Early Retirement as Easy as Pie 1


Anyone in middle class America can retire “early” (before age 65), if they so choose. Would you like to retire early? Oh right, that’s why you’re here. What you need to do is increase how much you’re investing and live below your means. That’s really all you need to be wealthy.

You can calculate when you’ll be able to retire right now by looking at what percentage of your income you’re investing. Just take the amount you’re investing every year and divide it by your yearly income. So if you’re investing $5,000 every year and you make $50,000 a year income, your ratio is 5000 / 50000 = .1, or 10%. Congratulations, you’ll be able to retire in roughly 51 years at this rate (refer to the table below).

In fact, there is a formula that translates the percentage you’re investing into a retirement date.

The Shockingly Simple Math Behind Early Retirement

Investing Rate (Percent) Working Years Until Retirement
5 66
10 51
15 43
20 37
25 32
30 28
35 25
40 22
45 19
50 17
55 14.5
60 12.5
65 10.5
70 8.5
75 7
80 5.5
85 4
90 under 3
95 under 2
100 Zero

The article written by Mr Money Mustache was one of his most popular ever written – it’s been referenced and redone many times. I’ll summarize it here for you. When you invest money it makes more money for you. To retire, you need the amount you have invested to earn enough for you to live off of (passive income). Investing creates passive income, passive income creates money, you live off of a certain amount of money, and once your passive income creates the amount of money you need to live, then you can retire. Thus there is a magic ratio of what percentage of your income you invest and how long it will take you to retire. It’s easy to see if you think about it. If you invest 0% of your income then you’ll never be able to retire. If you invest 100% of your income then you’re already living for free somehow and you can retire right away. If you invest 15% of your income then you’ll have to work about 43 years before all of the money you’ve invested will create enough passive income to cover your living expenses. If you invest more than 15%, then you can retire sooner.

The Math

It really is that simple. I can hear some people saying “Pffft. Yeah right. Details?” Ok, if you don’t believe simple we can complicate it a bit. Assumptions: Investments go into stocks (index funds) and you get a 5% annual return (this is conservative and is inflation-adjusted, normally 7% is assumed, see herehere, and here). You can withdraw money from your investments at a rate of 4% forever, without depleting your investments (see here, here, here, and here). Therefore, to replace any given income, you need 4% of your investments to cover the income you want. For example, if you want $50,000 to live off of every year, then you’ll need $1.25 million invested before retiring, because 1,250,000 * .04 = 50,000 (or 50,000 / 0.04 = 1,250,000) . Please go verify these assumptions on your own and by using the links I’ve provided in the text above  – you’ll find that they’re conservative.

Notes, Details, Another Example

The stock market is unpredictable and although the average has always been 7% or better, 7% has never been the actual return that people see – stocks are volatile.

The average return of 7% already includes inflation, so the actual average return is higher and the dollar amount increases you’ll see from investing would theoretically be higher.

Use the Early Retirement Calculator on this site to create other examples and adjust the average return and the safe withdrawal rate.

Notice how the only way to significantly affect your retirement date on the calculator is by raising the percentage of your income that you invest.

Making more money, making less money, adjusting the average return, and adjusting the safe withdrawal rate all have comparably minor effects on when you can retire!

retirement-calculator

Early Retirement Calculator

Bonus Awesomeness

The beautiful and rarely mentioned bonus is this: Once you get to that magic number of having enough invested to be able to retire, any additional money you invest gives you a raise for the rest of your life. It’s not like working at a job where you get paid once and that’s it. When you invest, that money works for you forever. It never asks for better hours, never goes on strike, and always keeps working.

Is This Wealth?

So if you decide to invest 75% of your income and retire in 7 years, is that really wealthy? You do have to live frugaly, after all. Yes. That’s exactly what wealth is. Wealth is not making a bunch of money and then spending it all on non-investments. In fact, living below your means is how most people become wealthy, based on research on millionaires across the United States (see “The Millionaire Next Door”).

Enjoy, Learn, Grow

To summarize, live below your means and invest the rest. Some people need a structured plan, but that’s not absolutely necessary. The key is to explore things in life that are healthy, enriching, educational, and free. Have a game night with friends, take a brisk walk in nice weather, go to a local meetup, go to the library, prepare some meals in advance, write a blog, knit/woodwork/car repair/exercise/start a journal, etc.

Go Forth, Be Rich

Now that you know, it’s up to you. You’re currently on a path to retire in a certain number of years. Will you change that number? Personal improvement books, educational classes, and regular reflection are the best ways to effect the personal change necessary to throw useless consumerism out the window and retire early. Don’t wait for a bankruptcy or some life changing event. In Jeff Olson’s book The Slight Edge, the author explains how much of a difference a little change makes. A small change like reading 10 pages a day of some good books adds up, because 10 pages a day becomes 3,650 pages a year. One small change, done every day, will change your life. The most important step is starting.


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One thought on “Early Retirement as Easy as Pie

  • Mustard Seed Money

    Thanks for sharing!!! I’ve always wondered how Mr. Money Mustache came up with the math. It’s clearly pretty easy :) My wife and I are trying to move from 65% to 70% in savings. I like that if we do this that we could potentially knock off two years :) That a big chunk of time for just 5%