People assume they need a huge salary and a great return on investment (ROI) in order to retire early. But someone with a wealth of understanding knows that more than either of those, the true determining factor of how long you need to work until retirement (or financial independence) is your savings rate.
Your savings rate is the percent of your paycheck you save each month.
The reason this is such a powerful determinant is because of the relationship between this number and the other numbers in your life.
If you save (or invest) 0% of your income, it doesn’t matter how much you make. $10,000/yr or $10,000,000/yr, it doesn’t matter because you’re spending everything and you aren’t saving any of it for your retirement.
Additionally, if you somehow are living for free (Thanks Mom!) and can save/invest 100% of what you make (zero living expenses) then you could technically retire right now. Because whatever little money you made now exceeds all of your living expenses.
Let’s take a look at some examples:
“99 years to retire” doesn’t mean you can retire at age 99. It means you can retire after 99 years of saving 1% of your income. So if you start saving at 20, you should be able to retire before you 120th birthday.
5% is the U.S. national average. But we aren’t shooting for average, are we?
Notice that by jumping from a 1% savings rate to a 10% rate, we shave off nearly half a century of working years until we reach our financial independence.
15% savings rate could have you retired “early” by U.S. standards if you get started before you’re 24.
When you start saving 20% of your paycheck (1/5) you really start to notice it. For most people it’s easier to earn more than to try to keep cutting expenses.
Notice that the exponential curve begins to fall. Increasing from 20% to 25% savings rate only shaves off about 4 years. Not nearly as noticeable as moving from 1% to 5% (34 years). Regardless, it’s still a good goal.
If you’d like more information about increasing savings, earning more, investing, or generally growing your wealth of understanding, follow us on social media:
-Wealth of Understanding