How to Retire Early: The Shockingly Simple Math

Transcript

0:00
Hi, my name is Phil. I’m a video creator and online instructor. I’m also a personal
0:06
finance nerd.
0:07
Because of that, I want to create a series of videos that breaks down some of the most
0:12
mystifying topics that plague our society.
0:17
In a world where people’s finances are typically locked away and not-talked about, I believe
0:22
opening up the gates of financial conversation will help everyone live a better and smarter
0:27
life.
0:28
In this first video, I want to explain the shockingly simple math behind early retirement
0:33
– thanks to one of my biggest heroes, Mr Money Mustache.
0:38
While the ability to retire may seem like a distant and unreachable goal for many, the
0:43
premise comes down to one thing. You need to invest money so that it earns more money.
0:48
This could be investing in stocks or bonds, real estate, or any other of investment vehicles.
0:49
As soon as your investments earn enough money for you to live on each year, you are able
0:54
to retire.
0:56
Let’s break it down further to know when you can retire.
1:06
The most important concept is knowing your savings rate, basically how much you make
1:12
minus your expenses.
1:15
If you spend 100% of your income, you will never retire… because you will never be
1:20
able to invest any money that earns money for retirement.
1:27
If you spend 0% of your income, you can retire right now… because somehow you are living
1:33
without needing to make any more money.
1:36
Between 0% and 100% are a number of savings rates that correlate with the years it will
1:43
take to retire.
1:44
For this, let’s assume your annual investment return is 5% (which is conservatively low)
1:51
and your withdrawal rate is 4%… meaning you spend 4% of your net worth each year.
1:57
For example, if you have a $1,000,000 net worth, and you live on $40,000.
1:59
If your savings rate is 10%, you will be able to safely retire after 51.4 years. Safely,
2:07
meaning you will never run out of money.
2:09
If your savings rate is 25%, you can retire in 31.9 years.
2:15
50%, you can retire in 16.6 years.
2:19
And if you can somehow save 75% of your income, you can retire in 7.1 years.
2:26
Now getting to that savings rate might not be easy in our world of societal pressures,
2:31
keeping up with the Joneses, and bad habits. But you can get closer by making smart decisions,
2:37
avoiding debt, and living simply.
2:40
The key take away is… Cutting your spending rate is way more powerful
2:45
than increasing your income because no matter how much money you make, decreasing your spending
2:50
will speed up the process.
2:51
A note, The math behind early retirement works if you are working a minimum wage job or a
2:56
7-figure CEO salary. It’s all about the savings rate.
3:00
So if you want to retire in 10 years, the math tells us that you need to save 66% of
3:12
your income.
3:13
Now there is a lot that I didn’t talk about – like how to invest, and how to cut expenses
3:19
to get to a high savings rate. Those will come in a future video.
3:22
For now, get excited about the honest truth about retirement (and early retirement at
3:28
that!)!
3:28
Let me know what you think in the comments below? Is this exciting or bogus?
3:34
Until next time… start being money smart.