Let's talk about early retirement and financial independence! These phrases alone have a lot of weight associated with them, and you might have an immediate gut response to just hearing these terms.
You might love your job and wouldn't think about leaving it. Maybe you hate your job and can't wait to leave it. Maybe you're looking for a change. Maybe you feel you never want to retire because you'd just "be bored", or maybe you plan to work until you can't work anymore. For this post, I'm going to ask one thing...
My request for you:
Don't assume financial independence
Instead, for this post, think of financial independence (abbreviated FI) as the point where if for any reason you stopped working, you'd be set for the rest of your life at your desired lifestyle. What you choose to do with your life at that point is up to you!
After making your way through this post and filling in your numbers, you're going to know what you'll need to do in order to make it happen. Here's a rundown of what we'll be talking about.
- Part 1: Where Am I Now?
- Part 2: How Much Should I Save?
- Part 3: How Much Do I Need?
- Part 4: How Much Could I Spend Then?
- Part 5: How Is That Enough?
- Part 6: What Can I Do to Retire Sooner?
- Part 7: Who is Actually Doing This?
- Part 8: Where Can I Learn More?
- Part 9: Recap
- Part 10: What Next?
Part 1: Where Am I Now?
The most common question when it comes to financial independence and early retirement is the big one:
How much money do I need to retire?
This is going to be the core question we answer in this article, exploring it in a number of different ways. My goal is that after reading this post, you know exactly how much you'd need to retire in your current state, but also give some advice on small tweaks to your lifestyle that could hugely impact this number.
The first step is understanding your financial footing today and where your current path would take you. Depending on your financial health, this can range from a breath of relief to a sobering realization. Please, bear with it. I guarantee that knowing your financial health is better than not knowing.
This Article Is Interactive!
This whole article is a bit of an experiment. Whenever you see purple underlined text yes! just like that! , that indicates this is a place that needs your input! Just hover over it and it'll tell you what to do. The content of this post will change based on your input!.
Another type of input in this article is the slider-field. You can type a number into this box, or use the slider to select a result. The inuts will allow numbers outside of the range, but the range is there to make it easier for you to have fun reading this article. Try this one out:
I am years old and was born in .
Adam Says: I'll be the first to say Happy Birthday! It's not every day you turn years old.
Sure, I'm month early, but I didn't want to miss the chance!
Consider it an old-school choose your own adventure blog post like you might have read as a kid. The goal is to have fun, explore financial independence, and hopefully learn a little.
To get started, let's dive into your numbers starting with the basics.
Savings Rate Calculator
Try changing the underlined values and see what happens!
My yearly after-tax income (w/401k included) is and each year I save total for retirement – including 401k and all other means. Using these figures, my savings rate (SR) will be about .
This is calculated with the following formula:
( / ) * 100% = Savings Rate.
When working towards retirement and financial independence, your savings rate is one of the most important numbers. The more you save each year, the faster you'll be able to retire – that's obvious – but how much faster? See where your SR falls on the following chart:
Years to Financial Independence by Savings Rate Calculator
Years of savings needed vs savings rate. 100% = saving every penny.
For your savings rate, , you can see on the chart that you would need year to earn enough to be financially independent if you were starting today.
If you were to continue saving and investing every year during that time, eventually you would have saved up. At that point, you would be able to retire and withdraw each year – most likely for the rest of your life.
Throughout this post, we'll be diving into the math behind these numbers, why this is enough, how can you lower this number and what's required of you (and the world) to hit it.
Part 2: How Much Should I Save?
What floors me about the above chart is that a 10% SR is often sighted as a "good" savings rate. In practice, it will take you 41 years to save up enough to retire, and that's only if your spending stays the same! If your income and spending go up, it'll take even longer.
If you double that savings rate to 20% though, you can retire in 30 years. That's 11 fewer years working for 10% of your salary.
