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If given the chance, most people wouldn’t work for a living. Almost everyone would agree with at least one of the following propositions:
- Work sucks, I don’t like walking into the building everyday.
- Work is great, but I’d like the option to quit and not worry about money.
- Work is tolerable, but I’d rather do something else with my time.
There is nothing inherently bad with working for a living. It just stops us doing what we want when we want to. It normally ties us to one physical location and is stressful because there is the constant fear of unemployment.
Most people recognize financial independence as being an objectively good end goal - passive income exceeding expenses is always a great situation to have. This leaves the obvious question:
Why aren’t more people aiming to be financially independent?
If humans acted in a purely rational and logical fashion, we would all be fit, we would all have perfect finances and would all be perfectly organized. Life gets in the way, priorities shift and we lose sight of what is really important.
The real reason most people aren’t trying to be financially independent is that most people think it’s out of reach and a goal that only people who are already rich can worry about, or perhaps those with very high incomes. I want to strip away some of these misconceptions so that you can see how easy an early retirement in ten years or less could be - if you want it badly enough.
The simple plan to retire in ten years
- Become a frugal machine and live on 25% of your income
- Invest the 75%
- Wait until your investment income exceeds your expenses
- Retire early, baby!
This plan will work with smaller savings rate, and it is perfectly fine to aim for a 50% savings rate or even higher - you just have to factor in a longer wait time before you will be able to reach financial independence.
Consider a 50% savings rate. Each year that you save this amount, you have saved an entire year’s worth of living expenses. If you had a flexible workplace, or a job that can be picked up after a break - after only a year you would have earned a years worth of financial independence.
Early retirement case study: Jane
Jane is single and earns $64,000 after tax. She manages to save 75% of her wage by living extremely frugally. Each year she does this, she socks away three years of living expenses for her early retirement.
Jane invests her savings in a US shares index fund which returns 7% (an approximation of the long term historical average) and puts away her savings each month. After ten years she has a nest egg worth a whopping $692,339.23!
She uses Firecalc and determines that her nest egg means that she has well and truly reached financial independence if she continues to spend at the same rate. The calculator allows for an increase in spending due to inflation. It uses over a century of historical share market information to test her nest egg against various historical periods (the great depression and all!) and sees how it would have fared.
In her case the Firecalc simulation tells us:
FIRECalc looked at the 111 possible 30 year periods in the available data, starting with a portfolio of $692,339 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 111 cycles. The lowest and highest portfolio balance throughout your retirement was $692,339 to $4,991,062, with an average of $2,179,896. (Note: values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 0 cycles failed, for a success rate of 100.0%.
The various lines are each of the different outcomes for her portfolio, using the historical data from the US share market.
This is all well and good, but how do I live on 25% of my income?
I’m not going to pretend this is easy. For some people, it’s just impossible. If you are a family with children with only one average income, or unemployed, a student, or at the very beginning of your career, then living on 25% of your salary isn’t going to be possible.
For the vast majority of people earning a full time income, or couples with two incomes, this is a difficult, but real possibility. There are sacrifices that have to be made, and I’m not going to pretend that you can drive around in a brand new BMW and still achieve this type of financial outcome. There aren’t any shortcuts or get rich quick schemes here.
It comes down to the question - how badly do you want to be free from work? Or free from the requirement to work?
I have managed to live on less than 25% of my income since starting my journey to early retirement, and I have an average income and started with consumer debt. When you factor in my partner’s income we have been going a bit above our 25% target, but should achieve a yearly 25% savings target in 2013.
Our financial independence journey since July 2012:
Final word on financial independence
If you want it badly enough you can make it happen. We tie ourselves to work because we spend all of the money that comes into our possession. If we can drastically lower the rate at which we spend our money on gadgets, expensive food, transport and accommodation we can swap all of those temporary things for something much greater: permanent freedom from work.
Kim’s Comments: While it would be difficult to live on 25% of your earnings while all of your colleagues are buying the latest and greatest, it must be very gratifying to know you will be free of having to work for a paycheck after such a short time.