most important concept is knowing your savings rate, basically how much you make minus your expenses.
If you spend 100% of your income, you will never retire… because you will never be able to invest any money that earns money for retirement.
If you spend 0% of your income, you can retire right now… because somehow you are livingwithout needing to make any more money.
Between 0% and 100% are a number of savings rates that correlate with the years it will take to retire. For this, let’s assume your annual investment return is 5% (which is conservatively low) and your withdrawal rate is 4%… meaning you spend 4% of your net worth each year.
For example, if you have a $1000000 net worth, and you live on $40000. If your savings rate is 10%, you will be able to safely retire after 51.4 years. Safely, meaning you will never run out of money. If your savings rate is 25%, you can retire in 31.9 years. 50%, you can retire in 16.6 years.
And if you can somehow save 75% of your income, you can retire in 7.1 years. Now getting to that savings rate might not be easy in our world of societal pressures, keeping up with the Joneses, and bad habits. But you can get closer by making smart decisions, avoiding debt, and living simply.
The key take away is… Cutting your spending rate is way more powerfulthan increasing your income because no matter how much money you make, decreasing your spending will speed up the process.
A note, The math behind early retirement works if you are working a minimum wage job or a-figure CEO salary. It’s all about the savings rate.
So if you want to retire in years, the math tells us that you need to save 66% of your income.
Now there is a lot that I didn’t talk about – like how to invest, and how to cut expenses to get to a high savings rate. Those will come in a future video. For now, get excited about the honest truth about retirement (and early retirement at that!)[/mks_tab_item]