Have you ever wondered how you can control your retirement date? It’s simple, really, to get to financial freedom. But how?
Believe it or not, you have more control over your retirement, or financial freedom date, than you realize or may have been led to believe. Most financial planners automatically assume a measly savings rate of 10% a year, which leads them to the assumption you’ll be working for about 40 years, retiring in your 60’s. However, nowhere is it written that you can’t set your own preferred retirement date.
It is entirely in your hands, thanks to the fact that you are in control of your spending. Yes, it isn’t how much you make that determines how long you work, it is how much you keep! Okay, you can turbo charge your results by earning more, but that will only help you retire sooner if you invest that extra income and keep your spending fixed.
Here is how long it will take to save for retirement based on different savings rates (play around with your own figures at networthify.com):
- 10% savings rate = 42 years to retire
- 20% savings rate = 32 years to retire
- 30% savings rate = 28 years to retire
- 40% savings rate = 21 years to retire
- 50% savings rate = 17 years to retire
- 60% savings rate = 14 years to retire
- 70% savings rate = 10 years to retire
No mystery here. The more aggressively you save, the sooner you can retire.
(Over longer periods of time, inflation and compounding will impact your final portfolio balance so these are rough guidelines only.)
The 10 years-to-retirement plan works well on a household income of $100K or more because in many parts of the US, you can still live a fairly normal, albeit simple, life on $30,000 a year. People would think you just didn’t get out much, disliked shopping or were a confirmed minimalist. This would enable you to sock away more than half your income and retire quite young. Ideal in many ways. But, if you were like me and didn’t start off with a huge income straight out of school, and got married relatively late in life (38 years), then working 20 years and living frugally will feel like a long, hard slog. And, it will be torturous if you don’t like your job.
The solution is simple, if not necessarily easy: find work you love to do and if it pays well, all the better!
However, if you are making a great income in your 20’s, or marry young and between the two of you earn $100K or more, and you like your job(s), then saving 70% of your (combined) income is potentially a brilliant plan and worthy of serious consideration. I especially like that you can get out of the rat race while still young before having children so you can then relax and devote your time to caring for and raising your kids while doing part-time or creative work to keep your brain engaged. Wouldn’t that be preferable to trying to juggle work and family with the constant feeling that you aren’t doing enough for either?
Before kids, if someone invited me to go do a keynote speech anywhere in the world, I’d jump at the chance. Now that I have two munchkins, I carefully consider each event and how much time away would be required. This is something that never even occurred to me before having kids. I naturally assumed I’d take off anywhere at any time. Now I don’t take unnecessary risks or trips. I declined an opportunity to go bungee jumping for this very reason. I’ll wait until the kids are self-sufficient before risking my life now!
If you need to save at the 70% rate for much more than 10 years, doing a job you don’t like, then the cost may be too great.
Why be miserable at all if you can help it?
To me, this is the major downside of the 10-years-at-70% savings plan. I cringe when I read about these young people scrimping and saving and not going out and enjoying themselves. Okay, so I overdid it a bit in my youth, but isn’t that the fun thing about being young? I’m living proof that you can afford to make a few mistakes as long as you get back on track quickly. And I’m not the only example.
Robert and Robin Charlton didn’t get serious about their careers and were under-earners until they realized that their incomes were the ticket to buying financial freedom. Then they really started to focus on doing a great job at work and getting raises and promotions. However, it wasn’t until Robin retrained as a nurse that they really increased their household income. In 15 years they managed to go from zero to retirement by saving and investing on average of $25,000 a year. They started out only being able to save $1,750 a year for three years until they improved their jobs and salaries when their investing peaked at 57% of their income.
Their message: don’t worry if you start small.
Stay committed and figure out how to increase your income while reducing your expenses. Was all this scrimping and saving worth it? A definite yes! They report in their book, How to Retire Early:
“When you decide to retire early you’re really deciding to buy time – time when you are on your own clock and not someone else’s. Because your time is valuable, we think you should buy as much of it as possible by working hard for a concentrated number of years so you have more time to spend later on however you may choose.”
“Your goal in your working years should be to create seed money that isn’t earmarked for bills, groceries, mortgage payments, and all the other necessities of life. This seed money could be thrown to the winds (spent on stuff), or it could be planted and allowed to grow into something that could cast a whole lot of shade on your future.”
Retiring is not a pipe dream. It’s achievable, and it really does give you the freedom to do what you love most. For us, it means being able to travel for longer periods of time than the two or three weeks our full-time jobs used to allow. Now our trips can last as long as we want them to; we can immerse ourselves in another culture and get to know it from the inside out.
Their recommendations for getting the life for now vs. saving for retirement:
- 15 years if you are ambitious and no kids and no plan on having kids.
- 20 years if you have kids and are ambitious as your no kids and single friends.
- 25 years if you have kids and are reasonably motivated but want to live more along the way.
I recommend their book. They share all the nitty gritty details of their finances and what they learned along the way.
Your mission this month, should you choose to accept it, is the following:
- Start taking inventory, don’t worry about actually making any changes yet.
- Make your list of duplicates. Sometimes knowing just what we have, seeing it written on a piece of paper, gives that bit of distance and objectivity to see where we can easily trim down our possessions. This frees them up for someone else to use.
- Consider your own retirement date. Do you want to go with the traditional path of working 40-50 years? What if you end up holding a pink slip before then? Take charge of your own financial freedom path by choosing a savings rate that works for you.
And, by living a simpler life, by getting your personal and emotional needs met, you naturally consume less and end up with so much more: more time to do what you are passionate about; more money to pursue your dreams and travel; and a greener, cleaner planet as a bonus. Get inspired by Greta Thurnberg to do your own thing.