As the one of the modern-day FIRE movement pioneers, I always encourage people to save until it hurts each month. Are you wondering: How much do I need to save to retire early?
We’ll discuss this topic in this post. I “retired” in 2012 at age 34 and went through an aggressive savings regiment since I graduated in 1999.
It wasn’t just saving aggressively, but investing aggressively to build passive income that enabled me to retire early.
Retiring early is simply a formula based on:
- The percentage of your take home pay you save
- Your gross and after tax income
- How much you can live on
The more you make, the more you can save, and the less you can live on, the sooner you can retire from your soul sucking job.
Of course, everybody’s standards and cost of living is different. If you want to retire early in San Francisco or Manhattan, then you’ll probably need at least $200,000 a year to raise a family. But if you can live in Middle America, you can probably get by on $50,000.
How Much Do I Need To Save To Retire Early?
If you’re the average American who only saves ~2.5% – 6% of their income, you will never retire early. In fact, any savings rate below 20% means that you will likely be working until you’re at least 60, which is not too far away from when you can start collecting Social Security.
If you want to retire early, you’ve got to save more than 20% of your income each year. The more you save, the less you require to live a comfortable life. Take a look at this chart below, which also assumes you’ll make at least a 3% risk free rate of return with your money while keeping your living expenses stable.
This chart is pretty spot on because I saved about 70% of my after-tax income each year for 13 years until I finally called it quits. Even though the chart says you can retire in 9 years if you’re saving 70%, I decided to work an extra four years to create a larger buffer.
It wasn’t really until about year 11 when I started getting sick of my job anyway. By year 13, I figured out how to negotiate a severance that provided for 5 years of living expenses as well. Never quit your job, get laid off instead folks!
Financial Freedom Savings Chart
Here’s another chart I created that highlights the importance of your saving rate. The higher your saving rate, the sooner you can achieve financial freedom and do whatever you want.
The gray shaded areas is when you should be able to retire early. The chart assumes 0% returns from all your savings and investments, which is highly unlikely.
What About Providing For Children?
Children are obviously a big determinant in whether you’ll have the ability to retire early or not. Frankly, retiring with children is almost impossible in a high cost of living city.
But are children really that expensive if you see plenty of couples who earn $50,000 or less have multiple children? The government provides a $1,000/year tax credit per child for middle class families as well.
The conventional wisdom is that if you decide to have children, you should immediately slap roughly 22 years of work to your life. You want to be able to provide for their living expenses and tuition through college, just in case your child isn’t that gifted to get a scholarship, or work to support themselves.
The good thing is that conventional wisdom is often times wrong. If you have a two income earning household, you can easily save more! Your expenses go down as a married couple due to a tremendous amount of cost synergies.
In 2017, my wife and I had a child and we both do not have jobs. Instead, she takes care of the baby full-time, I take care of him part-time, and I write on this website for some extra income.
What About Inflation?
Inflation is a beautiful thing that scares people who do not understand basic economics. To put it simply, inflation rises when the economy starts to heat up, and falls or stays flat when the economy cools. People often ask, “What happens when inflation increases? We need to invest and save more or else we’ll be screwed!”
We won’t be screwed. If inflation ramps from 2% currently to 5% in the future, it means the economy is ROCKING AND ROLLING! There is too much money sloshing around the system, and demand is too great, causing prices to rise.
When prices rise your dividend income, interest income, rental income, and real assets rise. This is why all of you must aggressively invest and accumulate real assets like real estate.
Personally, I’m investing in private eREITs from Fundrise and buying rental properties to play the inflation wave. The demographics, demand, and conditions are fantastic for real estate in the foreseeable future. I currently have $810,000 invested in real estate crowdfunding in the heartland of America.
Why I Saved So Aggressively For So Long
If I wasn’t whipped so hard my first two years out of college, I would never have saved so much. Thank you sir, may I have another! I worked for a firm that made me get in at 5:30 am every morning and have me stay until 7:30pm on average every evening. Some evenings, we went to 10:30 pm, which was brutal.
Furthermore, I constantly had to work at least 5 hours a weekend, leading to a total time spent of roughly 75+ hours a week. I gained 20 lbs, was constantly under pressure, and was generally pretty stressed. Despite the pain, the one thing I knew was that if I could just get through these first two years, I would be set.
Given the difficult experience right out of school, I swore to myself that I would save like a maniac to have the optionality of retiring early if I wanted to. I NEVER wanted to go back to that situation again. To be able to have the freedom to answer to no one is priceless. Hence, saving 50-75% of my after tax income is such a bargain for priceless!
Developing Passive Income Is Important
Finally, not only must you save aggressively, you most also build passive income through various risk-appropriate investments. Passive income is what will allow you to retire comfortably and not constantly worry whether you made the right financial move.
Here is my latest passive income for 2019-2020 that has allowed me to take care of my baby boy and be with my wife at home full-time.
When I left work for good in 2012, I was generating about $80,000 a year in passive income. $80,000 was enough for me and my wife to live somewhat comfortably, but I decided to ramp the passive income up to $200,000 in order to take care of a family.
As you can see, early retirement has made me much happier and much wealthier as well. I’m doing the things I love to do every single day. I’m also spending my time exactly how I want to. Nothing is better than having the freedom to choose your destiny!
Achieve Financial Freedom Through Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 was the latest example. However, real estate held steady and appreciated in value then.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Recommendation For Achieving An Earlier Retirement
Get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button.
Finally, run your numbers through their award winning Retirement Planning Calculator. Unlike other retirement calculators, their calculator pulls in your real data and runs a Monte Carlo simulation to produce the most likely financial scenarios. You can input multiple different expense, income, and life events to see how your finances shape up.
About the Author:
Sam worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income boosted by his investments in real estate crowdfunding. Financial Samurai was started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million pageviews a month.