As I have mentioned in a previous article, your personal savings rate is the number one factor that will influence how long until you can retire. This will answer the question, “When can you retire?”
Savings Rate Graph
I have taken it upon myself to create a graph displaying the relationship between your personal savings rate and how many years until you can retire.
There are three assumptions: you will spend the same amount of money in retirement as you did during your working career, investments earn 5% return after inflation, and you withdraw 4% of your income each year in retirement.
If you plan on spending more during retirement, you will need to tack on a few years.
This graph is the most powerful planning tool for early retirement! Take advantage of time and compounding interest to transform your life!
You Can Chop Years Off!
By increasing your savings rate by a few percentage points, you can exponentially chop off years until you can retire.
For example, increasing your savings rate from 10% to 15% cuts off 8 years! This relationship has the greatest effect for people saving a small percentage of their income (shift from 10% to 15% has a larger impact than a shift from 45% to 50%).
Early Retirement is Possible
You don’t have to wait until you are 60 to retire anymore! If you graduate at age 22 and save 30% of your income, it will take 28 years to retire.
This is substantially different from past generations where it was normal to work until you were 60!
Retirement Crisis is Coming
There is going to be a retirement crisis! According to Statista, the average savings rate for American households is 6.3%! This is crazy!
At that rate, it would take over 65 years for the average person to retire at their same standard of living.
It’s Not All About Income
Increasing your income doesn’t guarantee retiring early. As the graph shows, savings rate is the influencing factor, not income saved.
If someone makes $50,000 and saves $10,000, they will have the same retirement time span as someone who makes $500,000 and saves $100,000. It sounds extremely counter-intuitive because the second person is saving 10x as much money every year, but their standard of living also costs 10x more. This is something that plagues doctors, lawyers, and dentists!
Check out this awesome article from Mr. Money Mustache where he further breaks down the shockingly, simple math behind early retirement.
So, when can you retire? Your personal savings rate is the number one factor that will influence how long until you can retire
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