The Hope and Simple Math of Extremely Early Retirement

What if I told you that you could retire early, extremely early? What if I taught you the simple “how-to” mechanics of growing enough wealth to become financially independent and retire extremely early.

The Hope of an Extremely Early Retirement

Saving rate is the central fundamental formula to building wealth, and retiring early so you can pursue the things in life that actually matter. If money were of no consequence in your life, you would get up in the morning and use the gifts that you have been given on things that you care about in an environment that fits your values. Then you would live out your true calling. Then you will have drive, energy, and time to execute your true purpose, to achieve fulfillment.

There is a universe of online retirement calculators, financial blogs, high profile financial advisors, and highly educated economists trying to tackle the big question of, “How do you build enough wealth to retire and how long will it take?”

What if I told you that you could retire in 5-15 years from today regardless of your income level or how many years you have already worked? Now I know what you are thinking, the readers of this blog represent a broad range of education, income levels, lifestyles, and life goals. How could I possibly make a single claim that applies to most middle-class people given such a wide distribution of income and spending patterns between readers? Let alone, one that’s seems so extreme.

“Sorry Mr. Refined, too good to be true.”

You’re a tough cookie I see. And if you have never seen the math before you should be skeptical. But I should warn you, I invited my superpower, math, to this conversation. It turns out that the majority of online calculators are not worth the two bits they are programmed with. Most of them base retirement on your income and project forward a fixed number of years you are likely to live (need to spend away your life savings) based on that income level. Internet retirement calculator and many financial advisors have been officiating an incredibly simple mathematical truth.

The math behind early retirement has less to do with your income and everything to do with your savings rate. I know teachers that are able to retire before most attorneys and doctors do. How can people retire early with completely different lifestyles? How could the teachers reading this retire alongside the Wall Street types? I would be happy to show you.

Certainty In An Uncertain World

In an uncertain world filled with conflicting options of buy, hold, sell, panic, fear, and greed, scandals and lawsuits, different economic doomsayers that shout at you from the TV, predicting the rise and fall of financial empires. Opinions that seem to change faster than the weather. Shouting at you to buying something they stood there and told you to sell the day before. Exhausted you change the station only to find the exact opposite option. All of this ‘clanging of the gong’ has taught me two important principles in life:

Principle I

The first principle is that there are only two professions where you can get filthy rich by be right 51% of the time. A weather forecaster and a stock market investor. The second principle that I have learned is the serious one so turn on your memory brain cells and peel your face away from your Instagram feed for a moment. There is one constant underlying principle that need not bend the knee to the fear and greed of boom and bust.

Principle II

The central factor that controls your retirement timeline is your savings rate, as a percentage of your take-home pay. If you would like to break this down one more step your saving rate is composed of these two things:

• How much you take home each year.
• How much you can live on.
  
  
  

Where We Go Wrong

If you spend 100% of your income you will never be ready to retire. Think about it. Each night you go to sleep with the same ‘keep pile’ of cash that you woke up with the day before. Each day would add zero value to your ability to retire. That is unless you have a trust fund, large inheritance, winning lotto ticket in your pocket, or you are old enough to receive a pension or social security distribution. Millennials have increasingly reduced odds of having someone else save for their retirement (pension, social security, etc.) In this case, without someone else doing the saving for you, you move zero inches close to your goal.

Each day you wake up, cash in the majority of your life-energy at the corporate alter known as the job. In this case, you keep zero of those dollars you received in trade for your time. Trading hours for dollars linearly is curl enough and not being able to keep those dollars is, well, indentured servitude at is core. Your working career will be infinite. You will work until death relieves you from your shift. This outlook gets even worse if you consume more than you earn (debt).

If you spend 0% of your income and are somehow able to live for free, you could retire today. Assuming of course that you could continue this during retirement. Thus, your working career is already over or zero more years.

Mathematical Hope

The majority of us live somewhere in between these two extremes. Fortunately for us, there is an extremely advantageous function of mathematics that a guy named Albert Einstein called the “eighth wonder of the world.” That function is known as compound interest.

Have you ever seen a movie where the monster gets a head cut off and two pop us in its place? Well that this the way compound interest works except, for us, rather than against us. Every minuscule scrap of money that we invest earns Its own money, and the earning of that money also earns its own money. This cycle goes on and on in a chain reaction that allows wealth to grow exponentially through the wonder of compound interest. Don’t worry I am not going to derive the mathematical proof equation now (even though it would totally satisfy my inner nerd.) Instead, check out this aesthetically pleasing graph:

The good news for us is that the compound growth graph is not a straight line there is no fixed rate of number of dollars invested that buys you a fixed amount of time off of your working career. A dollar invested today could be three times more valuable than a dollar invested a decade from now.

As soon as this runaway growth is enough to pay for your living expenses while leaving enough earnings invested each year to keep up with inflation, you are ready to retire. You now have a Perpetual Money-Making Machine!

Another way to look at this equation can be seen in the following table. Can you tell I am really trying to drive home this concept?

