![]() money mustache full article: mrmoneymustache 2012 01 13 the shockingly simple math behind early retirement how does ea. it details how frugality is able to slash the time it takes to reach financial independence (fi). money mustache articles is the “shockingly simple math” post. The shockingly simple complicated random math behind saving for early retirement one of my favorite mr. 70 % savings rate chart portfolio target value a household with an income of $ 50,000 and an annual spending of $15,000 needs to target a portfolio value of $ 3,75,000 for early retirement. Shockingly simple math 70% savings rate with an income of $50,000 per annum at a 70% savings rate, so the annual contribution would be $35000 per year. i take $50,000 and subtract 15% (the irs cut) and get $42,500! i think my expenses this year will dip into the high 30’s because i soon won’t have a car payment anymore (yeah, yeah). i take $1,000,000 x 5% (income produced from nest egg) and get $50,000. My goal for early retirement is a nest egg of $1,000,000. Try Early Retirement as Easy as Pie for further reading.The Shockingly Simple Math Behind Early Retirement Mr Money Mustache The more you invest, the faster you’ll get to the sufficient retirement investment amount. We can then compute how long it will take to accumulate a sufficient retirement investment by using the compound interest formula. Given a safe withdrawal rate of 4%, we get the following. That’s how we get to the sufficient retirement investment. In order to cover living expenses without depleting your money (retire early), you need to have enough invested so that the money you withdraw at the safe withdrawal rate covers your living expenses. Sufficient retirement investment: the amount of money you need to be able to withdraw at the “safe withdrawal rate” and cover all living expenses. Current annual expenses are the same as your future annual expenses! Food, clothing, shelter, entertainment, travel, gifts, electricity, transportation, etc. Living expenses: money used for everything you need to live that is not an investment. I assume you’ve invested in a low cost index fund that represents the entire stock market, or the S&P500, for example. An average return of 7% is based on this, this, and this. This is an inflation-adjusted return meaning it is lower than the actual average because it takes inflation into account. ![]() No one has ever seen this exact amount as a return because the stock market is volatile. A safe withdrawal rate of 4% is based on this, this, this, and this.Īverage return: the overall stock market return. For example, if your investments gain 7% value on average and you withdraw 3% then you are “safe” from depleting your investment if inflation is 4% or less. ![]() Safe withdrawal rate: the rate at which you can withdraw money from investments so that the the invested money will never run out, while accounting for inflation. In other words, you don’t have to actively work for it. Passive income: Income that you get for doing nothing at all. These things can be compensated for with the “amount already invested” and the “living expenses during retirement” fields. It also leaves out, for example, equity in a home. The purpose of this calculator is to be simple and to show that the most important part of reaching early retirement is the percentage of your income that you invest. It leaves out additional forms of income such as pensions, social security, side jobs, and others during retirement. You can do it earlier than usual if you make sure the money you’re living off of will never run out. Retirement is a question of having enough passive income to support you for the rest of your life. Notice that the only way to significantly affect the time to retirement is to change the percentage of income that is invested – simply making more money does not help you retire sooner! Definitions, Assumptions, Notes, Etc ![]()
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