If you want to retire before you're 65, the common wisdom "save 10% of your income" is terrible advice!FIRE Wisdom
If you're hoping to be financially independent before collecting social security, you'll need to save more than 10%. Let's look into ways to reduce this number. The estimates in this article make a LOT of assumptions. We can refine this a little, but for that, I'm going to need your help – in the form of answering a few more questions.
Saving Money is a Hike
You're starting with a time period of based on just your savings rate. Saving this much isn't a sprint, or even a marathon but a hike. Depriving yourself for a few months, only to be exhausted, or spend more the following months, isn't going to have a positive impact. Pace and progress are the keys.
I've personally tried maxing out my savings some months – spending the least amount I possibly could to get that SR formula looking better. The problem was that the next month I'd reward myself for doing so and things would balance out.
Favor lifestyle changes that help you save over changes that feel like deprivation.FIRE Wisdom
Instead, make changes that make your life better, and that you look forward to week after week and year after year. If you're spending money on something that brings that kind of joy into your life, that's well worth it.
Find a way to enjoy saving the same way you'd enjoy a hike. Make it effortless, make it relaxing, make it feel right.
You could be reading this and think "there's no way I could save up!". I know when I was growing up, at times my mom was scrapping to make ends meet, and saving was the last thing on her mind. For those reading in that situation, I empathize with you but struggle to find the best advice. You know your situation better than I ever could, as well as what you could do to make it better.
Part 3: How Much Do I Need?
In order to understand how much you need, we'll need to learn a little more about you.
Let's Talk More About You
Customize this article by providing us with some details about yourself. By answering demographic questions, I'm able to analyze the collective results and share themes. Two of my favorites are: millennial spending analysis and an exploration into the gender pay gap. Rest assured that all data is anonymized in these articles.
I'm a year old born in with dependents/children. I have a total combined savings & liquid investments of about . Right now, I'm .
Each year I spend about , but when I retire I'll likely spend of that (equal to about /yr).
I'm hoping to retire when I'm years old.
Minafi's Take On Your Finances
Given your savings rate and a net worth of , if you continue to invest /yr, then you're on track to be financially independent in year – at years old.
When you're years old, you would need in retirement savings and can start withdrawing /yr.
Ahead of Schedule
You're way on track to be FI by your goal retirement date. Why not try setting a stretch goal for this post? Turn down the stock market rate of /yr or turn the withdrawal rate down even further below .
Close but Calculated
Your FI and RE dates are within a year of each other - which means you're right on track! I calculate you'll be FI at age years so if you retire at age years you should be in good shape.
Are You Retiring Too Soon?
You want to retire when you're years old but you're currently on track to be FI at age years. If you're expecting some additional funds or growth outside of what we've asked about, you might be in a good position. If not, I'd encourage you to check out why there is a difference between these two.
This is where things start to get fun! There's now enough information to know a rough estimate of when you'd be financially independent – in year at when you're years old. Let's dive into how we got to this number.
Retirement Age Calculator
This graph shows your future net worth given your current & future savings.
The dashed horizontal line in this graph is how much you'd need to be financially independent given your current numbers. The other line is your net worth at each age. The point where these lines intersect is your FI Age -- the age in which you'd have enough to be financially independent.
Financial Independence (FI) is different from retirement. Think of financial independence as the amount of money you'd need in order to never need to work again. Retirement (RE), on the other hand, generally means not being employed, but being self-sufficient.
It's possible for people to be FI but continue working – you see it all the time. From CEOs of companies to quiet employees who have saved huge amounts to bloggers talking about retirement (well, some – not me). There are also people who are retired, but who may need to return to work someday down the line when their savings run out, or if social security fails.
To be FIRE (financially independent + retired) is an aim with the goal of minimizing stress from external sources. It does rely on stock markets to perform in a similar pattern to the last 100+ years, but aside from that, it's not based on too many assumptions.
Part 4: How Much Could I Spend Then?
