If you’re reading this, I’m sure that you have been hearing about early retirement. I can imagine that you’re wondering how to make early retirement possible for you!
The basic idea behind being Financially Independent and Retiring Early is that you have enough passive income or savings to pay for your lifestyle without needing to work. This doesn’t mean that you need to stop working altogether, it means that you can do whatever you want! You can decide to pursue your dream career or launch your own dream business without having any pressure.
For most people retirement even sounds far far away, something that you shouldn’t be planning for until you’re at least 50. What if I told you that many people don’t even have enough money to retire?! That will not be your path! Retirement is possible in your 30s, 50s, 70s, whenever you want it. You just have to plan for it.
For me, having the option to retire early is all about freedom and flexibility. If you are flexible enough to deal with any bumps in the road, you will enjoy freedom!
How Much To Save?
When you want to know how much you need to save. First is it necessary that you think about how much you want to spend? This will be the main way to know how much money you will need to save. This means that the higher your spending, the more you will have to save. To cut down your spending, read more about 25+ money saving tips here.
How to calculate how much you need:
- Desired amount of annual spending / 0.035
Let’s take one example. for me my spending would be €15.000 in retirement.
15000/0.035= 714.285. This means I would need €428.571 of lump sum.
Read more detailed information about this over at the Ultimate Guide to Financial Independence and Retire Early.
Your Savings Rate
It is important to take into consideration the savings rate, which is how much you have left each year divided by how much you can live on. So: savings/(expenses-taxes).
Related read: A Simplified Look At The Savings Rate
Your savings rate determines how long it will take for you to become financially independent. When you are saving 0% of your income, you will never be able to retire (unless someone else saves for your of course, like the government or your employer).
On the less extreme end of the spectrum, there are some very interesting considerations. Did you hear about compound interest before? That means when you invest or save money, the money starts earnings interest or return. If you reinvest these returns back into your investment account, they will start to earn their own return. And so on. It can quickly become a very very interesting way to generate income.
When this income is getting big enough to pay for your lifestyle expenses, while still having enough to keep up with inflation, you can retire.
Years Until Retirement
Below you will find the perfect exponential graph, like the one created by Networthify:
This graph explains how long it will be until you reach financial independence. If you save a good amount of your income and you will live on the remaining, it can go quite fast. You can go about this in two ways. Either you calculate based on actual income and spending, or you look for your desired retirement horizon. For me, I want to retire in 11 years, so I will have to save around 64% of my income.
With the paying yourself first principle, you can then determine what amount you want to put into your investment and savings account. The upside is that you can spend the remainder on whatever you want. The downside is of course that you need to become creative at times, to cut spending or save extra money.
If you are curious about what is the amount that you would have to work, please see the graph below from Mr. Money Mustache:
Focus On Decreasing Your Spending
We all know the people who pick on people for enjoying their daily latte, it comes from a place of wanting to help! If you are focused on increasing your income, that’s great. The most effective thing is to save some money.
There are 25+ ways to save money. If we some from the list;
- Cutting your cable – savings €360
- Bringing lunch to work – saving €360
- Switch Energy provider – saving €500
By implementing these simple steps, you will save an extra of €1220 this year. To illustrate how this works, if this increases your savings rate by 5%, you can retire 3 years earlier!
If you cut these expenses, they will become part of your lifestyle. This means that your spending permanently drop. In addition to increasing your savings rate, you will also need less money to spend for the rest of your life!
Want to know how far you are with decreasing your expenses? Do a monthly money routine to see where you are with your finances.
If you’re not sure whether early retirement is for you, I recommend you think about having a mini-retirement. You can do whatever you want in a mini-retirement, go traveling or working on a passion project being two of those. Negotiating a mini-retirement is easier than you think. Don’t wait until retirement, enjoy life today!
What do you think, will you be able to retire early?