Overview: The fastest way to retire sooner rather than later is to increase your savings rate. A solid goal is to live on half your income. If you aren’t there yet, use this spreadsheet to see where you are and where you might be able to improve your numbers. Set a savings goal and move toward it every year.
I enjoy the Physician On Fire blog (FIRE = Financially Independent, Retire Early) and he has a great post called the Live on Half Challenge. I really love this stuff because it pushes me to do better with my own finances. I share it here in hopes it will push you to do the best you can as well.
The fastest and easiest way to reach financial independence is to earn a high income. However, a high income doesn’t equal wealth. Orthopedic surgeons (who work on spines) earn some of the highest pay in the medical field, upwards of $800k+ a year. They aren’t getting wealthy if they are spending 80-90% of that money on country clubs, car leases, and lavish vacations. Whether you earn $28k, $280k, or $2.8MM per year, the way to get wealthy is to spend less and invest more.
One of the better books you’ll ever read, The Millionaire Next Door, exposes this truth when the authors set out to find out how wealthy people spend their money. One of the book’s first paragraphs sums up nicely what the book finds:
You see, the guy who isn’t very wealthy, but thinks he’s wealthy, buys the Lexus, the Rolex, and the beach front timeshare. The truly wealthy drive an F-150, wear a Timex, and don’t own timeshares. The 5th Ave. media empire convinces us to live lavishly, but it’s really just a ruse to separate you from your money.
Can you live on half your income? Saving half your income is even more impressive, but living on half is much more doable, as it includes taxes, a mortgage, and charitable giving. Click on the spreadsheet below for a version you can fill out yourself.
The safe withdrawal rate (SWR) is 4%. This means you can draw down 4% of your retirement savings and never run out of money. If you’ve saved $1 million, multiply that by 4% to get $40k a year in retirement. So if you multiply your annual spending by 25, you’ll get your financial independence amount. Some try to attain 40x or 50x, but 25x is considered a minimum. Challenge yourself to get as close as you can to living on half. Doing so will allow you to retire sooner. The ‘years to goal’ line uses compounding at the specified rates of return. Good luck!