Up until this point, we've been a little rosy in our withdrawal rate (WR). The withdrawal rate is the percent of your savings you withdraw each year. This can be calculated as follows:
Withdrawal Rate Calculator
A percentage of your total investments you'll need each year.
This assumes that you'll spend of your current spending of about /yr in retirement, which would be /yr.
(Yearly Retirement Spending / Retirement Savings) * 100% = WR
( / ) * 100% =
In other words, at a withdrawal rate , you'll need to save up before you stop working completely. At your current pace, this will take year - allowing you to be financially independent at age years old.
The Lower the Withdrawal Rate the More Money You Need (but safer)
It may sound counterintuitive, but the lower the withdrawal rate, the more money you'll need. For example, if you use a withdrawal rate of 3%, and want to spend /yr, you'll need to save up .
If you want to use a withdrawal rate of 4% for the same spending amount, you'll "only" need .
In other words - a 4% withdrawal rate has historically been safe for at least 30 years. A 3% WR has historically been safe forever. For a 3% WR, you'll need to save an additional more than a 4% WR, but your FI plans will be that much more bulletproof.
Withdrawal rate is one the most talked about (and heavily debated) topics when it comes to early retirement. I'm only going to introduce the topic in this article, but if you want to read more here's a great post on Where'd the 4% Rule Come From Anyway?
My personal withdrawal rate I use for calculations is somewhere between 3% and 4%. The fewer unknowns in your life, the higher your withdraw rate can be. When I say unknowns, I include many things that are notoriously difficult to plan for: your health, insurance, home situations, family health, changes in your spending, lawsuits against you – anything that could throw a wrench in your plans.
The more of these edge cases you can have a plan for, the higher your withdraw rate could be. I don't know what will happen with insurance (or many other things) and so I lean towards a 3.5% withdraw rate.
Part 5: How Is This Enough?
When I first saw these numbers and did the math on it, I immediately asked the following question:
If I retire with and spend /yr when I retire, doesn't that mean my cash will run out in / = year?
If you put your money into a no interest account, then this is exactly how long your money would last. Even in a savings account it'll only last a little longer. There are better places to put your money though!
Factoring In Inflation
There is some bad news here, unfortunately. For each of those year, your spending power would be slightly less due to inflation, which is generally around 1-3%. Inflation is something we have no control over individually but it is something we can plan for.
Inflation means that each year, what you can buy with your money is going down by some small amount. If you've seen prices rise since you were a kid, that's potentially a result of inflation.
In year, in order to spend /yr in today's dollars, you would need in the year to have the same spending power.
Because of this, we need to increase our total funds by each year just to have the same buying power as today.
So why are we using for these numbers rather than ?
There are two main reasons. First, the withdrawal rate is inflation adjusted. That just means that each year the amount you withdrawal will shift based on the inflation rate of that year.
Here's an example using your expected yearly spending and spending rate. Here's how much you'd withdraw during your first few years assuming a inflation rate.
|Year||Amount||Inflation Rate||Inflation Increase|
The takeaway here is that your first year you'll withdraw a set amount, but then in future years the exact amount to withdraw will be based on inflation during those years. For this example we're using the same inflation rate, but in reality it'll vary.
Another thing to keep in mind is that inflation doesn't mean all of your expenses will rise by this much every year. Inflation means that the Consumer Price Index and Product Price Indexes indicate that this shift in prices.
Your net expenses may even go down! While many people see a spending reduction once they stop working, if you're more than 10 years away from that, I'd recommend raising your future spending percent from (spending /yr) to at least 90% to buffer for potential increases due to inflation and other unknowns.
Factoring in Taxes
In addition to inflation, you have taxes to watch out for. For that number we've talked about – that's how much you'll need to save after taxes are taken into account.
There is some good news here actually. Taxes are extremely lenient to those investing in the stock market. Withdrawals from a 401k/IRA will be taxed at the same rate your paycheck when working, but there are many other investing options that allow you to pay much less tax.
