Jan 13, 2012 162 comments

The Shockingly Simple Math Behind Early Retirement

This is the blog post that shows you how to be wealthy enough to retire in ten years.

Here at Mr. Money Mustache, we talk about all sorts of fancy stuff like investment fundamentals, lifestyle changes that save money, entrepreneurial ideas that help you make money, and philosophy that allows you to make these changes a positive thing instead of a sacrifice.

In addition, the Internet presents us with retirement calculators, competing opinions from a million financial advisors and financial doomsayers, unpredictable inflation, and a wide distribution of income and spending patterns between readers.

I reviewed my own path to age-30 retirement in “A brief History of the ‘Stash“, then I did a hypothetical calculation using two average teacher salaries to show how long it would take them to retire in “The Race to Retirement – Revisited“.

Because of this torrent of information, people tend to become overwhelmed and say things like,

“Yeah, good for you Mr. Money Mustache, but how can I possibly know when I’ll have enough to retire myself, with a completely different lifestyle?”

Well, I have a surprise for you. It turns out that when it boils right down to it, your time to reach retirement depends on only one factor:

Your savings rate, as a percentage of your take-home pay

If you want to break it down just a bit further, your savings rate is determined entirely by these two things:

How much you take home each year

How much you can live on

While the numbers themselves are quite intuitive and easy to figure out, the relationship between these two numbers is a bit surprising.

If you are spending 100% (or more) of your income, you will never be prepared to retire, unless someone else is doing the saving for you (wealthy parents, social security, pension fund, etc.). So your work career will be Infinite.

If you are spending 0% of your income (you live for free somehow), and can maintain this after retirement, you can retire right now. So your working career can be Zero.

In between, there are some very interesting considerations. As soon as you start saving and investing your money, it starts earning money all by itself. Then the earnings on those earnings start earning their own money. It can quickly become a runaway exponential snowball of income.

As soon as this income is enough to pay for your living expenses, while leaving enough of the gains invested each year to keep up with inflation, you are ready to retire.

If you drew this “savings rate” story into a graph, it would not be a straight line, it would be nice curved exponential graph, like this:

Working years vs. Savings Rate (screenshot from networthify.com)

If you save a reasonable percentage of your take-home pay, like 50%, and live on the remaining 50%, you’ll be Ready to Rock (aka “financially independent”) in a reasonable number of years – about 16 according to this chart and a more detailed spreadsheet* I just made for myself to re-create the equation that generated the graph.

So let’s take the graph above and make it even simpler. I’ll make some conservative assumptions for you, and you can just focus on saving the biggest percentage of your take-home pay that you can. The table below will tell you a nice ballpark figure of how many years it will take you to become financially independent.

Assumptions:

You can earn 5% investment returns after inflation during your saving years
You’ll live off of the “4% safe withdrawal rate” after retirement, with some flexibility in your spending during recessions.
You want your ‘Stash to last forever, you’ll only be touching the gains, since this income may be sustaining you for seventy years or so. Just think of this assumption as a nice generous Safety Margin.

Here’s how many years you will have to work for a range of possible savings rates, starting from a net worth of zero:

It’s quite amazing, especially at the less Mustachian end of the spectrum. A middle-class family with a 50k take-home pay who saves 10% of their income ($5k) is actually better than average these days. But unfortunately, “better than average” is still pretty bad, since they are on track for having to work for 51 years.

But simply cutting cable TV and a few lattes would instantly boost their savings to 15%, allowing them to retire 8 years earlier!! Are cable TV and Starbucks worth having two income earners each work an extra eight years for???

The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a double effect:

it increases the amount of money you have left over to save each month
and it permanently decreases the amount you’ll need every month for the rest of your life

So your lifetime passive income goes up due to having a larger investment nest egg, and it more easily meets your needs, because you’ve developed more skill at living efficiently and thus you need less.

If want to retire within 10 years, the formula is right there in front of you – simply live on 35% of your take-home pay**, which is approximately what I did without even realizing it during my own younger years. The only reason Mustachians will remain a rare breed, is because this article will never appear in USA Today. (Or if it does, people will be too busy complaining about how it can’t be done, rather than figuring out how to do it)

So keep reading, since this blog is all about making financial independence happen!

An MMM-Recommended Bonus as of August 2021:

If you have a mortgage or student loans, the current lowest interest rates in history (like mortgages for 2.9%!) could provide you with a pretty big head start. Check out Credible.com (NMLS No. 1681276) for surprisingly efficient and user-friendly (and free) comparison of refinancing rates on both home and student loans.

Student loans click here ($500 – $1000 bonus for MMM readers, only until about August 20th!)

Mortgages click here
(See their mortgage disclosure here)

note – Credible has now joined the short list of approved MMM affiliates, see more info here if you are curious how I handle them.

*If you want to play with the (rather basic) spreadsheet I made to generate this table, you can download it in OpenOffice format (.ods) here: Retirement Savings vs. Years

** definition of take-home pay: gross income minus all taxes. Remember to add back in any 401k or other savings deductions to the paycheck you see, since these are really part of what you are “taking home” – you just happen to be saving it automatically.

Note on how to track spending: we do almost all spending using the best rewards credit card I can get my hands on, and the rest by automated bank debit (checks or cash only for things that strictly require it, like Craigslist purchases). So at the end of the year just need to review the online statements for card and bank.

Recently this has been revolutionized by apps like Personal Capital or Mint.com. Same basic idea, but it lets me see up-to-the-minute spending that is automatically categorized into nice pie charts, etc. If a figure looks surprisingly high, you can click in to see the detailed transactions in the various accounts that were added together to make that category. Quite futuristic.

(note that this blog earns affiliate income from some companies mentioned herein – see my affiliates policy)

Previous Post: Getting Started in Carpentry – Tools of the Trade Next Post: Exposed! The MMM Family’s 2011 Spending!

Want More?

Gerard January 13, 2012, 6:31 am

I like the simplicity of this. And as usual, the number of work years saved through small lifestyle changes boggles the mind.

Obviously it’ll be messier in real life for many of us… in my case, I’ll spend much less in retirement than I do now, because it costs me money to work, and I’ll retire to a cheaper city.
- GamingYourFinances July 6, 2013, 11:48 pm
  
  I agree, I love this post, its been specifically bookmarked and I visit it weekly. There is something very reassuring about the simplicity of the math.
  
  It’s amazing how small changes can drastically impact the number of years I need to work. It’s extremely motivating!!!
  
  I made many small tweaks to my lifestyle after this post. Each one worth less than 0.5% of my income, but together they’ll help me avoid +5yrs of work! Thanks MMM!
  - Free Money Minute February 24, 2014, 11:54 am
    
    Visiting the page every week as a motivator is a great idea! Small changes are good, lots and lots of small changes are even better.
- theFIREstarter February 21, 2014, 12:51 am
  
  Hate to be pedant but I ran the numbers and found that your explanation of how to calculate savings rate is a teeny bit misleading given there are all of these tax advantaged savings accounts out there.
  I’ve gone through it all in detail here:
  
  http://thefirestarter.co.uk/calculating-savings-rate/
  
  But if you want the short version, if you using a 401k or anything like that, you should ignore your “Take home pay” which is in contrast to how you describe it above and do the following calculation instead:
  
  S.Rate = Total Savings / ( Total Savings + Expenses ) * 100
  
  Total Savings is every single penny that has gone into a savings or retirement account, whether you have saved into a 401k or any other tax wrapper, including all employer matches, and obviously all taxed accounts as well.
  
  This does not change anything about the percentage savings vs years till FI part of the post seeing as that percentage is already doing this calculation for you effectively, just with ratio’s of fractions that add up to 1, instead the hard $$$ numbers.
  
  Hope that helps anyone as I was a bit confused at first when I was calculating my savings rate!
  - Matt May 30, 2014, 7:02 am
    
    Hi there,
    
    Isn’t this taken care of by the second footnote:
    ** definition of take-home pay: gross income minus all taxes. Remember to add back in any 401k or other savings deductions to the paycheck you see, since these are really part of what you are “taking home” – you just happen to be saving it automatically.
    
    It says that you have to add back any deductions to your take home pay. If you do it correctly, your pay becomes equal to the denominator of your formula. I’ve checked my own spreadsheet to be sure, and I get the same answer whether I use your formula or a notional salary that’s the sum of take-home + deductions.
    
    Note that I include employer match as well. Perhaps MR MM could have been clearer on this point.
    
    All that said, I thought your post was very useful as the reader will REALLY grasp the concept after reading it! There’s a lot of confusion out there on this topic.
Joe O. January 13, 2012, 6:35 am

Great article. I love the “math” behind retirement.

Nords did a similar post with the math behind early retirement here:
http://the-military-guide.com/2011/01/03/how-many-years-does-it-take-to-become-financially-independent-2/

I’d suggest anyone who liked this article go read that one, as it digs into it even just a tad more (the math at least, with an equation and such, rather than just a chart).

I even hacked together a crude spreadsheet to do all the calculations on early retirement for you, given a set of assumptions (saving rate, spending rate, rate of return). It’s posted at the bottom of Nord’s post, and is also here:
https://spreadsheets.google.com/spreadsheet/ccc?key=0Av7xbSQj85XWdDlVZHpUUEkxd2xraFI3ekc0VlVEM3c&hl=en_US#gid=0

You can save your own copy to change the numbers.

MMM, feel free to post it in this post too if you want, or even improve on it and post it. MMM readers like spreadsheets, so I think some people will enjoy playing around with it.

