So as part of your early retirement planning, you’ve used our retirement calculator to figure out how much money you need to be financially free based on the cost of your expected lifestyle.
The next step is working out how long it will take you to get there – and, ideally, how to reduce that number as much as possible!
How long until I can retire?
Luckily, there are websites to do the hard work for you.
My personal favourite is Networthify, which is a great tool for showing how far you are from retiring based on your savings rate and annual expenses.
Let’s use an example of someone with an income of $60,000 (just over the US median household income of $59,039) who has no current investments, but they have committed to a savings rate of 20%. This is equivalent to annual savings of $12,000 and annual expenses of $48,000.
We know that if we assume that we will spend $48,000 per year during retirement, we will need $1,200,000 to reach financial freedom based on the 4% rule.
Consequently, based on these figures and assuming an annual rate of return of 8%, the Networthify calculator shows us that reaching that amount will take 28.5 years.
Not bad, I guess. Most people’s working lives are longer than that, after all.
But you’re not “most people”, right?
How about a slightly higher savings rate?
So let’s mix things up a bit. In a previous article, we looked at calculations based on expenses amounting to $40,000 per year during retirement.
Using that here, we see that this brings us up to a savings rate of 34%, meaning that you would reach financial freedom in 20.6 years.
That is, for saving an extra $8,000 per year, you take almost eight years off your working life.
Sure, I hear you scoff, I’ll just save $8,000. Easier said than done.
Maybe. It depends how much you value eight additional years of being financially free.
And as a bonus: congratulations! You just discovered the key to reaching financial freedom even quicker.
The key to becoming financially free as soon as possible
Let’s consider the information discussed above on a broader scale.
What does it show? The higher your savings rate, the quicker you can retire.
This is very clearly illustrated using the following graph:
As above, this is based on an annual income of $60,000, a starting net worth of zero, an 8% annual rate of return, and a 4% withdrawal rate.
Are you only saving 10% of your income per year? Expect to wait 38.3 years before retirement.
However, can you bump this up to 50%? Suddenly you’re only looking at 14.3 years until you are financially free.
As such, the rate at which you reach financial freedom is based on one single question:
How much are you saving?
There is also a sub-question here:
How much do you need to retire?
Actually, no, let’s re-phrase that:
How little do you need to retire?
It should be clear from this previous post that the less you need to live off each year once you reach financial independence, the lower the total amount that you need to get to that point and, consequently, the less time it takes you to get there.
However, the more you are able to save before then as a percentage of your income, the sooner that money can be subject to the magic of compound interest.
Shouldn’t I just be aiming to earn more money?
That absolutely helps. After all, there are three key points to reaching financial freedom:
Make your money work for you
However, as has been covered in an earlier post, the second point on that list is arguably the easiest – and the most important.
In that article, I suggested that saving 10% of your income is much easier than asking your boss for a 10% pay rise.
Of course, that’s not the only way to earn extra money. We are, after all, all about the side hustle.
But cutting out some expenses to boost your savings rate has a double bonus.
Not only does it increase your savings that month, but it also means that your ongoing expenses will continue to be reduced.
This means that not only is the amount that you are contributing each month towards being financially free suddenly higher, but the amount that you will need to be financially free will suddenly be lower.
So, just to clarify, how do I retire as quickly as possible?
Start saving more as soon as you can.
You will spend less, invest more, and need less to retire.
In turn, you will rapidly accelerate your journey to financial freedom.
I don’t know about you, but trimming down my working life by more than half sounds like a challenge that I am more than willing to accept…
If you’re willing to do so – or if you want a huge gold star, depending on where your financial journey is at – let me know in the comments how many years you are from being financially free. I’d also love to hear what you’re planning to do to reduce it!