For example, a Roth IRA allows your money to grow tax-free, and you to withdraw money without paying any taxes. Capital gains, which are the growth on an investment, are taxed at 15% – but only for earnings above $78,000 (!) if you're filing a joint tax return.
Depending on your situation it may be possible to withdraw /yr and pay absolutely nothing taxes. For our plan, we're aiming to withdraw $80,000 a year and pay $0 in taxes – so it's definitely possible!
The takeaway on taxes is that you'll want to make sure your number takes them into account. Keep that knowledge at the back of your mind for now as something to learn more about later (taxes are a huuuuge subject that are too big to cover here).
Enter Market Investing
The missing piece here is that you can invest that money in the stock market -- both while you're growing it and when you're drawing down from it.
A diversified portfolio of US stocks, foreign stocks and bonds has returned on average 7% a year over the last century. This is an important number! If you're withdrawing at most 4% of this, and 3% of it is going to inflation, then your net worth will last forever. Unfortunately, the stock market has ups and downs, so we can't make predictions quite that bold, but we can use it as a baseline. This is why 4% is often sighted as the maximum WR to use in calculations.
Learning how to invest and earn ~7% will sound intimidating at first. It will take trial and error, but more than that it'll take being brave and putting money into the stock market. Using a simple 3-fund portfolio is a great place to start learning how to invest.
Your Numbers with Market Investing
If you put your money into a savings account and withdrew some of it each year, the total amount you'd withdraw would be around . However, if you invested this and it grew at a pace of /yr, and you withdrew an inflation adjusted /yr, then this amount could provide you with before your 100th birthday.
That wouldn't be all at once but in the form of /yr. This is the true power of compound interest! Imagine how many more years you'd need to work to save this amount without investing. Actually, no need to imagine -- it's year!
That deserves repeating. If you learn how to invest, you can retire year earlier.
This is the number one difference between people who retire early and those who wait until social security -- people who retire early learn how to invest.
When I first did the math on compound interest I was floored. The idea that I'd make more money during retirement than during my working years seemed counterintuitive, but the numbers were right there.
Become an Investor
If you're not currently investing, learning enough to feel confident can be intimidating. It takes time, patience and the occasional leap of faith. I've put together a free 10-week email course to help you get started.
In this course, I'll email you a new set of tasks to accomplish each week. Sometimes this will include articles to read, or activities to perform on Vanguard.
By the end of this course, you'll have a balanced understanding of investing and confidence to invest for the rest of your life. If you've been putting off learning how to invest, this is where you should start. If you'd like to learn more, you can read about The Minimal Investor Course and take the entire course for free (Really. I just want to help you learn to invest).
Part 6: What Can I Do to Retire Sooner?
Now that you have a baseline of until you've saved up enough at your current pace, let's see what small steps you can take to lower that number!
There are only 2 ways you can affect this number:
- Make more money.
- Spend less money.
The savings rate calculation we looked at is based entirely on these two numbers (spending/savings). Let's look at a few scenarios and see what impact they have on your FI dates.
What If: You Reduce Spending & Save It?
If you reduce your spending by (saving a year more), then you could be FI year earlier once you have saved .
By reducing your yearly spending by , you'll need less to retire. Upon retiring, you'd be spending a year.
The less you need, the less you'll need to save. If you reduce your spending to $0/yr, you'd need $0 to retire. That's likely unrealistic, but the less you spend, the less you need.
The art is not in making money, but in keeping it.Proverb
Taking steps to reduce your lifestyle can pay off by reducing the time you'll be required to work to maintain it. Be careful not to go overboard though. Build a life you want, then save for it.
What If: You Earn Money In Retirement?
You're on track to spend /yr during retirement. What if you still spent this exact same amount, but of it comes from income in retirement? This would involve you finding a way to make /yr in side income.
In that case, you can retire year earlier!