I sure have fun playing with numbers. “HEY! I only need a 200% return for 3 and 1/2 years in a row to retire!” lol
gestalt162 January 13, 2012, 6:51 am

Sounds good MMM, but I’m left wondering about the 401(k) portion of the stash, which indeed accrues earnings, but can’t be touched until you’re 60. What if that is a major portion of your ‘stash?
- No Name Guy January 13, 2012, 1:02 pm
  
  There are ways to tap a 401k / IRA. Fist off, when you retire, roll the 401k to an IRA. Then do a “substantially equal distribution” from the IRA. Check it out on the IRS web site. One formula is based on your age, another is like an annuity and I forget off the top of my head what the 3rd formula is. But the bottom line is you CAN tap 401k / IRA money before 59 1/2 without penalty.
  - MacGyverIt January 13, 2012, 4:05 pm
    
    A 72t can help you avoid the IRS early withdrawal penalty:
    
    http://www.72t.net/Home
    By using IRC Section 72(t), it is possible to eliminate the 10% early withdrawal penalty normally due for distributions from an IRA prior to age 59 1/2. By studying the information on this website like our 72(t) FAQ, you will be able to learn the rules that govern Substantially Equal Periodic Payment (SEPP) Plans as defined by IRC Section 72(t) and 72(q).
    - EL March 3, 2015, 8:14 am
      
      Really great that the IRS has created a loop hole in order for people to access their accounts. One thing that could complicate things is that the amounts are fixed for 5 years straight, and if you have a down year, the income payments from the portfolio might eat into your principle more than you would like or prefer. Keep on compounding.
Jimbo January 13, 2012, 6:54 am

I’ve got two comments:

Sure, 401k (and in my canadian case, RRSPs) deductions are ‘take-home’ pay, but they are hard to access before 60/65… So not that much help in the Early Retirement scenario…

And second, would you consider mrtgage payment to have a 5% return? I mean, killing my mortgage in less than 10 years is my main financial goal (we are already down 7% in less than 8 months…) but this won’t bring me any dividends… It’ll just lower my expenses… (unless I buy another house and rent the current house…) So in a Growing your dividends point of view, I am unsure of my own strategy…

Thanks for the posts!
- Jimbo January 13, 2012, 6:55 am
  
  I should specify that my mortgage rate is 3.9% right now, thanks to the ultra low interest rate days we are livinig in…
- Jeff January 13, 2012, 6:58 am
  
  Your mortgage payment has a 3.9% return. That’s not where you should invest your money if, according to MMM, you’re going to make over 8% elsewhere this year.
- Jeff January 13, 2012, 6:59 am
  
  Your mortgage payment has a 3.9% return. But MMM is talking about 5% over inflation. Inflation was over 3%, so you need an over 8% return.
- rjack January 13, 2012, 7:00 am
  
  For the US and 401K/IRAs, you need to look at rule 72t which allow you to take early distributions:
  
  http://www.investopedia.com/terms/r/rule72t.asp#axzz1jGaOP72E
- MMM January 13, 2012, 7:07 am
  
  Reduced expenses are exactly the same as tax free dividends! And Canadian RRSPs have no age limitations on withdrawal. Even 401ks have workarounds, see the article right here on this blog: http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/
  - Jimbo January 13, 2012, 7:19 am
    
    Yes, it’s true… However, no compounding effect that would be yielded from dividends during the ‘mortgage payment’ phase.
    
    I’m kindof new to the whole maths of early retirement. The concept and principles, I do all the time.
    
    The calculations, i’m not as good.
    
    Also, have you ever tried talking to a financial advisor about this sort of strategy? You get a loooot of funny looks.
    
    People like to work during 40 year spans, I think.
    - Bullseye January 13, 2012, 8:35 am
      
      Mortgage paydown definitely has a compounding effect! Every extra payment means your next payment will go more towards principle and less towards interest. Same effect as a compounding investment.
      
      re: RRSP’s, as MMM says, you can withdraw these at any time without penalty. All you need to do is pay the taxes on them. In fact, if you structure it right, and live a low cost lifestyle, you can withdraw it all effectively tax free.
      - Jimbo January 13, 2012, 8:42 am
        
        Thanks for that! I appreciate the input….
        
        Good advice, I will keep that in mind. And i can definitely retrieve less from the RRSPs than the lowest taxable bracket – especially with the mortgage paid…
        
        Good stuff.
      - jd January 13, 2012, 11:48 am
        
        I think RRSPs are better suited for early retirees than “traditional” ones. As mentioned above, with an early retirement, low-cost lifestyle, and good planning, it is possible to withdraw (at least some of) the money with little or no tax applied.
        
        The problem with RRSPs that is not always understood is that when you turn 71, you are required to convert to an RRIF, and minimum annual withdrawals apply. These withdrawals (currently 7.38% at age 71, rising to 20% by age 94) can push your annual income into higher tax brackets and cause reductions in other benefits (like OAS).
        
        My plan is to withdraw at least $5k per year from my RRSP and move as much as possible into my TFSA. Actual amounts will vary depending on how much other income I make and tax deductions that apply each year. By doing that, I will keep the same amount of capital working for me, while reducing my future tax liability.
      - Bullseye January 13, 2012, 12:01 pm
        
        The OAS clawback is not really an issue most Mustachians would worry about, I imagine, as it doesn’t begin until $67k annual income in retirement.
        
        A bigger issue the Old Age Credit, worth 15%, or even GIS, if you’re truly living the low cost lifestyle. Best to kill that RRSP before 65!
        
        Agree that RRSP’s are a fantastic tool for early retirees. By retiring pre-65 and keeping withdrawls low, you essentially game the system. Especially if you are high income pre-retirement. I could forsee a situation where an extreme early retiree could end up with a negative net income tax burden on a lifetime basis.
    - Dragline January 13, 2012, 10:42 am
      
      Actually, it is pretty much the same, since you could take the money you are not paying on the mortgage and invest/compound it elsewhere.
      
      To give a concrete example, if your mortgage payments are $10000 per year and your marginal tax rate is 20%, you have to earn $12000 to pay that mortgage, although you may be able to deduct a portion. You will still have to earn more than $10000 to actually have $10000 to spend (on anything).
      
      If you don’t have to pay the $10000 (or whatever), you can invest that in whatever you want, which will be compounded over time.
      
      While you are paying down the mortgage, every extra principal payment gives you essentially a risk-free return on that amount of the mortgage rate. To compare that to a comparable rate in the market, you compare it to a t-bill. T-bills today pay essentially nothing now. So if your mort rate is 3.9%, by paying it down, you get a risk-free return of about 3.9% over what you can get in the market. That’s a really good deal. And that doesn’t even include the fact that the rate should be grossed up by your marginal tax rate, so if that’s 20%, your effective rate is getting close to 5% — risk free (minus deductions of course).
      
      But you say, I can make 8% in the market. Shouldn’t I do that instead? Actually, you can make even more if you are willing to take more risk — maybe 12% lets say on some leveraged reits or something. The correct strategy in this scenario is usually a barbell. For example, if you had $10000 to invest, instead of investing the whole thing at an expected 8%, you take 2/3 and invest it at an expected 12% and use the other third to pay down the mortgage. You would have the same expected return, but with less risk.
      
      So the answer to “Do I pay down the mortgage or invest the money?” is often just “yes.”
      - BDub January 13, 2012, 11:45 am
        
        Your math is wrong: you need to earn 12.5K gross to net 10K at a marginal rate of 20%. You can’t simply multiply your net x rate to get your tax owed. You need to divide your net by (100%-rate). I know this doesn’t change the gist of your post but the math error can add up significantly at higher tax rates.
        
        For me, my mortgage isn’t even part of the investment equation. I simply have a goal of having it paid off when I retire and I base my extra payments on that goal. Unless you plan on selling your home to pay for retirement, it should not be in your investment equation.
      - Ralph November 13, 2013, 4:43 pm
        
        Don’t forget that the property grows in value (at least in theory). While the investment shows an obvious compounding effect. The property does too. By the growth in property value and the savings in rental expense. In the early years of a mortgage, the house is highly leveraged so the compound growth rate can be quiet large if the house grows at any significant rate at all. Of course the leveraging is eliminated as the mortgage is paid off but so is the risk of foreclosure.
  - Sean January 13, 2012, 10:51 am
    
    Yes, reduced expenses are like tax free dividends, and this makes the mortgage case a bit more complicated, because as the saying goes, “you have to live somewhere.”
    
    It may not strictly be the most efficient thing to pay down your mortgage early. This is especially true because mortgage interest is deductible.
    
    But once it’s paid off, you have permanently wiped out the largest expense in most people’s lives. Also, many states have laws that protect primary residences from lawsuits and debts from other sources. If disaster strikes and you lose everything, you’ll still have your home as long as you can cover the property taxes. If you have a mortgage when disaster strikes, on the other hand, you’ll lost your home along with everything else.
    
    A paid-off home is thus a tremendous source of life-long security. A better way to value it is to pretend to charge yourself rent. That’s your tax-free dividend.
    - jlcollinsnh January 16, 2012, 5:32 pm
      
      you don’t have to pretend, you are charging yourself rent in the form of opportunity cost.
      
      If your paid off house is worth 100K and you could earn 8% on that money elsewhere, your rent is $8000 per year.
      
      5% earn potential = $5000, etc.
      - Dougie944 July 28, 2013, 9:49 pm
        
        I have read many articles about people that have lost/spent massive amounts of money. I don’t remember one of those articles where their house was paid off. They always carried a mortgage. I suspect they were all told their money would be better served in other investments, rather than in their house.
        
        Take the security that comes with a paid off house and save other money to invest.
  - Gypsy Geek January 13, 2012, 12:23 pm
    
    One work-around for 401ks if you don’t want to use the 72t rule (*) is taking out the money out in retirement even if you incur the 10% penalty. This only works for high bracket families, but think about it this way… Say you are in the 33% bracket. If you plan to live with say $35,000 a year in retirement (which any Mustachian can do!), you will basically be in the 10% bracket (couples exemption + standard deduction has you in the 10% bracket). Even if you start taking money out with the penalty it’s 10% + 10% (20%). 20% is a lot less than having had paid 33% during your work years.
    
    So, for (Mustachian) families in a high tax bracket that expect to retire early, it makes sense to put in the 401k max even if you don’t need it, because 20% is a lot better than 33% :).
    
