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The math is covered here: http://earlyretirementextreme.com/ http://earlyretirementextreme.com/ Basically the thought is that 20-25 years of living expenses wi
by stephenbez 13y ago
The math is covered here:
http://earlyretirementextreme.com/ http://earlyretirementextreme.com/
Basically the thought is that 20-25 years of living expenses will generate enough income for you to early retire on.
If you make 100k (post tax) with a 20% savings rate, you save 20k, and have living expenses of 80k. Ignoring future compound growth, for each year you work, you save 1/4 a year of living expenses.
If you go the other extreme, and have 66% savings rate, you save 66k, and have living expenses of 33k. With 33k living expenses you need 660k to retire. Each year of working you end up with 2 years of living expenses. Even ignoring the effect of investment growth before you retire, that is only 10 years of working.
Of course 20 years of savings maybe be too optimistic. The book is good and has more details.
- alok-g 13y agoI'll have to read the book for more but the math you explain seems incomplete. The earlier I retire, the more would be my expected number of years in retirement (assuming a given life expectancy). If in one scenario my retirement is 40 years away and I need to save for 20 more years, then in he other scenario where I retire in ten years, I need to save for fifty! That's a factor of 2.5 in this example! Ignoring growth rates and inflation is also a huge simplification. E.g. 3% yearly growth doubles your money in about 24 years. So it may again be a factor bigger than two between the two scenarios above.
- stephenbez 13y agoI think the idea is that if you have a large pile of money and take out a small portion of it each year to live on, due to growth the money will last indefinitely. So if you have 25 years of living expenses and each year take out 1 year of living expenses, that is 4% of your money. If you earn ~4% a year then your account balance stays the same. The 4% number matches the 4% rule: http://www.investopedia.com/terms/f/four-percent-rule.asp http://www.investopedia.com/terms/f/four-percent-rule.asp Of course after the great recession now the common wisdom is that the 4% rule can't be trusted: http://online.wsj.com/article/SB10001424127887324162304578304491492559684.html http://online.wsj.com/article/SB1000142412788732416230457830... Personally I think it would be foolish to plan on retiring with only 20 years of living expenses. However some people also plan on holding a part time job at least in early retirement.
- alok-g 13y agoThanks. This answers my original question too.