All over the Internet, you can find incredible success stories of regular folks who were able to pull off the impossible.
But what is their secret? How do you retire young in today’s world when so many of the odds seem stacked against you.
It’s one of my personal hobbies to read these stories and look through the details to see what makes them different. And you want to know what I’ve noticed?
It’s not that they won the lottery or received a huge inheritance.
It’s also not that they were necessarily big-time executives earning way more money than you and I.
No, the answer is actually much simpler than you might think. Most of the early retirement success stories I’ve read have one theme in common: They all involved extremely high savings rates.
It’s true. You can find this in nearly every case. But just exactly how high of a savings rate are we talking about? Let’s consult those who have actually retired young to find out.
How Much Do You Need to Save to Retire Young?
So what is the right proportion of your savings to stash away if you want to kiss the cubicle goodbye?
Probably one of the oldest cited blog posts come from Jacob at Early Retirement Extreme. In this article, he lays out a chart describing how many years each level of savings frees you:
If you save 5% if your income, you can take 1 year off every time you work 19 years.
If you save 50% of your income, you can take 1 year off every time you work 1 year.
If you save 90% of your income, you can take 9 years off every time you work 1 year.
Is this actually true? Check out these choice selections from some of the more popular early retirement blogs and see for yourself.
- Mr Money Mustache calculates it would take 10.9 years to retire if you saved 64% of your income.
- Mr and Mrs 1500 from the blog 1500 Days: “Right now, I think in our most efficient life, now that we’re not doing that, we save at least 75%. And our life isn’t compromised. We’re very happy. (From an interview on the Mad Fientist podcast).
- Jeremy from the blog Go Curry Cracker: Our overall savings rate started relatively low (albeit high by average American standards), but as income rose and we learned how to be more efficient with our spending, our savings rate passed 70%.
- Brandon from the Mad Fientist: My savings rate in 2014 averaged over 73% but I expect that number to be higher this year because my expenses have dropped dramatically.
- Frugalwoods from their blog Frugalwoods: Mr. Frugalwoods and I finally did the arithmetic on our 2014 savings and expenditures (as I’m sure you’re all relieved to know). While in any given month of 2014 we vacillated between saving 65%-82%, our average savings rate for all of 2014 is 71.4%. Woot!
Noticing the same trend?
Why Does a High Savings Rate Help You Retire Young?
The math that connects early retirement and high savings rates is pretty interesting.
What most people don’t realize is that when you save more for retirement, you’re not just simply saving more money. You’re also training yourself to live on less income.
Take this simple example.
- If you’re generally used to living on an after-tax income of $40,000, then you will need a nest egg of approximately $1,000,000 in order to retire (i.e. 25 times your expenses).
- But if you can get your savings rate up, this means you automatically have less after-tax money to spend. Suppose your high savings rate left you with only $30,000. Now you only need $750,000 in order to retire.
You might even think of this as the double-ended approach to early retirement. You save now in the beginning, and it results in needing less in the end. Double-impact for your efforts!
Why Do Early Retirees Focus So Much On Their Savings Rates?
The answer is simple. Your savings rate is the one thing you can control.
When you think about this, it makes sense.
- You can’t control the direction of the markets.
- You can’t control how much money your investments will make (or lose).
- You can’t control the rate of inflation.
But you can control how much you save. Whether you think so or not, its entirely up to you whether you save 10% or 90% of your income.
The trick, of course, is all in how you get there.
Fortunately, there are literally thousands of ways to save more. (I’ve even gone so far as to write a book about it.) To get started, I’d suggest starting in the following places:
- Get a better job.
- Fight off lifestyle inflation.
- Take advantage of tax-advantaged retirement savings like 401(k)’s and IRA’s.
- Also take advantage of other tax-advantaged savings tools like FSA’s, HSA’s, and 529 college savings.
- Saving thousands of dollars on travel.
- Refinancing your mortgage.
- Paying less for your vehicle.
- Getting a better insurance rate.
- And so many more …
You might also find these practical tips to be helpful.
Little by little, the more you work on each of these points, the more money you’ll have to stash away. And that will get you closer and closer to your goal of becoming financially independent.
Who knows. Maybe it will be your early retirement success story I read next!
Readers – What do you think is the best way to retire young? How important do you believe the role of savings rate plays? Are there other strategies that can be useful too?