    (*) Taking the 72t forces you to continue taking distributions even if you no longer need the income– say because you had an unusually good year due to a side job/project.
    - Alice January 13, 2012, 2:08 pm
      
      You need to add in the taxes that you need to pay on top of the 10% penalty
      - Gypsy Geek January 13, 2012, 4:00 pm
        
        I am adding the taxes… that’s the 10% bracket you will be in living as a Mustachian in retirement (income less than $35k ish). So, you pay 10%, then 10% on top of that. Your mileage may very depending on your state taxes, unless you living in the 7 states that have none.
- Dan January 18, 2013, 10:17 am
  
  I’m Canadian.
  
  RRSPs are not hard at all to access before you are 60/65. You can walk in right now and withdraw all you want.
  The only catch is you’ll pay income tax on any withdrawals. So the secret is to wait until your income is $0/yr, then withdraw $10,000 per year from your RRSPs – you won’t pay any income tax, which means you’ve got that money income tax free (because you didn’t pay any when it went in either)
  
  I’m 30, and I work for 2-3 years putting the max into my RRSPs I can, then I stop working for years and withdraw only $10k/yr . That means I get all that money completely income tax free.
  
  I’m doing it. It works great.
  - Bullseye January 18, 2013, 10:35 am
    
    This is totally possible, of course, in a technical sense, but has two drawbacks that should be noted;
    
    1 – you need to be able to live on $10k per year for those years you withdraw from the RRSP’s
    
    2 – using RRSP’s for short term arbitrage eats up contribution room permanently, meaning you won’t be able to ever accumulate long term savings in an RRSP
    
    Both of these are workable problems, if you plan for it, though.
    - Dan January 18, 2013, 10:40 am
      
      Absolutely, good points.
      
      1. Well, I have other savings outside the RRSPs to live on because I keep hitting my contribution cap, so I’ll live on around $15k-$20k/yr for those years.
      
      2. Very true. I don’t see the value in keeping money in RRSPs long-long term, I think of them more like an income-tax avoidance technique, so it’s working well for me.
rjack January 13, 2012, 6:55 am

I used to only pay attention to the earnings side of the equation – I wanted to make enough money so that I could save more. However, after reading ERE and MMM, I’ve recently spent more time on the spending side of the equation and I’ve been shocked by the impact on my time to retirement (I plan to retire later this year!). Reducing spending gives you the double whammy of saving more in the short term and needing less money in the long run to retire.
- Jeff January 13, 2012, 7:02 am
  
  Completely agree! Cutting down on spending is better than making more money when you consider the tax implications. If you earn an extra $1,000 in a year, it’s really more like $850 after taxes. If you save $1,000, that’s like earning an extra $1,176!
  - Ericka October 21, 2013, 7:20 pm
    
    Light bulb moment! Thanks, Jeff. You some how made this theory so clear for me. I’m a new reader and was getting a little bogged down with the mathematics of it all. :)
- drewstees January 13, 2012, 7:30 am
  
  Totally agree with you, rjack. I was the same way. Most people focus on earning more, and unfortunately this also often results in spending more. I recently saw this XKCD comic over on the reddit FI forum, and it really bugged me as anti-Mustachian, on multiple levels: http://xkcd.com/947/
  
  To add to your comment, I’m a fan of FIREcalc (http://firecalc.com/), and it’s amazing to see what a powerful effect your spending has on the calculation.
Jeff January 13, 2012, 6:57 am

Inflation for 2011 was over 3%. Do you really think over 8% ROI is a conservative assumption for a portfolio? A 30-year treasury doesn’t even beat 3% right now.

In my mind, the math is much simpler than percentages. You need a source of revenue that doesn’t fluctuate as much, and you need that revenue to exceed your cost of living. Rental properties seems to be the way forward for me. I just bought my first foreclosure and am fixing it up now. I estimate I only need about 10 financed properties to retire (5 owned outright).
- MMM January 13, 2012, 8:13 am
  
  Jeff:
  
  Wow, that 3.4% inflation number did surprise me for 2011. Then again, the -0.4% number surprised me for 2009 as well: http://www.usinflationcalculator.com/inflation/historical-inflation-rates/
  
  I’m not going to argue about forecasts for inflation or stock market returns, because those factors are very small compared to SAVINGS RATE, which is the whole point of this article.
  
  But I will point out these three things:
  
  – Pessimism about market returns is unusually high due to the Great Recession and the irrational human recency effect right now. Everyone thinks there will be no more economic growth, forever. Historically, that’s usually a good sign that economic growth is about to go ABOVE AVERAGE for a few years. Don’t bank on it, but also don’t follow the crowd!
  
  – You are interested in rental houses: these will easily beat 5% returns after inflation: the house itself keeps up with inflation (or beats it if you happen to buy right after a housing crash – HINT!), and the rent returns after all costs can be above 5% if you buy well.
  
  – There is plenty of safety margin in other areas of my calculations (much like Gerard pointed out – your expenses can drop after retirement). Much more than the nitpicking over stock market returns and inflation.
  
  All I’m saying is, “If one adopts a Mustachian lifestyle and follows this chart, one will be Absolutely Fucking Fine” – so no more busting my balls over tiny percentages! ;-)
  - Benoit Essiambre January 18, 2013, 10:08 am
    
    I understand that savings rate is important but rate of return is also important and certainly not a nitpick. As shown on your graph, at a 30% savings rate, the difference between 1% and 10% returns is about 30 years of work.
    
    10 Year treasury yields, which are a predictor of upcoming market performance are at a record low right now. There are certainly reasons to be concerned. http://0.tqn.com/d/bonds/1/0/8/-/-/-/10-Year.jpg
    - Mr. Money Mustache January 21, 2013, 8:49 am
      
      Aha.. but you’re looking at this moment (markets at an all-time high, interest rates all-time low) as if it were a permanent condition.
      
      For people retiring right now with an all-stock portfolio and living expenses barely covered by a 4% withdrawal rate, I would say “yes, be careful and be sure you have a safety margin like the ability to rent out a room in your house or work part-time sometime in the future”.
      
      For people part way through right now, I would say, “If you are in the US, use the low interest rates to lock in a profitable (10%+ gross annual rent) rental property and manage it yourself”.
      
      For people just beginning, I’d say “invest in stocks and use a split asset allocation (stocks, bonds, other) so you have something to automatically shift into stocks in the inevitable stock market crashes we will see in the coming 10-20 years. It is during these crashes that we get better deals on stocks, meaning higher dividend yields and lower prices measured by P/E 10.
  - chubblywubbly February 19, 2013, 5:12 pm
    
    If one adopts a Mustachian lifestyle then one will indeed be fine. The rub is that it is not easy to change habits especially when one is surrounded by non-Mustachians.
    
    Self-discipline is a must.
Will January 13, 2012, 8:05 am

Thank you for the extremely concise breakdown on this point. This is one of my favorite charts in the ERE book and I think it’s perfect for illustrating this.

@rjack and Jeff, I was in the same boat for a long time, only focused on earning more. I overlooked the very important point you both made. A penny not spent is a penny saved for all intents and purposes.
- Jimbo January 13, 2012, 8:19 am
  
  a penny not spent is (almost) 1.5 penny earned, due to my high level of taxation. (I’m not super rich, I am just Canadian). Calculating this with your level of taxation is a great way to get thrift motivation.
  - mugwump January 13, 2012, 8:42 am
    
    Love the remark “I am not super rich, I am just Canadian”. In terms of health care costs, Canadians are super rich by U.S. standards.
    
    One thing I would like to caution super-early retirees on is to allow some slack in your budget for increased health expenses as you get older. It’s easy for a thirty-something to assume they will maintain a superior lifestyle and stay healthy. But life has a way of catching up with you, and who wants to face having to go back to work when you’re not well?
    
    One of the reasons I love this blog is MMM’s concept of the safety margin. A generous safety margin should cover most such contingencies.
  - Canadian Dream January 13, 2012, 8:55 am
    
    I’m Canadian too and I have to agree with mugwump. Yes we pay higher taxes, but don’t underestimate the cost savings for health care. My first son came 10 weeks early and easy would have cost us over $500,000 in the US (two rounds of brain surgry). In Canada, my cost were easily under $5000.
    
    I pay my taxes with a smile on my face and plan my retirement knowing I’ll be looked after for basic health issues.
    - Des January 13, 2012, 3:05 pm
      
      I’m not defending our system, and I agree that you shouldn’t underestimate the cost savings for healthcare, but don’t overestimate it either. Most health insurance plans in the US have out of pocket maximums around $10k per year. If your increased taxes are roughly equivalent* to an insurance premium, your savings for that tragic event were just over $5,000, not $495,000. Not saying what you’ve got isn’t better, just saying it isn’t as scary to live here as some of our northern neighbors seem to think. I’d rather pay $5k than $10k, but $10k doesn’t keep me from sleeping at night like $500k would.
      
      *It goes without saying, but that is a very very very rough guess, as it would of course be highly dependent on your income, obviously.
  - Nerode January 13, 2012, 4:54 pm
    
    Are you perhaps being slightly hyperbolic here? As another reasonably well-paid Canadian. my marginal income tax rate is 36%, with an additional $3150 for CPP/EI. Sounds painful, and seems to illustrate your example rate.
    
    However, my net tax rate (all income-related taxes/CPP/EI, no sales taxes) for the last few years has floated around 16%. For US readers, remember that includes health care.
    
    And remember too, the more you save into RRSPs, the lower your net tax rate becomes.
Heather January 13, 2012, 8:54 am

BMO bank in Canada just cut the 5 year mortgage rate to 2.99%. MMM suggests 5% after inflation is a reasonable amount to expect from investment. Canada’s inflation rate is around 3%. It just doesn’t add up.
Do the banks make so much off of extra hidden fees, that they are actually making the equivalent of 8% on the mortgages? If invested money was worth 5%+inflation, that’s how much the banks would have to charge us to borrow it, no? If not, why not?