Finding a small way to supplement your income can reduce the amount you'll need to save. The concept of a side hustle has grown a bunch in the last few years, with people opting to find ways to control their financial destiny. I like Side Hustle Nations description of a side hustle:
A side hustle is something you do to earn money outside a traditional job.Side Hustle Nation
If you're like me and haven't made money outside the boundaries of a W-2 for your career, this might just seem like more work and not FIRE. The distinction to me is in having a side hustle that you love doing. One that you look forward to waking up to work on.
At that point, this additional revenue stream can become another challenge in your life or another form of self-expression.
Lowering expenses and earning money in retirement are three very clear ways to reduce the time until you are financially independent.
What If: Reduce Spending & Earn Income?
Rather doing one or the other, what if you do both? That's the best way to optimize your path to financial independence.
You reduce spending by while replacing of your income during retirement ().
This would result in you reaching FI in year. That would be earlier than your current timeline of year by year!
Making more money and spending less while investing is the key to achieving financial independence sooner.
Part 7: Who is actually doing this?
You might be surprised by who is pursuing FI. It ranges from people in debt to multi-millionaires who have retired already. There is likely someone who is in a similar situation to you out there.
Here on Minafi alone there are 3 people pursuing fire who have contributed their own stories to the community directory! Here's a random sampling of a few stories.
Adam from Minafi
Hi, I'm Adam! I help millennials invest to reach financial independence sooner than they ever thought possible. Want to see what you could do to reach FI sooner? You're in the right place!
Michael from Financially Alert
I ditched a traditional 9 to 5 when I was 36. If I can do it, so can you! I'm here to help you find and accelerate your path to FI (financial independence)... and have FUN doing it!
Frugal Hackers from Frugal Hackers
We are two married Frugal Hackers living and working in San Francisco, CA. We are young Canadians of Indian Origin, and we blog about being smart, being frugal, and hacking the system.
Want to share your story? Add yourself to the community directory to tell your own tale.
Common Similarities In This Group
When reading over everyone's answers to these questions, a few themes start to stand out real quick.
They avoided lifestyle inflation
Nearly everyone mentioned avoiding lifestyle inflation as an essential component. If your expenses increase with your income, you'll never save more. All of the numbers in this post assume that your expenses do not go up. If you spend more each year, you'll need more money to retire, and it'll take you more time to accumulate it.
They didn't start with everything
No one I talked to got lucky with the lottery, an inheritance, a business acquisition or a lucky Bitcoin investment that accounted for a sudden retirement. There are some out there who hit the jackpot, but for most people, it's going to take hard work and time.
They spent in areas that matter to them
Going overboard on saving can make you miserable. Focus on spending money on things that will what bring joy into your life and makes you and those around you happy. This may seem at odds with lifestyle inflation, but it's important to strike a balance between these two.
Adam Says: Thanks so much for all the people who agreed to be interviewed for this post! Their time and support mean a lot to me. I recommend you check out their blogs and events!
Part 8: Where can I learn more?
There are a few amazing books on the topic of financial independence and early retirement that go into these topics with much more eloquence and depth than I could ever explore. If you're curious to learn more, these are all amazing resources.
Minafi Email List
Here at Minafi, I write about the intersection of minimalism, mindfulness and financial independence. I'll also be releasing more interactive posts like this one in the months to come. Sign up to get one email each week with what I'm focused on.
Here are some of the top sources in different mediums to learn about financial independence.
Your Money is an amazing exploration into developing a relationship with money that goes deeper than just buying things. This book is the origin of many articles and concepts that you'll read about in the FI world, told beautifully.
As great as Your Money is, it borders on self-help as opposed to finance - which actually helps its topics connect deeper for me.
This is the book that personally got me into investing and thinking about this subject. By introducing things like the 4% for withdrawal rate, understanding investing, diversification, fees, fund types, account types and more, this book served as my education on investing.
The Bogleheads Guide consistently ranks as one of the 3 most influential books I have ever read in my life - serving as an introduction and education all in one.
