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The Simple Retirement Calculation Keeping Me Up At Night

Do you remember what it was like being a kid and not being able to fall asleep because you were so excited?! How you would lie in your bed starring at the clock wanting to fall asleep, but getting so excited that you couldn’t possibly close your eyes for more than 2 seconds at a time. That’s how I’m feeling about what I’d like to share with you today.

A Simple Idea That’s Change My Life

One of the things I love to do is think about numbers. I know you’re probably thinking “NERD!”, and in all truth, I guess I am.  But hear me out! As we have been coming up with our newest Family Money Plan our focus has been to start saving half of what we make. In playing with this I have found some crazy motivation for saving more. As we are setting our sites on financial freedom I find myself playing around with numbers a lot more.

What’s More Important than Early Retirement

Looking to the future we want to leave a legacy. Ideally, we want a retirement that would allow us to retire, without ever touching our principle (i.e the amount we have saved up). It’s the idea of living on the eggs from the golden goose, not the goose itself.

There’s a ton of retirement calculators and no matter where you are in the world, your situation will be different than anyone else. Honestly, after a while, your head starts to spin.

So I decided to boil it down to a simple concept.

The more you can save today, the more you have for later on. So I asked myself this one question:

“If I can get 5% return on our investments, how much do I need to save so that I can live off the interest/dividend/yield?”

Which means we live off the other half (kinda obvious), but keep reading, I’m going somewhere with this.

The little calculation that I never really thought of…

This concept of saving is pretty simple. Live off less, means you save more. If you live off half your income, then the other half you saved could be used for expenses in the next year without needing to work.

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Simple Retirement CalculationSo that means after one year of saving, we will have one year where we could live without earning. Think of it like a mini-retirement. In theory, we could work one year, and get one year off. Doing that continuously until we die (since we wouldn’t be saving anything in that second year).

That’s pretty cool and a good incentive to save half. If you only save the recommended 10% that means you are spending 90% of your income. So to get a year saved up will take you 9 years instead of 1 (not counting inflation and all those fun things).

This Got Me Excited as a Kid at Christmas…

So when I saw this I got excited. Really really excited. If we save half, then we speed up our retirement timeline by decades. We all know the more we save the better it is for us. But when you look at it like it is below you can see why saving more makes more sense.Here’s how my saving idea worked out…

Here’s how my saving idea worked out…

Saving up for a Years Worth of Expenses

If you Save 5% of your income, then it will take 19 years to save up one years worth of expenses.

If you Save 10% it will take 9 years to save up one years worth of expenses.

Save 20% and it’s taking 4 years

Save 25% and it’s taking 3 years

Jump up to 50 % and it started getting good

Save 50% and it takes you 1 year of working time to save up one years worth of expenses

Save 75% and 1 year of saving gives you 3 years of living expenses!

That’s pretty cool, 75 % is not the easiest thing to do but it could be doable if you are willing to make some new choices.

How Long to save 1years worth of expenses

How long to save 1 year worth of expenses

Let’s Take it one step further and use a real life example:

As a numbers guy, I just want to share this in a real world examples. Let’s use a household that takes home $60,000 a year.

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Let’s simplify this and say we live off half. So for every year we live and save half of our income,  we get a freebie year (i.e. a year where we don’t have to work because we have saved it up from the previous year). Great for retirement, or at hitting your freedom point where you can walk away from your job.

So what happens if we banked all those extra years off?

If you save half of your income for 20 years and get a 5% return you can retire and live off the 5% interest with all of the principle being untouched!!!

Here’s the math for savings. So our family earning $60K saves $30K, over the next 20 years it looks like this:

20 Years X $30,000= $600,000 in savings

$600,000*5% = $30,000 in interest income

However if you save 75%

Let’s get extreme with this. If you save 75% of your income for 7 years and get a 5%  return on your investment, you can retire and live off the 5% interest!!! So saving $45,000 and living on $15,000. This means retirement is:

Savings over 7 years: 60,000*75%* 7 = $315,000

Interest on $315,000 @ 5% is = $15,750

Expenses  are $15,000 so we are financially free

Of course, this doesn’t include things like taxes, inflation and other variables. It’s pure numbers and it looks good to me as a starting point. Especially since I’m pretty concerned about retiring early, doing so makes me want to make sure I don’t touch my savings and live off the interest only. If you are looking to draw down capital there is more to it than this.

I really like this way of looking at it. It’s probably basic for a lot of people but for some reason, this really clicks with me. So often you need to hear an idea over and over again before it clicks. It looks like it’s finally clicking.

While it’s probably not feasible for many of to live off of 25% of their income, I’m finding a new motivation I never had before.

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Sure 5% interest may seem high right now. Historically interest rates have been around 6-8%. We are just living in unprecedented times. Assuming rates will stay low forever is like assuming you will never get old. It’s going to happen, a little bit at a time.

Early Retirement Graph

The other side of this

Now at this point, I can hear people saying ” I can’t possibly save anymore, let along 75%”

I know I heard that voice too.

But there is another way…

Start looking for ways to earn more money.

Start looking for higher yields, side jobs, and ways to grow the amount you are saving. It’s way better to be informed than to be ignorant. After all, you don’t want to get to your golden year and say “I wish I knew.”

As for us, we are going to aim for saving 50% and start working towards an earlier retirement. I have no clue if we will get there, but it’s going to be a fun ride along the way. I hope you will join us. 

So what do you think? Is this motivating, demotivating or just crazy talk? Let me know in the comments below.

 

 

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6 comments

  1. Sumu

    Reply

    I think one part you missed in the 50% saving (30K per year) is the return your savings will generate over the years of saving. If you assume that you get 5% per year even during the years of savings, and you save 30K per year, you will reach 600K in little less than 14 years (compound interest). So, if we save 50% or more, we just need 14 years to be financially independent and not 20 years.

    • Reply

      Hi Sumu! That’s a great point. I purposefully left out compounding investment returns and inflation and all that fun stuff just to simplify my first step. Now that this principle is making more sense I thought it will be good to start with it and then build on it. Thank you for bringing that point up! 🙂

  2. Reply

    That is certainly enticing. I’m doing a hard push into the make-more-money arena as I generally get better results that way instead of cutting things back too hard (just how my personal motivation seems to work), though I do make various cyclic cuts also. Seeing how those different amounts impact the ability to retire early certainly gives an interesting additional perspective. Sometimes, nothing says it better than a graph.

    • Reply

      As a nerd I love graphs. Way to go on looking at the make more money avenue, I’m starting to look at it more myself. There are tons of options it’s a matter of picking something that resonates with me. I love the idea of cyclic cuts. Reminds me I need to go back and look at a bunch of things and see if anything can be trimmed.

  3. Reply

    This is certainly motivating. I’m a numbers nerd, too, so this is interesting stuff for me. I’m just about to start tracking my savings rate, haven’t dug in yet. I know I’m starting at the low end but by tracking it and focusing, I’ll be able to improve it.

    • Reply

      Thanks Brian! I’m trying to figure out the best way to track it that makes sense to me too right now. Between tracking dividends and net worth, I’m hoping I can find a simple way to know how much I save every month. When I figure it out I will share it! 🙂

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