My own so called “balanced” RRSP investments were barely keeping up with inflation over the past 10 years, and are probably below at the moment.

This conflict leaves me gridlocked into inaction. I leave my RRSPs in the hands of my seemingly poor investment advisor, because I don’t trust that the grass is really greener elsewhere.

No wonder people spend crazy amounts of money on houses. At least you can see your money. But we all know there’s a Canadian housing bubble burst looming, so I’m not keen to do that myself.

Perhaps financial pessimists are doomed to financial mediocrity.
At least I’m relatively thrifty by nature.
- MMM January 13, 2012, 9:09 am
  
  Heather – banks are complicated businesses, and they get to employ leverage on your deposits to get greater returns, plus they have various consumer fees, consultancy and brokerage stuff, and other profit streams. Go look at CIBC’s annual report and find what their actual “Return on Invested Capital” is. I haven’t looked myself, but for most profitable businesses, this is nowhere near 3% – it’s more like 8% or higher.
  
  In the S&P500 index, the median ROIC is around 7% and the market-weighted average is actually over 17% because some big companies that are not capital-intensive (like Apple and Microsoft) make loads of profit relative to their invested capital, skewing the average upwards.
  
  Here’s a much more exciting and practical example: Guess what the dividend yield on CIBC stock is right now? 4.57%. Buy stocks like that, and the stock price will on average keep up with inflation or greater, plus you’ll get 4.57% to take home every year as well.
  
  You are correct – financial pessimists ARE doomed to mediocrity. This is still pretty good, because most people are financial illiterates, meaning they are doomed to the even lower level of Shitocrity.
  
  But with optimism and armed with just conventional knowledge, anyone can do better than inflation. It’s the simple idea behind owning a business (either a real business, or rental houses, or a business through stock ownership which pays dividends). I’m not a genius, nor am I unusually lucky, but I do expect to continue to make several percent above inflation on my investments on average!
  
  And again, don’t use the last 10 years as a representative sample – that is just as bad as using 1990-1999 as a sample (20% annual gains or whatever).
- James January 15, 2012, 12:13 pm
  
  It might be more clear to simply realize that the money banks lend didn’t exist before it was lent. Say a bank loans me $200,000 for a house, they might only have as little as $20,000 of that actually on deposit from other customers. So if they make 3% on the $200,000, then they are actually making 30% on the $20,000 that was used to create the rest of the money. Makes you want to go into banking doesn’t it… :) It’s obviously very complicated like MMM said, but the simple idea that banks create money with loans (and in other ways) is something we all need to be aware of, since this is fundamental reason the financial crisis is so extreme.
qhartman January 13, 2012, 8:59 am

Kudos for putting the spreadsheet out in OO format. Might want to include links to OpenOffice (and LibreOffice, which I prefer these days) for those that aren’t familiar with the software.

In fact, that would be a possible topic for another post, “The Mustacian Computer User”, getting good quality Free software. I’d be happy to help you with it if you think it’s a good idea. That sort of thing is right in my wheelhouse.
Bullseye January 13, 2012, 9:10 am

I’m quite familiar with the concepts discussed here like SWR, years to retirement, etc, but one issue I struggle with is that most early retirees essentially have two financial life phases to deal with, and that is rarely addressed. One being the early retirement part where you are on your own, and the second being the traditional retirement part (65+) where your pensions are unlocked, you get senior tax breaks and discounts, and most likely social security (CPP and OAS in Canada).

I believe the way MMM addresses this is to ignore the benefits of the second part, making them part of his Safety Margin. Essentially just a bonus. That’s nice if you were two high incomes and smart enough to start early enough, but for those of us who still want to retire early and didn’t have this, how best to approach it? The standard approach of save enough till you can live off 4% plus inflation would mean years of extra working before you could retire, and likely dying with a sizable estate.

I’m considering a different approach where we save enough money to get us to 65, and then that money is gone. So instead of 4%, my calculation would be more like Required Savings = Living expenses for Number of Years Till 65. These savings would have to be invested much more safely due to the need to eat capital in the short term, and any compound interest would be my Safety Margin. We have enough saved already in locked in pensions that even if we never added another penny, we’d be able to live off a 4% SWR from 65 onwards. House would be safety margin, and if not needed, go to kids.

The problem I’m having with this approach, though, is that the amount required to cost living expenses is almost as high as just saving enough and then using 4% SWR! For example, say we wanted to retire at 45, and needed $25k per year to live. 20 years x $25k/year is $500k. I know this ignores inflation and compounding, but I think that wouldn’t change the number drastically after netting the two. If we just saved $625k instead and live off 4%, we’d have our $25k.

Am I making an errors here? Any other thoughts or comments on this?
- MikeK January 13, 2012, 11:17 am
  
  Yes! I’m in the same boat as you! Only recently came to the realization that I didn’t have to work until ‘retirement’ and could fund a ‘young age retirement’ fund that only had to last until my (near as I can tell, fully operation old age retirement fund!) kicks in.
  
  The way I’ve gone about it is to project out my income, living expenses, savings amount and expected growth rates (both ultra-conservative and conservative). I then keep cutting back the years of income until the amount in the pre-retirement fund goes to zero at age 60. By my calculations, it is just over 10 years away….though I’m still trying hard to grow my mustache. Like MMM says, cutting an expense and adding it to the savings has an amazing affect on the time required!
  
  If your interested, I could sanitize my spreadsheet and post it…
  
  mike
  - Bullseye January 13, 2012, 11:27 am
    
    I’d love to see it!
    - Bullseye January 13, 2012, 11:43 am
      
      Okay, I had a quick go of seeing how long $500k could last at $25k per year spending plus inflation of 2%. I assumed money would be invested in guaranteed products paying 2%.
      
      https://docs.google.com/spreadsheet/ccc?key=0AgEx7EZh8s8RdGNhSU9DQ2M0WG1UdW50UHRGQVh5c3c
    - MikeK January 14, 2012, 12:13 pm
      
      Wasn’t as easy to cut/paste as i thought i’d be, but I think I got most the formulas entered.
      
      https://docs.google.com/spreadsheet/ccc?key=0AhDLWD_ESOY_dFhFMmNfR3YzWWg1UEpZcWpZdWM3Wmc
Bullseye January 13, 2012, 9:22 am

Other approaches I’ve considered;

– Save a chunk of money and use a withdrawl rate of more than 4% to account for the pensions and other stuff that kicks in at 65. I’d have to do more math to find the correct safe number, but probably doable?

– ignore the SWR altogether, and just build enough assets that pay income until that income hits my $25k. Ensure that the income is inflation protected. This would mean dying with a sizable estate, but I believe it would actually mean that the required assets would be lower than other methods, if structured right. For example, say I built a $200k stock portfolio that had an average yield of 5% (easy at current prices, even with blue chips), and then purchased a $200k rental property with cash that yielded 7.5% after all costs (easy to do in the US right now, but also possible in certain Canadian cities like Hamilton or Kitchener). My total savings would only need to be $400k in this scenario, the income would grow with inflation (more or less), and all 65+ income would just be gravy
- Agent9 January 13, 2012, 1:43 pm
  
  This is the exact quandary I find myself currently in. The first question that jumps to mind, are you comfortable chasing a 5% (is this inflation adjusted?) return with your stock portfolio? When I run the numbers on my own portfolios it’s easy to calculate the assumptions on the tax-advantaged accounts but I’m having a hard time structuring the taxed account.
  
  I take a lazy portfolio approach but it’s easier with a portfolio that will start draw-downs in 30 years versus a portfolio that will start draw-downs in 5 years. Risk over 30 years can be spread out, not so with the 5 year.
  - Bullseye January 13, 2012, 2:01 pm
    
    It’s not a 5% return, but a 5% dividend yield. Many blue chips have yields around this level, and many I would consider sustainable. I wouldn’t be worrying about total return. If stock price went down, I would still get my 5% yield on the price paid.
    - Agent9 January 13, 2012, 2:13 pm
      
      Ok, so you are assuming a 2% inflation adjusted return. Other people I have been talking to are also recommending this path. The numbers are less attractive though. I’ll plug it into my worksheet tonight to see how that affects our ER scenario.
      - Bullseye January 13, 2012, 2:22 pm
        
        No, I’m assuming that dividend yield growth will roughly MATCH inflation, and income would go up every year to maintain buying power. Most solid dividend payers raise their dividend annually, as they raise prices on the goods/services they sell.
      - Agent9 January 13, 2012, 3:05 pm
        
        Dividend yield growth can not keep up with inflation if you are spending the yield each year. That’s the problem with draw-down.
      - Bullseye January 13, 2012, 3:15 pm
        
        Not sure what you mean. If I have $25k in dividends and $25k in expenses at beginning of year 1, and the companies I hold raise their dividends on average by 3%, then I have $25,750 in income that year. If inflation is 3%, then my buying power is the same as the year before. As long as the dividend increases match or exceed inflation (most increases exceed it, as there is also profit margin increases), then my $25k original buying power will always be the same.
      - Agent9 January 13, 2012, 3:28 pm
        
        Ah. I see it now. Thanks for correcting me.
      - Agent9 January 13, 2012, 3:45 pm
        
        Just did a number crunch. If your assumption is correct then in 20 years the stock will be paying a dividend of 8.7%. This doesn’t sound reasonable if inflation is still at 3%.
      - Bullseye January 13, 2012, 4:03 pm
        
        Inflation compounds as well. Something that is a dollar today costs $1.03 next year (at 3%), and $1.061 the year after.
        
        Look at the $25k of expenses in the Google docs spreadsheet I posted above so see how this works in detail.
      - Gerard January 13, 2012, 8:02 pm
        
        Agent9, I think your calculations assume that the proportion of the share’s value paid out in dividends increases every year, which (if I understand equities properly) is not what actually happens. Yes, the dividends increase by 3% or whatever, but so (usually) does the share price. A share may indeed one day pay dividends that are 8.7% of what you paid for it originally, but the ratio of dividend to (current) share price is actually semi-stable in the long run.
      - Agent9 January 14, 2012, 12:54 am
        
        Dividends as a percentage of current share price. I think I understand. Thanks for the clarification.
El Beardo Numero Uno January 13, 2012, 9:48 am

Kickass! You’ve really cut through the complexity and delivered a clear statement of the core idea of early retirement.