The term "millionaire" has a connotation of lavish spending and abundance in popular culture. This book looks at a different side of that - working millionaires who worked hard to create a life they wanted.
In order to achieve FI, most people will need to earn more than a million dollars. This book put that number into perspective for me, bringing it down to earth.
There are a number of thriving communities focused on financial independence and early retirement. I can't include them all, but here are a few that I've participated in and enjoyed.
This is a place for people who are or want to become Financially Independent (FI), which means not having to work for money.
This was the first forum I discovered when investing. I asked extremely basic questions and people were helpful and welcoming. If you're learning how to invest, and want to do it the smart way, this forum, the associated wiki, is an amazing source of knowledge.
While Bogleheads leans towards investing, the MMM community ranges from "do it yourself" to "real estate investing" to "taxes" and "entrepreneurship".
The Early Retirement Extreme community (created by Jacob interviewed above!) focuses on all parts of retiring early with a slant towards extreme lifestyle changes that can make the process go faster.
The graphs in this post are only a starting point for understanding your financial future. The best tool I've found for digging deeper into these numbers and incorporating many more variables is Personal Capital. They have a Retirement Planner tool that I've been using for years to understand my own finances. Check them out if you're hoping to dig deeper into graphs.
What I really like about Personal Capital is it goes beyond the averages used in this post to group scenarios by percentile. In this screenshot above, you can see a line for my median case, but also the worst 10 percentile. The little blocks are me playing with life events: buying healthcare, taking social security and when Mrs. Minafi stops working.
Part 9: Recap
You made it to the end! Let's recap a little about where you are now and where you're going.
Here's A Snapshot of your Financial Health
You're a year old born in with dependents/children, currently earning /yr and saving /yr for a savings rate (SR) of about .
You've managed to save up so far. Right now, you're and spending /yr.
In retirement, you're hoping to spend of what you spend today (equal to about /yr) and retire at age years old.
You're on track to be financially independent in year – at age years old once you've saved up .
You're assuming markets will rise /yr and that your withdrawal rate will be .
If you permanently reduce your spending by (saving /yr) then you could be FI in year.
If you earn a little money in retirement, say , then you'd be FI in year.
If you permanently reduce spending by and earn a side income of , then you'll be on track to be FI in year -- year earlier than your current path.
Part 10: What Next
If there's one takeaway you get from this post, it's that the concept of financial independence isn't solely for those who are extremely wealthy or for those who are nearing social security.
It's a path that starts with understanding what you want out of life and figuring out what you'd need to do to get there. The fastest way often means removing excess from your life that isn't increasing happiness in proportion to the amount spent. Beyond that, it's about understanding how much you need to save to live the life you want and making a plan for it.
There is no predetermined group that financial independence is for. It could work well for people in extreme debt who want to get out and work towards a different future -- or for people in their career looking for what comes next.
My Recommendations For You
- Join Minafi to continue learning more!
- Track your spending for a month. Learn where every cent is going.
- Sign up for my free Minimal Investor Course and learn how to invest.
- Find a community of people to learn from. This could one of the above places, a blog you enjoy, a podcast you jive with - anything that keeps you learning.
- Make a plan for when you'd want to be financially independent, and work backward to understand when you'd get there and how to get there sooner!
- Read more about minimalism, mindfulness or financial independence here on Minafi.
If you enjoyed this article, or have any thoughts on it, please share it and let me know what you think. I would love to hear from you!
Special thanks to the following people for helping out on this!
- My Wife for reading over various drafts and ideas.
- Bret Victor for Tangle, the JS library that inspired the data binding here.
- Mike Bostock for D3.js, the library used for graphs
- John Bogle and The Bogleheads who gave me a great foundational education in investing.
- Mr. Money Mustache for introducing me on to the idea of financial independence.
- All of the bloggers who agreed to an interview.
- Everyone who's shared this post to help spread the word of FI!