Spend Less Than You Earn
Hurdle Number One: People spend too much money.
Section titled “Hurdle Number One: People spend too much money.”People spend too much money. They decide that they need the newest iPhone, the most fashionable clothes, the fanciest car, or a Cancun vacation. Say you’re earning $50,000 per year, 15 percent of which is $7,500 or $625 per month. In this day and age, that’s a painfully thin margin of saving, and it can be wiped out simply by stringing together several seemingly innocent expendictures, each of which might nick your savings by $100 or so per month: a latte per day, a too- rich cable package, an apartment that’s a little too tony, a dress or pair of brand-name sneakers you really don’t need, a few unnecessary restaurant meals and, yes, an excessive smart phone plan you could, if you had to, not only live without, but also function better without. Life without these may seem spartan, but it doesn’t compare to being old and poor, which is where you’re head if you can’t save. You might even save the whole $625 in one fell swoop just by living with a roomate for a while longer, instead of renting your very own place. Again, as bad as having a roomie may be, it’s not nearly as awful as living on cat food at age 70.
— William Bernstein
Savings Rate vs Years to Retirement
Section titled “Savings Rate vs Years to Retirement”Key Insights:
- The curve shows an exponential relationship - small increases in savings rate dramatically reduce working years
- Going from 5% to 20% savings rate cuts retirement time nearly in half
- Beyond 50% savings rate, each additional percent saved has massive impact
- This assumes a 3% safe withdrawal rate (more conservative than the traditional 4% rule)
Financial Independence Calculator
Section titled “Financial Independence Calculator”Calculate how many years until you can retire based on your savings rate and investment returns.
How it works:
- The calculator determines when your investment returns can cover your annual expenses
- Target portfolio = Annual Expenses ÷ Withdrawal Rate
- Your savings rate is the most important factor for early retirement
- Assumes expenses remain constant and accounts for compound growth
The Power of Savings Rate
Section titled “The Power of Savings Rate”The most important insight from early retirement math is that your savings rate matters more than investment returns for retiring quickly. Here’s why:
- 10% savings rate: ~51 years to retirement
- 25% savings rate: ~32 years to retirement
- 50% savings rate: ~17 years to retirement
- 75% savings rate: ~7 years to retirement
The relationship is exponential - small increases in savings rate lead to dramatic reductions in working years.