My personal savings rate has been 58% over the last two years, and my goal for this year is to bump that up to 70% by reducing expenses and selling off some fancy equipment that I rarely use. I see every big ticket item in my collection differently now – would I rather have this item, or the cash I could get for it? That’s worth one vacation day… etc.

Thanks a million (maybe literally) for the inspiration!
Meg January 13, 2012, 9:59 am

Thanks for the great post! I had done dozens of retirement calculations on my own, but I tend to be too “gloom and doom” with my assumptions. I’m not making 8% ROI at the moment, but hopefully it’s reasonable to assume over the long run. Using your chart and referencing my own spreadsheets, I’m now feeling much better about my chances for early FI. In 2010, I saved 47% of my take home pay. In 2011, I saved 65% (due mostly to an unexpected salary boost). I now have renewed motivation to make it 70% this year!
Geek January 13, 2012, 9:59 am

We’ll either be at 60% (GeekHubby goes back to work in corporate-land, OR earns a good salary from his business… we’re saving 20% of one income now, and we’d save all of his, which I’d expect to be close to mine) or “windfall-land” (GeekHubby sells business) within a year or two…

Nice to see I could be out of the rat race by 40 if I wanted.

Though the new job is a little too good for me to want to leave at the moment. We’ll see how I feel in a few years.
John Cheever January 13, 2012, 10:20 am

I just calculated how much I spent last year: $42,500 and change. That was a crazy figure for this reason. My plan is to retire in 10 years at 42. My goal for early retirement is a nest egg of $1,000,000. I take $1,000,000 x 5% (income produced from nest egg) and get $50,000. 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 think that the $1,000,000 goal is solid for my current lifestyle.

I currently save/invest half of my take home pay, which is awesome and I calculate I will in fact reach that $1,000,000 mark in ten years. Also, I am single but if I settle down with a special lady and am able to split costs then my financial independence will come even sooner.
- Dragline January 13, 2012, 10:45 am
  
  Even better, find a special lady with $1,000,000. ;-)
  
  Sorry, I just couldn’t resist.
  
  You have a good plan, though.
  - John Cheever January 13, 2012, 11:03 am
    
    Yes, I would be game for that as well haha! Honey, enjoy work today…I will be at home managing your $1,000,000.
Alice January 13, 2012, 10:35 am

I’m a long time advocate and practitioner of the Your Money or Your Life approach you’ve outlined. Now that I’m reaping the rewards I would suggest two big factors that influenced my results.

1. Education – Without the college degree I received via scholarship and the two Masters I earned with my employer paying for it I would have been in dead end, physically debilitating jobs or saddled with big school loans. That said, your plans should include getting and continuing with your education.

2. Health – As others have said, without the health insurance I’d had from my employer the two serious illness I had (neither preventable; childbirth complications and brain tumor) my assets would have been wiped out. Any plan needs to include some provision for catastrophe.
Marcia @Frugal Healthy Simple January 13, 2012, 12:21 pm

This was a great post. I have to admit complete ignorance on what % we are saving these days. I am going to make it a goal to figure that out for 2011, at least sometimes in the next month.

I also enjoy reading everyone else’s comments, and hope to read them in more detail when I’m not at work.
bethh January 13, 2012, 12:47 pm

That was very helpful. I’ve never figured out my total savings rate before – it never occurred to me to just add the pre-tax savings to my post-tax income amount. (duh) I track my spending so it was easy to look at my average expenses for 2011, compare it to my income, and see I’m saving 30%.

Now that I have a baseline I can work on improving my saving/spending rates!
Matt G January 13, 2012, 2:00 pm

Every student that graduates from highschool should be required to create this spreadsheet from scratch, rather than books of useless facts that can be looked up on google in less than 5 seconds.
brad January 13, 2012, 2:00 pm

The math may be too simple. This model assumes an individual is making the same amount every year. If someone starts out their career making $78k per year, and after 12 years are making $178k per year, and during that entire time are saving 40% of their income, your model states they could retire after 22 years on 60% of $178k.

Their absolute savings rate would need to to be 40% of their ending savings rate throughout their career, which would be 91% of their starting salary of $78k.

Your model works if it used average take home pay for the career opposed to using salary as a constant.
- MMM January 13, 2012, 4:10 pm
  
  Nope – your example would just mean the person could retire even earlier. You start with making $78k per year, and that’s when you set your mind to early retirement.
  
  So you start saving 60% of that. Then your income goes up, and your savings rate goes up, because you don’t go out and blow your raises on a McMansion and a Mercedes GL450. You just save 100% of your extra cashflow.
  
  But despite the incorrect pessimism, you have cleverly discovered yet another one of the amazing MR. MONEY MUSTACHE SAFETY MARGINS that I secretly build into all of my calculations. I make everyone assume that they will never get a raise. But then they do get raises. And everything ends up turning out even better than expected.
  
  Develop yourself to be tough enough for the worst, yet execute for the best. That’s the way of the Mustachian. You just can’t fail.
JJ January 13, 2012, 3:15 pm

I agree 100% with the basic premise, but doesn’t this assume that expenses are fixed and not variable. Some expenses grow more than others (healthcare). In some years, expenses will be higher due to things like college expenses for kids, etc.

Sorry if this is complainy pantsy. But what I have trouble with is the variability of expenses in the future.
- George January 13, 2012, 6:40 pm
  
  This is a linear model, and life doesn’t work in linear terms – so it isn’t really fair to expect it to perfectly match “real life”. The model expects that you are starting with a net worth of zero, and that your savings rate never changes. In reality your expenses might go up, but it’s just as likely that your income would go up – people do tend to get raises and promotions over time, and if you’re careful you can leverage those raises and promotions into an increased savings rate.
  
  This model, though, provides a good way to look at savings and some targets to strive for. Personally, I think the “be as efficient as possible and save as much as you bloody-well can” method is the mustachian ideal, if your goal truly is to achieve financial independence as soon as possible.
  - JJ January 15, 2012, 6:59 am
    
    Agree with you here George.
    
    It’s just that we’re getting very close (if not already there) where our income thrown off from our investments pays all expenses plus a little cushion to keep up with inflation. It’s just that we’re afraid to stop working while the kids are still young (for fear that our expenses will rise in the future). We’re early 40s with a 7 year old and a 5 year old. I have only a vague idea of what our expenses might be in 10 or 12 years. We probably just need more cushion.
    - pachipres January 15, 2012, 2:44 pm
      
      Hi JJ,
      My experience in having five children is that even though I didn’t want to believe it, they do get more expensive. We pay no universtiy education but we try to help them out in other ways ie. pay for some dental coverage, money towards textbooks, few clothes, track fees even in their 20’s we keep helping them out. We figure we dont’ pay any tuition so this is our way of helping them get their education. Also as they get older they start developing their own interests ie. piano lessons and hockey. I am pretty frugal but if they beg me over and over again like my 11 year old son did for two years to play hockey, then I will try to accomodate their requests. It is easy when they are 5 or 7 because they don’t seem to cost much then. Also our groceries go up because they eat alot in I find after age 10. Just my two cents here.
- Brian January 13, 2012, 10:18 pm
  
  But don’t forget, a big item in of most people’s expenses doesn’t go up: your mortgage (assuming a fixed rate product). By assuming everything increases by 3%, you have actually added MORE SAFETY MARGIN.
  - Joe User January 18, 2013, 3:18 pm
    
    read your fine print. very hard to actually have a fixed rate mortgage after 70’s stagflation. Most mortgages have a clause for consecutive high inflation quarters allowing a raise in mortgage rates.
    - Mr. Money Mustache January 18, 2013, 4:34 pm
      
      I’ve never heard of that, even though I did read my own mortgage documents back in the mortgage-having days. But mine was from a small private bank that holds its own loans. Does anyone else have information that can confirm or deny this? (For now I’m assuming we are talking about US mortgages – many other countries have never even heard of the fixed rate).
      - emiljs January 13, 2015, 3:50 pm
        
        In Denmark today, it is now possible to get a 2% fixed rate loan if you make a 20% down payment, and we have free education up to masters level, free healthcare, and preschool is subsidized by two thirds. However, we also have a world record i taxation, which makes the savings rate perspective ever so relevant.
Ed January 13, 2012, 3:17 pm

Hi MMM, love your blog. But I have a question concerning this table here: say i earn $30,000/year and i save 50%, that’s $15,000, now your table says after 17 years i could retire, that would be just $255,000, clearly not enough to retire. Am I missing something?
- MMM January 13, 2012, 4:04 pm
  
  Hi Ed,
  
  Yup, you sure ARE missing something! It’s the rewards you’ll be getting for investing your money for those 17 years. Because of that, the spreadsheet tells us that you will have about $397,000 and it will safely provide about $15,750 in annual income. And this is after adjusting all of these numbers for inflation, so the amounts will pay for roughly the same lifestyle in the future as they do today.
  
