Earlier this year, my wife and I decided that we wanted to achieve financial independence so we could retire far earlier than our peers – about 30 years earlier. We ran the rough numbers to see how things would play out, and to our surprise, things looked pretty optimistic for us.
Our primary objective in becoming financially independent wasn’t to shirk responsibility, or to amass unlimited free hours to sit around and play video games. On the contrary, we wanted the freedom to choose what to do with the rest of our lives; to take on employment that we cared about; and to spend time improving ourselves, our family and our community.
There will probably never be a point where we won’t be earning some form of income. Especially when it’s possible to earn money doing something you love. Personally I have a great time writing this blog, and while it doesn’t produce crazy amounts of money, it does help bring us closer to retirement. And I’ll probably continue writing long into retirement.
My wife, on the other hand has developed an interest in real estate, and is planning on getting her Realtors License in the near future. While she isn’t going to jump from one full-time career to another, she will be able to use this training to occasionally earn a commission. Another benefit from this ‘career choice’ is the ability to locate future income properties for us to increase our income during retirement.
How will we go from employed to retired in the next 7 years?
What is the magic that sets us apart from the people that are going to work well into their 60s? It’s a simple answer: Our spending-to-income ratio. This amount is easily represented using percentages. As a family, we spend almost exactly 30% of our annual disposable income every year.
Shortly after I started this blog, I had calculated our spending-to-income ratio based on our spending from the year prior. Needless to say there was significant room for improvement. We ate out too much, we had cable, we did our primary grocery shopping at big box stores and we used a gas guzzler as our daily driver. Overall, we had been saving a lowly 50% annually prior to 2013.
Since then, we’ve tightened up the parts of our fixed budget, and became more conscious about our non-budgeted spending. We began renting our first investment property and we downsized to a smaller house, which had an incredible impact on the amount of money we get to keep every month. Now, it’s safe to say that 70% of our annual disposable income goes into buying freedom.
It doesn’t take an enormous amount of money to retire. You don’t need to hit the magic $1M or $2M to do it. What you do need to have is about 25-30 times your annual spending rate invested at the moment you retire.
If I were to start fresh right now, at my current savings rate, I would have to work 8.5 years until I could retire (assuming 5% interest after inflation).
Here is the 100%-uncomplicated math behind it:
- First you would divide your savings rate by your spending rate, in my case: 70%/30% = 2.3333
- Then you would plug a few numbers into a compound interest calculator
- Current principle: $0.00; Annual addition: $2.33 (the number we found in step 1); Years to grow: X (for me it’s 8.5); and Interest rate: 5%
- Basically we’re solving for X. This is the amount of years you need to work in order to retire.
- Once the ‘Future Value’ falls between $25-$30, you have enough to retire.
Notice that by doing the above equation if you were to drop your savings rate to even 50% it would double the amount of years of your working life. And if you stick with the Dave Ramsey plan of 20% savings, then you extend your working life by 30 years.
We’re cheating a little bit, in that we aren’t starting from $0. A few years ago we had debt, then almost all of a sudden we didn’t. Then, we kept the ball rolling and began saving intensely. We didn’t know at the time that we were going to start preparing for retirement. We didn’t even realize that it was an actual thing.
So, now we have just under 7 years left until our retirement date of June 2020. Over the next 7 years our incomes are sure to go up, which means that our savings rate will go up as well, because we don’t buy into the whole ‘lifestyle inflation’ thing. That means we’ll probably have enough to retire before June ’20, but we’re more than likely going to stick it out for the whole 7 years.
After doing the math, and realizing how easy and actually doable it is, why wouldn’t we try to retire within the next 7 years?
I don’t think that I’m special in any way, or that there is only a select type of person that can achieve these goals, or that you need to earn a certain amount of money annually to retire early. No matter what your income level, your savings rate is the key that will determine how many years you’ll have to spend in the workforce.