How Early Retirement Is Possible.
Updated: May 5, 2020
What would life be like if you could retire early? Would you lie on a beach with your toes in the sand, or would you stay cozy at home reading books? Whatever it is, it seems like a mere dream for most Americans today. However, today I will show you how much money you will need to save if you want to retire early depending on your lifestyle.
Crunching the Numbers
First, before we start, I calculated all of these numbers on this retirement calculator. If you would like to do more calculations based on your specific income and expenses, you are more than welcome to. Additionally, all of these calculations are based on a 7% investment return and a 4% withdrawal rate. This calculation is also based on the percentage of after-tax income you put into savings. For example, if you have an after-tax income of $100,000 and you save $15,000, then you have a savings rate of 15%. This calculation is also showing that you will live off of the same expenses as you are now. In the 15% savings rate, the calculation is assuming that you will live off of $85,000 when you retire.
What Does This All Mean?
For retirement, an individual needs about 25x their expected yearly retirement expenses in investments. As you can see, the higher the percentage of your income that you save, the sooner you will be able to retire. The reason it takes so little time to retire when you save so much is that when you are saving 50% of your income, you are actually saving 100% of your expected retirement expenses. For this reason, these calculations prove the advantages of saving money.
For People Who Do Not Want to Have A Frugal Retirement.
With these calculations, let's say a person is making $200,000 a year with a savings rate of 90%. Yes, this person would be able to retire in 2.6 years. However, he would only be living on $20,000 a year throughout his retirement. Most people would not want to live off of $20,000 a year. On the other hand, if this doctor were to work for ten years, he would be able to retire with a more lavish spending lifestyle throughout his retirement.
Savings rates prove to be extremely important when trying to retire early, but one should always keep in mind how much money they would like to spend in retirement. By making a financial plan on how much you want to retire with and when you want to retire, you will be able to figure out what percent of your income you will need to save.