How Much Do I Need To Save To Retire Early?

Retiring early is simply a formula based on:

  1. The percentage of your take home pay you save
  2. Your gross and after tax income
  3. How much you can live on

The more you make, the more you can save, and the less you can live on, the sooner you can retire from your soul sucking job.

Of course, everybody’s standards and cost of living is different. If you want to retire early in San Francisco or Manhattan, then you’ll probably need at least $200,000 a year to raise a family. But if you can live in Middle America, you can probably get by on $50,000.

The Early Retirement Savings Chart

If you’re the average American who only saves ~2.5% – 6% of their income, you will never retire early. In fact, any savings rate below 20% means that you will likely be working until you’re at least 60, which is not too far away from when you can start collecting Social Security.

If you want to retire early, you’ve got to save more than 20% of your income each year. The more you save, the less you require to live a comfortable life.  Take a look at this chart below, which also assumes you’ll make at least a 3% risk free rate of return with your money while keeping your living expenses stable.

How Much Do I Need To Save To Retire Early?

How much savings to retire early

Retiring early is simply a formula based on:

  1. The percentage of your take home pay you save
  2. Your gross and after tax income
  3. How much you can live on

The more you make, the more you can save, and the less you can live on, the sooner you can retire from your soul sucking job.

Of course, everybody’s standards and cost of living is different. If you want to retire early in San Francisco or Manhattan, then you’ll probably need at least $200,000 a year to raise a family. But if you can live in Middle America, you can probably get by on $50,000.

Thinking about what you entered……..
You are in!

What About Providing For Children?

Children are obviously a big determinant in whether you’ll have the ability to retire early or not. But, are children really that expensive if you see plenty of couples who earn $50,000 or less have multiple children? The government provides a $1,000/year tax credit per child for middle class families as well.

The conventional wisdom is that if you decide to have children, you should immediately slap roughly 22 years of work to your life. You want to be able to provide for their living expenses and tuition through college, just in case your child isn’t that gifted to get a scholarship, or work to support themselves.

The good thing is that conventional wisdom is often times wrong. If you have a two income earning household, you can easily save more! Your expenses go down as a married couple due to a tremendous amount of cost synergies.

In 2017, my wife and I had a child and we both do not have jobs. Instead, she takes care of the baby full-time, I take care of him part-time, and I write on this website for some extra income.

What About Inflation? 

Inflation is a beautiful thing that scares people who do not understand basic economics. To put it simply, inflation rises when the economy starts to heat up, and falls or stays flat when the economy cools. People often ask, “What happens when inflation increases? We need to invest and save more or else we’ll be screwed!”

We won’t be screwed. If inflation ramps from 2% currently to 5% in the future, it means the economy is ROCKING AND ROLLING! There is too much money sloshing around the system, and demand is too great, causing prices to rise.

When prices rise your dividend income, interest income, rental income, and real assets rise. This is why all of you must aggressively invest and accumulate real assets like real estate. 

Why I Saved So Aggressively For So Long

If I wasn’t whipped so hard my first two years out of college, I would never have saved so much. Thank you sir, may I have another!  I worked for a firm that made me get in at 5:30 am every morning and have me stay until 7:30pm on average every evening. Some evenings, we went to 10:30 pm, which was brutal.

Furthermore, I constantly had to work at least 5 hours a weekend, leading to a total time spent of roughly 75+ hours a week. I gained 20 lbs, was constantly under pressure, and was generally pretty stressed. Despite the pain, the one thing I knew was that if I could just get through these first two years, I would be set.

Given the difficult experience right out of school, I swore to myself that I would save like a maniac to have the optionality of retiring early if I wanted to. I NEVER wanted to go back to that situation again. To be able to have the freedom to answer to no one is priceless. Hence, saving 50-75% of my after tax income is such a bargain for priceless!

Take advantage of higher savings rates thanks to the Fed raising rates since end of 2015. You can get a high interest savings rate from CIT Bank for at least 1.8% nowadays. That’s pretty great compared to just 0.1% several years ago

Developing Passive Income Is Important

Finally, not only must you save aggressively, you most also build passive income through various risk-appropriate investments. Passive income is what will allow you to retire comfortably and not constantly worry whether you made the right financial move.

Here is my latest passive income for 2019-2020 that has allowed me to take care of my baby boy and be with my wife at home full-time.

When I left work for good in 2012, I was generating about $80,000 a year in passive income. $80,000 was enough for me and my wife to live somewhat comfortably, but I decided to ramp the passive income up to $200,000 in order to take care of a family.

About the Author: David worked in investing banking for 13 years at GS and CS. He received his undergraduate degree in Economics and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income boosted by his investments

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