The alternative way to increase your savings rate is increasing your income. No matter how frugal we are, you can’t live on $2000 in a year. You can’t keep chopping off your spending & live miserably for the sake of financial independence. Reducing your spending on bills has a ” ceiling”.
Guy B spends $ 40,000 per year, his portfolio value should be (25 * $40K) $ 1 million in value. Guy A spends $ 50,000 per year, his portfolio should be (25 * $50k) $ 1.25 million in value. This will equip with a new skill “reducing your spending”, it will also decrease the size of your overall portfolio to achieve 25X. You can reduce the years to retire by decreasing your spending. Savings (Investing) Two ways to increase savings Reduce your spending.Your take home pay is divided into 2 categories: Also your savings should be invested in instruments where it work towards your financial independence. It entirely depends on the savings rate (i.e Investing) from your take home pay. How many years does it take you to achieve 25X of your annual spending? If your networth is below zero (Debt trap), get your finances straight and come out of the debt pit. If you have started investing a few years back regularly, then you are closer to your financial independence compared to the years you are about to see. Your networth is zeroĪll the calculations are made on a assumption “Zero Networth”. (Annual spending * 25)= Retirement portfolioĪlso if your are withdrawing 4 % from $1.25 million ( $1.25 * 0.04= $50K), you can take out your annual spending amount $50K without depleting your portfolio on your retirement years. (Make sure you are covered by health insurance, I am sure you don’t want to be generous in paying hospitals bills by staking your health:)įor example, If your annual spending is $ 50,000 per year, by saving 25X of annual spending you can achieve early retirement. As you get old, you spend less compared to your young self. Your annual spending and the size of your portfolio go hand in hand.Īssuming you have no source of other income and solely relied on your retirement portfolio.īut your spending has to remain constant in your retirement years. So automatically the years to retire corelated with the savings rate you see in this post also remain pretty conservative.īut, it gives you an insight where you are standing on the journey of your early retirement, and also it shows you whether you need to amp up your savings rate or stay at the same pace. Even if you are going to invest in a low cost index fund the average rate of return is 8 percent or a bit more ( adjusted for inflation) on S&P 500 since 1900. The 5% return assumption made by MMM (Mr. 5 percent return adjusted for inflation.Your Savings percentage rate! Source: Xavi Cabrera on Unsplash Shockingly simple math tells you how many years it takes to achieve early retirement. You can check out his article here shockingly-simple-math-behind-early-retirement. The Shockingly simple math behind early retirement is popularized by veteran blogger Mr.
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