Do you notice anything surprising? That right, how much income you earn is not the factor. The percentage you keep each year is. For this calculation I made the following assumptions:

• The starting value of your portfolio is zero.
• A conservative 5% annual return on investments
• You live off of the 4% safe withdrawal rate in retirement.
  
  
  

How To Ensure Your Money-Making Machine Lasts Forever

If you live off of just 4% (or less) you abide by the “safe withdrawal rate” which affords you an almost statistical certainty (see the table below) that you will not run out of money in retirement according to the Trinity Study. In other words, your money, adjusted for inflation, will continue to grow faster than you spend it and last indefinitely. Overly conservative, maybe, but remember we want to so sleep soundly for the 70+ years of retirement ahead.

In addition to the three conservative assumptions above, you can add an additional margin of safety by exercise some flexibility in your spending during recession years. Let’s call this the whipped cream on top of our conservative cake.

“That’s all well and good Mr. Refined… but it is not possible to save that much.”

If you save a very reasonable 50% of your take-home pay, which you could easily do without reducing your current quality of life with just these two blog posts: How to reduce or eliminate your tax liability and 12 Ways I Saved 13k’s… from My Expenses Last Year, then you would be on track to retire within 16.6 years (starting from zero). The important concept is that you focus on saving the biggest percentage of your take-home pay that you can and realize the power of the compounding curve. I will continue to show you the details to allow your perpetual money-making machine automatically take care of the rest.

Considering the far less refined end of the spectrum, even the smallest efforts to save and invest make a huge impact. A little bit of effort compounds over your lifetime to save you thousands of dollars or years off your retirement horizon.

Double Your Life in Retirement

Let’s take the case study of a middle-class family with 50k of annual take-home pay who saves 10% of their income, that’s $5k per year. This is actually better than average these days. Sadly, “better than average” is still pretty bad, since they are on track for a 51.4-year working carrier.

According to the actuarial tables that would leave 4 years of retirement before death for men and 9 years for women. Simply cutting cable TV and a daily latte could instantly boost savings from 10% to 15%, allowing them to retire 8.6 years earlier! That would more than double their average time in retirement life. Are cable TV and Starbucks worth having two income earners each work an extra eight years for?!

An important point to note is that cutting your spending rate is much more powerful than increasing your income, and certainly the best place to start. Here are a few reasons that every permanent drop in your spending has a force-multiplying effect:

• It instantly adds to contributions. No lag to negotiate and implement a raise or a new job, or start up a new business. Thus, compounding can get to work immediately.
• It increases the amount of money you have left over to save and invest each month.
• and it permanently decreases the amount you’ll need every month for the rest of your life.
• If you are still not convinced the Mad Fientist said it well in his post the Triple Value of Income.
  
  

Of course, in more advanced article we will look at how to grow the gap between income and spending rate.

I hope I have clearly laid out the formula to retire extremely early. Exactly how early, is up to you. If you would like to retire in 5-15 years simply live on ~20-50% of your income and invest the rest in your perpetual money making machine. If not, remember this:

Savings Rate Rule of Thumb… Every 1% increase in savings rate translates to approximately 1% reduction in your working career life.

If It Is That Simple, Why Doesn’t Everyone Do This?

I contemplate this often. I believe there are two reasons people don’t act on such a simple mathematical truth and both have to do with human nature. “Change” is processed by the brain as “pain” even if it is a positive change that will improve your life. The short term act of change will still be scary and painful. The good news is you can trick your brain (even if it is aware you are tricking it.) You can short circuit this thought pattern by reframing the “change” as a “win or gift” In other words, you can choose to perceive the changes needed to take advantage of this information, as a win rather than pain or sacrifice. Then it feels like you just inherited a mansion and now you get to move into that mansion. Even though that would technically be a change, your brain receives it as a gift. So treat this information as my free gift to you.

The second element of human nature most people can’t overcome is greed. By greed, I mean consuming 100% of a resource that comes their way. Specifically, consuming 100% of your income (or more via debt.) I am not here to pick at your scabs, I just want you to understand why so few people pursue their own best path to happiness. Greed is a major roadblock for most people and American consumerism, backed by the infinitely deep pockets of the advertising and marketing, and reinforced by the predatory credit industry are a formidable force to be reckoned with.

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Dedicated to the Benefit of My Readers

I am certainly not the first to point out this mathematical truth and I certainly won’t be the last. Many great men such as Jacob Lund Fisker of Early Retirement Extreme, Mr. Money Mustache, JD Roth of “Get Rich Slowly,” and many others have been writing about these concepts before I even knew how to calculate a derivative. However, now it is my turn to pass the baton. I would be doing you a disservice without illustrating the concept of savings rate as early and often as I can.

Saving rate is the central fundamental formula to building wealth, and retiring early so you can pursue the things in life that actually matter. If money were of no consequence in your life, you would get up in the morning and use the gifts that you have been given on things that you care about in an environment that fits your values. Then you would live out your true calling. Then you will have the drive, energy, and time to execute your true purpose and achieve fulfillment.

Keep the FIRE burning my friends.