When we read stories about average people who do extraordinary things in the realm of personal finance – like paying down a mountain of debt in a handful of years – we, understandably, tend to question the veracity of such claims. The stories are often accompanied by photos of the principals, and they all look great: happy, healthy, often quite young…and without a trace of having gone through any of the hardships associated with what it takes to accomplish such amazing feats.
As I said, we often read these kinds of stories in conjunction with the issue of paying down debt, but we will also see them now in relation to retiring well before typical retirement age: 65, 70, whatever. In fact, you don’t have to look very hard to find a growing body of articles that discuss the subject of retiring as early as in one’s 30’s. Part of what makes the articles so interesting, just as with those that talk about paying down huge sums of debt in short order, is how relatively stress-free the process seems to be for so many engaging in it.
So, what’s going on here, and is it really possible to retire decades earlier than your peers?
The answer is “Yes, it is possible,” but an important caveat is that you really have to decide that such is your goal almost as soon as you begin life as a working adult. The reason is that between what you necessarily have to set aside, and the lifestyle choices you must make in order to facilitate those financial allocations over the long term, you have little choice but to embark on this path as early as possible. Alas, math is the culprit here; math, conjoined with reality, prevents an average person making a typical salary for his or her profession from beginning this journey at, say, age 30, in order to be financially independent by age 40. It is simply not possible.
In its purest form, the underlying question driving the inquiry at issue is this: What does it take to accumulate $1 million in savings at an age appreciably younger than 65? Generally speaking, the answer comes down to having the ability to set aside at least 30 percent of your income for a little more than a couple of decades. If you can do this, you should no longer be “job-dependent” at the conclusion of that period, assuming you are also willing to live a financially-prudent lifestyle during the years that follow.
Here is an illustration: Let’s say that your average salary over the course of your working life is $60,000 per year. Taking into account the realities that, as an average, what you can set aside in dollars will likely be lower towards the beginning of your working life and higher at the end, we can assume you will be able to put away $1500 per month as a function of your 30 percent savings effort. Do that for 24 years in a diversified portfolio of investments that generates an (assumed) average annual return of six-and-a-half percent, and you will have your $1 million in savings. Of course, the more you can set aside and the higher your average annual return, the earlier you reach your own, personal retirement age.
Now, if you live rather parsimoniously thereafter, a million bucks in savings should be enough to sustain you. That said, if you decide you would like to live a little more grandly in retirement, the achievement of the $1 million threshold also provides you with greater flexibility to live a life that is somewhere in between having a daily, rigid employee obligation, and needing to generate no additional income whatsoever. For example, if you would like to live a little better than what your $1 million in savings can provide, a part-time, work-from-home opportunity could be the perfect answer for you.
Setting aside a minimum of 30 percent of your gross income is the key here, and the more you earn, the better this works – living on just 70 percent of your income is a lot easier if you make $100,000 per year, compared to if you bring in $40,000 per year. On that note, you cannot realistically expect to succeed at this if you are content to exist at the bottom of the career food chain for the duration of your working life.
Unquestionably, putting away 30 percent of what you earn over the course of your working life is not easy. It is not, however, the most challenging of things when your perspective is configured appropriately at the outset of your goal. If you resolve that the goal of early retirement is paramount, and work backwards from there in determining how your subordinate priorities – including the essentials, like housing, food, and transportation – will have to be structured in order to allow for the ongoing allocation of the 30 percent, it can be done, and with less stress than one generally assumes. The key lies in making these decisions before you are already fully immersed in adulthood; the lifestyle of consumption is immeasurably more difficult to exorcise once it takes root.
That said, the lessons here are not just for the benefit of the very young who actually have a shot of no longer needing to work much after age 40; they also apply to that person of more advanced years who seeks to be unburdened by work obligations sooner, rather than later. As the previous paragraph mentions, it can be an especially daunting task for that individual to readjust his or her life in a way that allows for the setting aside of the 30 percent. However, for many of those folks, much of the challenge in tucking away a significant portion of one’s income, even if it is not as much as 30 percent, has to do with an unwillingness to make the necessary choices, rather than a genuine inability to do so.
The point here is that if you are willing to live in a way that allows you to set aside into your retirement savings 30 percent of what you earn, and you can do so for a little over 20 years, you will, thereafter, enjoy financial freedom of a kind that you were otherwise not destined to realize.
The information contained here is for general information purposes only. The Financial Writer blog and Bob Yetman disclaim responsibility for any liability or loss incurred as a consequence of the use or application, either directly or indirectly, of any information presented herein. Nothing contained in this article, or any other article featured at this blog, should be construed as a solicitation or recommendation to engage in any financial transaction. You should seek the advice of a qualified professional before making any changes to your personal financial profile.