This post reveals how you can achieve financial independence and retire in as little as ten years.
Here at Mr. Money Mustache, we delve into topics like investment fundamentals, money-saving lifestyle changes, entrepreneurial strategies for boosting income, and philosophies that turn these changes into empowering opportunities rather than sacrifices.
With endless retirement calculators, advice from countless financial experts, unpredictable inflation, and a wide variety of income and spending habits among readers, it’s easy to feel overwhelmed.
In past posts, I’ve shared my journey to retiring at 30 (see A Brief History of the ‘Stash) and explored a hypothetical retirement plan using two average teacher salaries (see The Race to Retirement – Revisited).
Yet many readers still ask:
“That’s great for you, Mr. Money Mustache, but how can I determine when I’ll have enough to retire, given my unique lifestyle?”
Here’s the simple answer: your time to retirement depends on one key factor:
Your savings rate as a percentage of your take-home pay
This boils down to two numbers:
- How much you earn each year.
- How much you can live on.
Understanding the Numbers
If you spend 100% (or more) of your income, you’ll never retire unless someone else is saving for you (e.g., through a pension or inheritance). This means your working career will be infinite.
If you spend 0% of your income (you live for free somehow), you can retire immediately. In this case, your working career is zero years.
In between these extremes lies a fascinating dynamic. As you save and invest, your money begins to grow, generating income on its own. Over time, this income grows exponentially. Once your investment income can cover your living expenses while accounting for inflation, you’re ready to retire.
The Savings Rate Graph
If we chart the relationship between savings rate and time to retirement, it forms a curved exponential graph. For example, saving 50% of your take-home pay and living on the other 50% means you’ll be financially independent in about 16 years. Increase your savings rate, and your time to retirement decreases dramatically.
To simplify, here’s a table that estimates how long you’ll need to work based on your savings rate (starting from zero net worth):
Assumptions:
- Investment Returns: 5% annual returns after inflation.
- Withdrawal Rate: 4% safe withdrawal rate in retirement, with flexibility during recessions.
- Longevity: You’ll only spend investment gains, ensuring your ‘Stash lasts indefinitely.
| Savings Rate (%) | Years to Retirement |
|---|---|
| 10% | 51 years |
| 25% | 32 years |
| 50% | 16 years |
| 75% | 7 years |
The Power of Cutting Spending
Cutting expenses is far more powerful than increasing income. Why? Every permanent reduction in spending:
- Increases the amount you can save each month.
- Reduces the amount you’ll need to sustain your lifestyle in retirement.
This double impact accelerates your path to financial independence. For example, cutting cable TV and coffee shop visits could increase your savings rate from 10% to 15%, allowing you to retire eight years earlier. Are these small luxuries worth nearly a decade of additional work?
The Formula for a 10-Year Retirement
To retire within ten years, aim to live on 35% of your take-home pay. This is roughly what I achieved during my younger years without even realizing it. While this approach may not be mainstream, it’s entirely possible if you’re committed to financial independence.
Maximizing Your Savings
If you have loans, take advantage of today’s historically low interest rates by refinancing. Platforms like Credible.com make it easy to compare rates for mortgages and student loans. Refinancing could give you a head start on your financial goals.
Tracking Spending and Optimizing Savings
To keep tabs on spending, I recommend using rewards credit cards for most purchases and automated bank debits for bills. Apps like Personal Capital or Mint.com can categorize transactions and provide visual summaries of your spending habits, making it easier to identify areas for improvement.
Final Thoughts
The path to financial independence is clear: save a significant portion of your income, invest wisely, and minimize unnecessary expenses. While this approach may seem unconventional, it’s a proven method to achieve a lifetime of freedom and security.
Keep reading, and let’s make financial independence a reality!