  Without the concept of money earning money, there would be no such thing as early retirement (and no such thing as rich people). Both concepts would be impossible.
  - Ed January 14, 2012, 1:25 pm
    
    ah… right, should have read the assumptions above it, sorry! Thx for clearing that up.
    It is an interesting table. Of course, meeting 5% of investment return after inflation seems not that easy, it means 7-8% return, with a risk, and since your table is based on that number as a performance, that means you have to risk ALL of your savings into that kind of return… Of course, apparently Buffett did a 25% return according to this web site http://www.zimbio.com/CEO+Warren+Buffett/articles/214/Berkshire+Hathaway+Historical+Total+Return plus they show a portfolio based on BH purchases which performed higher than the market, i suppose that is with buying at prices after the purchases by BH become publicly known. This might be an interesting place to start or combine with high dividend stocks.
Yabusame January 13, 2012, 3:23 pm

My savings percentage has taken a big hit recently. I’m at the beginning of pursuing a second career. Although the ultimate aim is to grow my income by multiples of what it was, it means taking a major cut in salary right now. I’ll get there, but it’s going to take time,
Nate January 13, 2012, 7:55 pm

You mentioned that the time to reach retirement depends on only two factors:

– how much you take home each year
– what percentage of this you can live on

If you know the percentage of your take home pay that you live on, then why does it matter how much you take home each year? It seems that your calculations are only a function of this percentage, not your take home pay each year.
- MMM January 13, 2012, 8:24 pm
  
  BAH!! You are RIGHT! I tried to make it sound as simple as possible, but yet you have simplified it even further. Early retirement is now 50% simpler than it was even this morning!
  
  Thanks for the correction, I just updated the article.
Fishingmn January 14, 2012, 10:26 am

My only concern is that there are some articles coming out that the SWR assumption of 4% may not be conservative enough. Recently updated studies using the last few turbulant years have cast doubts about it and suggested numbers as low as 2.5%.

If the Safe Withdrawal Rate declines to even 3.5% it throws these assumptions off by a good margin.
- MMM January 14, 2012, 3:57 pm
  
  I understand the desire to be conservative, but I would still totally disagree with the idea of going for an even lower SWR.
  
  If anyone doesn’t believe me, go read the “Safety Margin” article and think carefully about the layer after layer of safety margin that is already built into my assumptions for this table:
  – no income at all for the rest of your life
  – no windfalls or inheritances
  – constantly increasing spending according to the CPI (no further increase in frugality skills)
  – no social security
  – no drawing down of your principal
  
  What I’m trying to encourage people to do with this article is this: FIRST get to the point where you can easily live on a small fraction of your take-home pay, and you have enough savings that you could theoretically live off of the proceeds at a 4% withdrawal rate. You have a nice low-cost lifestyle with a wide variety of useful skills, and you’ve read lots of books on investing and other subjects.
  
  THEN, try to tell me you are still afraid to quit your job.
  
  If you worry about “will it be enough to retire?” before you even have the savings and the frugality skills to get to that point, you are putting the carriage in front of the horse.
  - Fishingmn January 15, 2012, 7:29 am
    
    Well – I certainly hope 4% is right too since that’s what I’ve been basing all my assumptions on. 3-5 years and I’m there!
- Ari April 22, 2012, 12:03 pm
  
  It’s important to realize where the “4% Rule” comes from. It came out of research (the “Trinity Study”) into safe withdrawal rates for a traditional 30 year retirement. It might surprise you to learn that many of the portfolios studied did not even last that long! The single biggest risk that retirees face is longevity risk.
  
  This article discusses the applicability of the 4% rule to early retirement in some detail:
  
  http://arilamstein.hubpages.com/hub/The-4-Rule-and-Early-Retirement
Dividend Mantra January 14, 2012, 5:50 pm

MMM,

Thanks for this old-fashioned “numbers don’t lie” look at what it takes to retire early. Your spreadsheet and chart simply reinforce what I already knew. I started my journey to FI at 28 and plan to reach it by 40. I saved 60% of my net income for the full year of 2011, which puts me on a 12 year trajectory…exactly what I had figured.

Good stuff. Best wishes!
pachipres January 15, 2012, 2:37 pm

Loved this article. But what I don’t get is how do we account for a safe 4% when the markets have done so poorly recently. I worked our stash out and all we made this year was 2.3% and our investment advisor tells us that this is better than some other portfolios. I am very new to learning all about investing and ERE, so can somehow help me out here. Am I missing something?
Makee January 16, 2012, 6:31 pm

Hi Mr. Money Moustache! I stumbled onto your blog via Early Retirement Extreme. I’m a 20something professional living in a Third World country (which makes it harder, but also more imperative, to save). Recently I’ve been finding it harder and harder to justify to myself why I’ve been saving 50% of my salary since I started working about three years ago, especially when I see my colleagues and friends buying new stuff, going on foreign trips, and doing all sorts of cool stuff that costs money, even though I actually earn a lot more than most of them.

Your article inspires me to keep on saving by keeping the end in mind: not only am I working towards a comfortable early retirement, I also enjoy the peace of mind that comes from having a solid emergency fund. It’s especially important for someone like me, living in a country with poor job prospects, and where there are no such things as 401(k)s, welfare or unemployment benefits. Now I’m actively looking for ways to reduce my expenses even more. I’m also going to start working on increasing those Safety Margins you talked about (I’ve only counted out 3 so far).

So thanks! :)
- jlcollinsnh January 16, 2012, 7:14 pm
  
  Hi Makee…
  
  very interesting and I’d like to hear more about the unique challenges pursuing this in the 3rd world presents. what country are you in?
  
  Mr. MM…..
  
  perhaps a guest post?
  - Makee January 17, 2012, 2:33 pm
    
    I’ve lived in the Philippines all my life. To put my personal financial situation in perspective, I’m part of the middle class of a society in which 1/3 of the population earns about 1 USD a day.
Johonn April 3, 2012, 7:23 pm

How did you get that referral link from Mint.com? I’m trying to find one, but there seems to be nothing about that on the site.
- Mr. Money Mustache April 3, 2012, 8:10 pm
  
  Last year I got the blog signed up for a couple of affiliate programs – if you want the inside scoop, feel free to email me through the contact button. Commission Junction is a well-known one, you can visit that directly as well.
  - Johonn April 3, 2012, 10:12 pm
    
    Thanks for the reply, I see.
    I was just looking for a quick, dropBox style referral link to share with friends, but I’ll keep that in mind for the future if I decide to get serious about it! Right now my blog doesn’t really have much of a readership, so it wouldn’t make that much sense.
RichUncle EL June 4, 2012, 10:31 am

I know of two co workers who save upwards of 30% take home pay, eventhough they do this I dont forsee them retiring as they like coming to work. I currently save about 15%, but I am now jazzed to increase this every year with additional raises.
Russell August 27, 2012, 2:30 pm

I don’t know if anyone is still tracking these comments, but the GIF image in the middle is missing.
- Mr. Money Mustache August 27, 2012, 5:13 pm
  
  Thanks Russell! Yes, all articles their comments section active forever, so thanks for letting me know. It seemed to be a bug in the Wordpress system’s ability to display an otherwise-fine .gif. So I replaced it with a .jpg version.
Captain and Mrs Slow November 29, 2012, 4:52 am

here’s a slightly better graph than what MMM provides

http://freeat33.com/from-never-saved-to-retired-in-ten-years-this-is-how/

BTW I mentioned this to Derek in an email but almost no bloggers talk about saving. It’s all getting out of debt or spending less, not even GRS or The Simple Dollar talk about that. So when I first read this I thought it was all BS!!!!
Freeyourchains December 20, 2012, 10:27 am

“Or if it does, people will be too busy complaining about how it can’t be done, rather than figuring out how to do it”

This is what I always say about faster than light travel in spacetime!

Nay sayers always say, “it can’t be done”, when we have discovered a star’s gravity bends light to it’s will, let alone planets of huge mass, and a blackhole completely stops light once it is close enough, let alone pulls in an entire galaxy. As scientists and engineers, the scientific community can’t even fully understand gravity and it’s impact on what we call spacetime. We just measure what we see, experiment, and base understanding on what we discover. The vast majority of the Universe is a complete mystery to us.

Almost like FI and mustachianism were complete mysteries to us before we stumbled upon this blog or our first FI book and began to question our spending lifestyles, investments/income generators if any, and future goals.

So when you hear a habitable Earth like planet is 22 light years to 5,000,000 light years away, don’t rule out traveling to it! At Warp 8, you can be there in 3 seconds or 7 days, respectively. (Warp = 1 LY/sec, in my/this instance.)

A small example to get you interested:

Say there is a stronger form of gravity that holds protons and neutrons together, for now science calls it Strong Nuclear Force in the Atom’s nucleus. If we ever discover or find an element that has this strong nuclear force extend outside of it’s nuclear boundaries, and this force has wave like properties (as i believe general gravity does, and should be on the EM spectrum), we could then amplify this micro strong gravity/nuclear force, to a meter scale, and potentially use it for bending spactime to our will with enough energy for amplification. Thus achieving interstellar and intergalactic travel within minutes.

That is just a theory to get you intrigued in all these mysteries, that many people are unaware of, or will not ever question.
- Kyle April 19, 2013, 7:08 pm
  
  http://ct.fra.bz/ol/fz/sw/i54/5/8/24/frabz-who-the-hell-is-this-guy-127851.jpg
Chris January 18, 2013, 9:59 am

Where should I be investing? I currently save 10% of my check to savings and another 5% goes into 401k. Another 10-20% goes towards student loans. Where and how should I be investing that money sitting in my savings?
- Mr. Money Mustache January 18, 2013, 10:05 am
  
  Hi Chris.. I’d start by maxing out 401(K) instead of having the money stagnate in an after-tax savings account.
  
  Then, if you have more left over and if the student loans are about 4% or so, you might as well wipe those out first (effectively guaranteed return that affects your everyday cashflow).
  
  After that, more investing: http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/
tunesmith January 19, 2013, 2:30 am

Hi, I think the 5% figure is ridiculous. Here’s why.

I started saving for retirement in 1993. I have perfect data on the dollar amount and date of every single retirement contribution I have ever made.

I have saved for retirement pretty consistently since then, and that consistency has been affected only by things that would reasonably affect anyone. I was able to save a little more when times were good, and I had to save a little bit less when times were bad.

It’s worth noting that when times are good, the market tends to be up, and when times are bad, the market tends to be down. This means that the average retirement investor tends to buy into the market more when it is up, and less when it is down.

