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How is it possible to retire early? How much do you need in the bank? When can I retire?

Shockingly Simple Math

First of all, there is some Shockingly Simple Math to early retirement, and I recommend you start where many of us started on this journey, and that’s Mr. Money Mustache’s post with that title. There, Pete Adeney (aka Mr. Money Mustache) shares in a very clear way how simple it really is to determine when you can retire early by knowing only two numbers:

• how much you make each year
• how much you save each year

You really don’t need to make it more complicated than that (but we’re nerds so we like to). If you’re not a nerd, as long as you know those two numbers, you’ll easily be able to determine how long it will take to reach your early retirement goals.

How the Baby Steps prepare you

You might be surprised (and depressed) that at the Dave Ramsey baby step 4 rate of 15% of your income going to retirement savings, you’ll be working 43 years until retirement. Depending on when you get to baby step 4, and are doing this retire early math, that can be very discouraging. I know it was for us.

We hit baby step 4 in 2007, so we would be on track for working 43 years, saving 15%, until a retirement in 2050 (30 years from now, after a 55-year working career, at the age of 75!). That was discouraging to say the least.

Thankfully, there’s a baby step 7. And it includes “building wealth.” And to us that also meant bumping up our savings rate substantially. And without a mortgage payment, you can bump up that savings rate pretty dramatically.

This is the beauty of the shockingly simple math.  There are only two numbers to be concerned about.  You can drastically affect the time to early retirement by adjusting those two (how much you make and how much you save).  If you are able to reduce your spending by being frugal, getting out of debt, etc), you can increase the amount you save.  If you get a raise, start a side hustle, etc, you can increase the amount you make.  Both of these shorten your time to early retirement.  In our case, it took our time to retire from 2050 (30 more years in a cubicle) to 2022 (2 more years in a cubicle).

If you’re like us and want to play around even more, I suggest trying one of these calculators.

One step beyond the simple math

The underlying math behind these calculators is the “4% Rule” which is based on the Trinity Study. It used complicated mathematical models called Monte Carlo simulations to predict, even with crazy events like the Great Depression, how likely it would be that you would outlive your retirement nest egg vs. eating dog food in your later years.

The 4% rule says that you can withdraw 4% of the total of your retirement accounts each year and never run out of money. This is equivalent to the 25x rule, which is just a different way of stating this. The 25x rule means that if you have 25 times your annual expenses saved, then you can continue to spend at that rate forever and not outlive your money.

Although the idea is simple, the process of getting there is not easy. That’s why you don’t see more people doing it. Here’s an example:

“What a salad taught me about early retirement.”

Forgive me for taking a moment to step up onto my soapbox.

Here’s a story from last weekend: I was at a restaurant with friends. I was trying to eat healthy. The waitress described the specials, one being a delicious sounding salad with fresh caught Steelhead, caramelized walnuts, apples, and Gorgonzola. That sounded healthy and delicious, so I ordered it. A few minutes later she corrected that they were out of the Gorgonzola and would I be okay with a substitution of feta or Parmesan. I was bummed. I am a certified stinky cheese fan, and feta or Parmesan just didn’t make the package I was looking forward to. 

In that moment, I re-evaluated my healthy eating endeavor and my eyes drifted over to a cheeseburger with fries that had the option to add a fried egg and bacon on top. I almost gave up my healthy eating goal and go “whole hog,” so to speak, over a minor change in cheese plans. 

I find that the same thing happens in personal finance. We know that saving money (eating a salad) is the wise choice even if it’s hard, but when the smallest of obstacles presents us doubt, we may bail out on it even though we know it’s the right thing to do. I’ve seen this take a few different forms:

• “I can’t do that because of, well, the Great Depression. What if that happens again?”
• YOLO – “I’m not willing to give up or delay satisfaction today for the future.”
• That’s great if I had started saving in my 20s but I’m so far behind and 43 years to retirement is so long, I’ll never get there so I might as well not even start.

Saving for retirement, and even more so early retirement, is a marathon, not a sprint. It takes disciplined effort over a long time (that’s how compound interest works). That’s why early retirement is not so common.

It’s so easy to get derailed. I wish I had an easy answer for how to consistently pick the salad instead of the burger, but it’s called personal finance because it’s personal and different for everyone. I’ll share some of our tips and tricks through this blog, but they won’t work for everyone.

All I can say is that the math works. It is achievable. We’re doing it! Run the numbers, find out what works for you, and start making the choices that will get you to your goals. If you have any questions about how it works or our journey to early retirement, feel free to reach out. You’ve got this!

And, yes, I still ordered the salad…