Why You’ll Never Retire. (Unless You F.I.R.E)

retirement

Retirement. Ever thought about it? If you’re like most people retirement may seem simple. Its just what you do when you get old. Or, if you’re a little bit wiser that word probably brings you some anxiety and stress. You know that retirement doesn’t just “happen”. You also know that social security won’t come close to covering your needs. And yet, you don’t actually know how you’re going to get there. So you keep socking away money here and there in the hopes that it one day adds up to be enough for retirement. But what amount is that exactly? And how many more years will it take for you to get there? If you’re a financial guru you already know that number. Mine is 20. What’s yours?

How do you figure out your retirement number?

Its simple really. Its 25. 25x your annual expenses is what you will need to save in order to retire. For life. Regardless of your current age. If you were 30 and had 25x your annual expenses saved up you could retire right now. Today. Sounds crazy right? Its not. Its simple. Save up 25x your expenses and you’ll never have to work another day in your life. Its called the 4% rule. No need to wait until you’re 55, or 62, or 67. No need to wait on hitting your ‘retirement age’. You just need to wait until you hit that 25x figure. But how do you get there? Well, If you’re follow the standard financial advice that the world preaches you’re putting away 10% of your income annually. So how long would it take to retire? We’ll, if you haven’t started saving yet and you were to start today, it would take you 41 years to retire (assuming you’re investing your savings with a 7% return rate). Yikes! That’s a very long time. Thankfully there’s a better way. It’s Called F.I.R.E, and its a movement that stands for Financial Independance, Retire Early. Its a philosophy that preaches if you take control of your finances, you can retire on your own terms. Sometimes Decades earlier than you think. So. How do you FIRE?

The concept is simple. If you save 10% of your salary per year, that means the other 90% is being spent. Say you’re getting paid $50,000 per year. You save $5,000 and spend the other $45,000. That means it would take you 9 years to save up just 1 year of living expenses. If you raise your savings rate to 20%, saving $10,000 per year, it would take you just 4 years. Thats because not only are you saving an extra $5000, but your living expenses have now been reduced to $40,000. Now image you upped your savings rate to 50%. You’re now saving $25,000 and spending $25,000. Every year that you work is a years worth of living expenses saved. Do you see how increasing your savings also has the added benefit of decreasing your expenses? Its a double pronged sword that works for your benefit and can drastically reduce the amount of time you need to spend saving.

And it gets better than that. If you were to invest those savings you can get to your retirement age even faster. Say you were to invest your savings into the broader stock market anticipating a not unrealistic 7% return. with a 30% savings rate you could retire after 25 years. 50% savings rate? You could retire after 15 years. Check out the graph below and see the correlation between your savings rate and your retirement date.

If you have any other financial questions, remember you can always Ask the Savings Guy! askmrsaver@askthesavingsguy.com

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