I have compared my deposit dates with the historical records of an S&P-500 index fund, and here’s what I found. If I had aimed on simply buying in to the S&P-500 every single time I made a deposit, my lifetime APY as of today would be 3.35% And right now happens to be a good period – the vast majority of the time between 1993 and now, that APY would have been negative.

I know the stats on how people can’t reliably beat the market, and how it’s unreasonable for anyone to expect they can beat the market year in and year out. Most people have trouble even matching the market, and simply buying into an S&P-500 index fund is a useful approximation of that.

Here’s the other thing, from June 1993 to November 2012, inflation went up 59.43% Yearly, that is 2.45% APY.

What that means is that after inflation, a reasonable investment schedule over the last twenty years would mean a performance of about 0.9%. In order for someone to have matched that 5%, they’d have to have beaten the market by 4% per year, which is astronomical. I’m sure someone will brag that they have done so, but if it’s not as easy and repeatable as buying into the S&P-500 index fund, I don’t consider that valuable “advice”.

The market is different than it was thirty years ago. It is volatile and automated, and trading programs chase each other up and down the board. I think that any advice that relies on the old “safe assumptions” of 5-8% annual investment returns is hopelessly ignorant and out of date, and I think holding on to those figures will only give your readers false hope and lead them astray.
- Mr. Money Mustache January 19, 2013, 5:28 pm
  
  Interesting set of results tunesmith, although I’m not sure I believe you (I could be convinced with a spreadsheet).
  
  Did you remember to account for the reinvesting of quarterly dividends of the S&P500 index funds? Many stock market cynics do calculations like this based on the quote price of the index itself, while neglecting the real reason we own stocks: the flow of cash they provide in the form of dividends.
  
  From 1993 to today, the CAGR of the S&P including dividends is 5.65% per year after inflation: http://www.moneychimp.com/features/market_cagr.htm
  
  That’s not the greatest rebuttal, because it doesn’t take into account a stream of investments like you made, but rather a lump sum in 1993. If anyone has a better tool that can do the same calculation for a stream, let us know.
  
  Most of my own retirement stock holdings were bought between 2001 and 2005. Not the cheapest years to buy shares, but not awful, looking at the market value today. But again, I don’t really care about the quoted value of all these businesses, I care mostly about the annual dividends they pay out, which would more than cover my entire living expenses if all my savings were invested in stocks.
  
  .. even better is the fact that I actually have a good portion rental real estate right now.. which yields much more and will soon exceed 8% annually after expenses and after inflation (and many of your fellow readers are in the same boat)!
  - tunesmith January 19, 2013, 10:42 pm
    
    Thanks for the reply.
    
    You are right about the dividends. I wrote a perl script long ago where it relied on downloading historical “adjusted close” data from Yahoo – which takes dividends into account. That’s the coding library that powers many of my scripts. I knew about dividends and adjusted close, and wrote my library to use adjusted close.
    
    At your response, I double-checked my library, and… it is using the non-adjusted close now.
    
    I’m guessing that during one of my many OS upgrades on the Mac, the upgraded version of Finance::QuoteHist changed how they reported “closed” versus “adjusted closed”. Or it’s possible that even though I knew about dividends and intended to use adjusted-close, I just missed it.
    
    I re-ran my analysis using adjusted close. Now it tells my my APY (had I bought VFINX on each date) would have been 5.22%, not the 3.35% I mentioned above. While that still doesn’t rise to the level of 5% after inflation is taken into account (now it’s more like 2.75% instead of the 0.9% I mentioned before), it’s not as bad a picture as I painted, so I apologize for and retract my strong wording.
    
    What sucks is that I have based many of my own financial strategies off of the previous numbers, so I have to rethink a lot of things. I’m glad your response encouraged me to take a second look.
    
    BTW, I am calculating my figures using a simple software representation of excel’s XIRR, assuming continually compounding interest.
    
    At 2.75%, your table above would change. For high savings rates (50-70%) it looks like it would add a couple of years. For a savings rate of 20%, the number of years needed goes up from 37 to 49.
    - tunesmith July 7, 2013, 4:45 pm
      
      I thought I would give an update about my situation now that a few months have passed, and since we’ve had a major bull market run since then that is only recently starting to soften up.
      
      My retirement investing started on June 30, 1993. I did a Wolfram Alpha query for the inflation since then, and it came back with 61.32%. That works out to an APY of 2.39% inflation per year. ( ln(1.6132) / 20 ).
      
      After confirming that my historical stock market checker is looking up “adjusted close” for the S&P 500 (so dividends are counted), I looked up what my all-time retirement performance would have been had I simply bought the S&P-500 (VFINX) every date I had retirement money to contribute.
      
      As of today, the APY of that approach would be 6.22% . If you subtract inflation, that would be 3.83% .
      
      So, I still think the 5% assumption is too high. Especially since when you look at my historical graph of APY rates, most of my data points are below 3.83% (over the last 20 years, times have generally been worse than right now). People don’t have control over the market realities at the time they might most want to retire, so they want to have some assurance that their lifetime APY at that point will as expected. Judging by my graph, it would appear my median APY (of monthly data points) would be lower.
      
      I think a reasonable-but-conservative estimate would be 2.5%, not 5%. There’s a moderate chance you can beat it, but not a guarantee.
      
      Using 2.5% instead of 5%, here’s a re-do of the table above, comparing savings rate to # of years needed for retirement:
      
      5% – 104 years
      
      10% – 77 years
      
      15% – 61 years
      
      20% – 51 years
      
      25% – 43 years
      
      30% – 37 years
      
      35% – 31 years
      
      40% – 27 years
      
      45% – 23 years
      
      50% – 20 years
      
      55% – 17 years
      
      60% – 14 years
      
      65% – 12 years
      
      70% – 10 years
      
      75% – 8 years
      
      80% – 6 years
      
      85% – 5 years
      
      90% – under 3
      
      95% – under 2
      
      100% – 0 years
      
      You can see that as the savings rate goes up, it starts to converge with the table in the blog post, but at the lower savings rates (< 40%) the differences are drastic.
      
      Note that with these numbers, if you're saving less than 20% take-home pay, you're basically committing to a future of no retirement, and working for the rest of your life.
- Erich April 30, 2014, 9:37 am
  
  Why would the average investor have less retirement savings when “times are bad”? In a worst case scenario when 10% of the population is unemployed, 90% still kept their jobs during a market downturn. Personally I’ve never had my salary decrease because of a stock market crash, though I have had a few freezes. That just slowed down my rate of savings INCREASES annually. I realize SOME people’s salary would be more directly market sensitive (independent contractors, restaurant employees/owners, etc), but I dispute your implying that this would affect “most” people.
  
  If a person is in a higher risk consultant/contractor job, such a person should be seeking to earn a higher annual earning than a salary employee to make the risk worth it. If that’s the case, then lower earnings during market downturns would not offset your advantage of a higher salary with which to invest overall (and therefore easier to save a higher % of your income).
John April 29, 2013, 12:29 pm

How do you plan to pay for long term care when you and your wife need it? I totaly agree with you about saving, I’m 68 and spend less than I receive from investments.
Michal May 9, 2013, 7:25 am

Hi,

Just a short question: if I pay mortgage on our primary house, does that count as an expense or saving?
I am not sure how much I would have to be making to get to 40 or 50% of savings if the mortgage payment is counted as expense.
Thanks in advance
- Agent9 May 9, 2013, 12:35 pm
  
  I’ve always thought of payments to principal as savings and payments to interest as expense. But I have never made additional payments to principal in the 10 years I’ve been a home owner. I like having a fixed living cost and more flexibility with investments for the extra cash.
  
  Having said that, when plugging in figures into retirement spreadsheets I leave out the value of my primary residence and just include all payments as expenses. That way the housing market doesn’t affect my retirement calculations at all and we can move at any time as long as the new payments will be acceptable. In fact, housing payments are a hedge against inflation with this method because we only use fixed rate mortgages.
  
  I am very conservative though so people may disagree with me.
- George May 9, 2013, 4:02 pm
  
  The house itself is an asset, worth whatever the current market value might be. The mortgage is a liability – a loan that’s secured against the house.
  
  Payments to the mortgage are a combination of two things – interest (pure expense) and principal reduction (which reduces the loan balance and is a form of saving).
  
  So, I guess the answer to your question is that mortgage payments are both saving and expense. Except the expense portion is a lot larger at the beginning and goes down as you pay down the loan balance.
Stuart May 17, 2013, 7:43 pm

I think early retirement is a great goal to have, but I think some of the assumptions are a bit rosy. The 5% return on your investments is unrealistic. Who can forget 2008? I watched my Vanguard Allocation Fund lose 45% of it’s value. The income side of my investments were paying 9% while the principle drifted down and down by 50%. “Oh well, at least I’m earning 9%,” I thought. Then Calamos cut their dividend from 14 cents a share to 9.5 cents. Ok, the markets have come back, but it took five years and the interest rates are way down. Calamos still pays 9.5 cents, but I noticed some of it is now return of capital. My point is that nothing is sure in life, and what you think is enough and safe might not be. I guess that means save more than you think you will need and spend less than you think you can. Maybe that will require you to work longer than you think you need to.
- Erich April 30, 2014, 9:20 am
  
  5% is a very conservative and reasonable long-term goal. You said who can forget 2008? well what about 2001-2007? Did you get 0% return during that time? I didn’t. 5% is an AVERAGE over the LONG TERM. your lifetime is a sufficiently long term to reach quite close to an average like that. Also, if you are in the accumulation phase, 2008 did not matter because you were not selling shares, you were buying them as aggressively as possible right? So the shares you had in 2007 have now fully recovered in price, in addition to the buying you did during that downturn has put you ahead. The % paper valuation drop during a bad year does not matter unless you SELL.
  
  Actually, even after inflation, I think 5% is an overly conservative estimate. I began saving in 2001 and I’ve done better than that with mutual fund/index fund investing through my employer’s funds for most of that time.
Kat October 13, 2013, 5:03 am

Looking at trying to crunch the numbers for my husband and myself. I am wondering, do we count in the contributions our employers put into retirement accounts for us toward the percentage we are saving?

Thanks! Kat
David October 31, 2013, 6:11 am

Almost all of the comments above address the contribution side of what is proposed. What isn’t addressed is the lifestyle after retirement.

The unstated assumption here is that your cost of living before retirement is satisfactory after retirement. In theory, it should be.

However, if you cut your spending so as to be able to contribute more, will you make your life less comfortable than you prefer? And then consider you will be living this minimalist lifestyle for maybe 60 or 70 years. No cable TV. No lattes.

Really, there has to be consideration for the lifestyle required after retirement in determining the saving level. There’s no point in making yourself miserable so you can retire a few years earlier so you can continue to live in misery.
- George October 31, 2013, 6:59 pm
  
  You’re assuming, of course that “not spending money on stuff” equates to “living in misery”. The reality is quite the opposite. There are lots of people who spend tons of cash, but are miserable. Many of us have discovered that a simple life, with a few luxuries here and there, is far better than wasting cash on lattes and cable TV. Netflix and home-brewed coffee are far cheaper and just as enjoyable.
  - David November 2, 2013, 4:57 pm
    
    Of course you are right, but what I was trying to point out is that the article seems to assume that the lifestyle you are living while you are working is the one you want to live after you retire. If you make sacrifices (i.e., don’t spend money that would make your life more comfortable) so that you can retire earlier, you have to be prepared to live that lifestyle for the rest of your life.
    
    Now when you are working, you may not have much opportunity for having coffee. My retired friends think it is great if they run into someone to sit down and have a coffee. They have the time to do this. But it is an expense they did not have while working.
    
    My point is that somewhere in this analysis you have to look at the lifestyle you want to live after you retire. After all, if you retire at 30, that’s another 60 years, and you want to make sure you can enjoy it!
    - Jason November 5, 2013, 1:13 pm
      
      True, but you also can account for expenses you no longer have when you retire. E.g. business clothes, any transportation to and from work, work equipment, costs incurred through social functions necessary to be successful at work, etc. etc. This can also multiply if you were having to live in a higher cost area to be close to your job and can now move to a lower cost area. If you still drove to work you can largely ditch your car outside special trips not possible on a bike, a huge savings right there.
      .
      
      So yes, you might want a more expensive lifestyle in some ways after retirement, but you can also offset the shift financially by effectively reallocating your expenses from work needs to personal wants; a nice change!
      .
      
      And this doesn’t even account for the fact that you could still do part time work or start a business or do side jobs for entertainment that may very well make money. You’ll have so much more time after retirement, if you’re active at all you’ll likely find ways to make a bit of extra income. If you’re worried that retirement like this means you’re stuck with that lifestyle for life then check out some of the MMM articles on side jobs, entrepreneurship, the retired life, safety margins, and things around that. If you can manage to reach the retirement point discussed above and then also make a bit of side income then you’ll actually be able to accrue more money than inflation over time, allowing you to gradually increase your retirement standard of living if you so desire! Or just have a bigger safety margin.
      
      .
      The point being, yes, your concern is a legitimate one, but it doesn’t even have to be an issue if you work it right.
      
      .
      And personally, I think you’d need some serious standard of living requirements to be worth continuing to work a full time job you don’t love. To me, not having to do that is such a huge standard of living increase that it’s hard to find many other sacrifices that aren’t more than offset by that. That, after all, is one of the fundamental principles of this philosophy. Exactly what standard of living requirements are worth sacrificing that much of your time or life?
      - David November 6, 2013, 5:13 pm
        
        All valid points, and you demonstrate my argument. People *do* need to think about their intended lifestyle after retirement while they are making these plans.
        
        I have a couple of friends nearing retirement who track everything they spend in detail, so as to know what they will and will not be spending after retirement.
        
        People also should not regard work only as a chore that has no redeeming benefit, and that you should get out of as soon as possible. Work provides many benefits that are not financial. There are social aspects, educational opportunities, satisfaction with completing a project and so on.
        
        For example, I thoroughly enjoyed my first 23 years of work. I had the intention of working forever, never retiring. I got to meet lots of interesting people, do interesting things and play with the best toys in the land :-)
        
        (I worked in computing. I never could have afforded to buy any of the equipment we were running.)
        
        Then we got new management and it all went downhill. I should have left and gone elsewhere but I didn’t. So they got rid of me, and I have been working as a part time consultant ever since. I had a fair number of investments at that stage which have enabled me to live quite comfortably, but the consulting still gave me the benefits of working.
Jason November 7, 2013, 7:43 am

I’m not sure I’d go that far. Yes, the intended lifestyle after retirement can matter, but my point was that there are enough offsets in both directions that you can largely consider that a rounding error. Your current expenses are still a good proxy for what your retirement expenses will be. In fact, for the MMM lifestyle the differences are probably much smaller than for most. I think it’s worth focusing more on getting to retirement than worrying about differences in the exact expenses when you get there. Then, as you get close to the goal, you can start working out the details of said rounding errors and work a bit longer or shorter to accomodate, similar to what your friends are doing.
.
Also, if you read more articles here you’ll see, the point isn’t to always regard work as a chore but rather to give you the flexibility to decide as you go. In fact, it sounds like you’re the ideal example of the MMM philosophy, if you’d reached financial independence earlier in your career you could have continued working at the job you liked (still counts as early retirement for the purposes of this philosophy) but then quit when things got bad with no worries! The real point of early retirement here isn’t that you stop working if you enjoy doing so, it’s that you reach a point where you can make such decisions without having to consider the finances. Gives you more flexibility and optionality.
alex January 22, 2014, 2:55 pm

As a guy who spent >30 years in the investment business, I’m pretty sure (you can never be 100% sure) that 5% is high from today’s starting point. The best long term indicators I’ve found of equity performance (Shiller’s 10 yr adjusted P/E, GMO’s formula for 7 yr returns, or the following 5 yr returns based on current real interest rates), which use different inputs, point to real equity returns in the 2 to 4 percent range for the next 5-10 years. Since most people will include a mix of bonds in their portfolio, the expected return on the whole portfolio only goes lower. (It’s great if you can get some income producing properties if you can do all the repair and maintenance, but that’s not practical for most.) It is also very possible that the Fed keeps short term interest rates very low for a long time – it has happened before. As a result, I think using a 2.5-3% initial spending rate is more appropriate if you start retirement today.

In general I love this MMM stuff – changing the American mind set is a worthy goal! You don’t have to be “all in” or be in total agreement to apply these principles. However, as pointed out, any expense saving has a huge multiplier applied to saving needed. And having expense flexibility is a point that is often overlooked. I do think it will be super hard for the vast majority of people to have the investment discipline to stick with equity investments when the press, friends, etc. are telling everyone to cut their exposures. That might even be more hard than maintaining expense control.

I retired from full time work about 18 months ago. My part time gig is great and doesn’t take up a lot of time. In a broad sense, we used a lot of the principles to save over the past 30+ years. To a comment above, I don’t think you need to figure out everything you want to do in retirement ahead of time, but you do need to be highly confident you are creative enough to find stuff to do so you won’t get bored. Retirement isn’t for everyone.

So far, I don’t know where all the time goes. Also, and to me this was a very pleasant surprise, there are all sorts of things that have popped up that I’m really enjoying. For example, I love the free online MOOCs, get way more exercise (I ran 5 miles the other day – I had to work up to it gradually, but for many years I was positive my body couldn’t have handled more than 2 miles), help college students at a couple of colleges with job interview prep, go for lots of great hikes with guys I hardly knew before, rode my bike for a lot of hours last spring-fall, and have more time to see friends.
- Mr. Money Mustache January 22, 2014, 8:22 pm
  
  I agree with you Alex – if you invested in all stocks at valuations at today’s level or higher, you’d probably see lower than average returns. On the other hand, we’re likely to see a nice recession/crash at some point which will allow people to stock up on shares which are on sale. Taking tabs on the market in well into a long bull run always results in lower forecast growth. It happens this way all the time, right?
  
  On the other hand, rental houses in some areas are still great, and even Lending Club still seems to be doing very well for me. Hey, I had better get my monthly update to that page done soon (http://www.mrmoneymustache.com/the-lending-club-experiment/)
Rebecca February 19, 2014, 9:26 am

I’ve enjoyed reading your blog and sharing it on my Facebook. Lots to think about. My scenario and question are this: Looking at the savings rate table here, it seems that a stay at home parent re-entering the work force (years later, very rusty) and making minimum wage working part time wouldn’t really make much difference to a family’s retirement savings, in number of years until retirement. By my own quick calculations, it’s a drop in the bucket added to a larger salary of the one working spouse, and only brings retirement one year closer. In your opinion is it worth it for the stay at home parent to get a meager part time job or not?
321GleichReich March 15, 2014, 3:22 pm

Hey MMM,

I digged through the whole blog and this is my favourite article!

In my home country so many people, websites, and blogs bother about life insurances, Rürup, Rieser, direct insurances (all government supported ways of saving for retirement in Germany), ETFs, and fonds, so that it is easy not to see the woods for the trees.

Who cares about the +1/-1 percentages bits of return gains/losses on the way to retirement, if you understood the true power of the savings rate? Those discussion deserve their place, but they make the target of an early retirement blurry and they should be put aside intially and only put back once a big stash has been accumualted.

Thanks for the post,
3,2,1, soon – independent!
Sam Scully May 31, 2014, 12:13 pm

If you simplify and assume that the safe withdrawal rate and interest rate on savings are equal, then you get this very simple formula:

years to retirement ~= ln(savings rate) / (interest rate)

Where ‘ln’ is the natural logarithm. This tends to overestimate the years to retirement by about 5-10% but gets more accurate for higher savings rates. There are so many different factors in a realistic model though, that I think this probably gives a good enough estimate for most people. I can show the derivation of this formula if anyone is interested.
- Mr. Money Mustache June 1, 2014, 7:43 pm
  
  Sounds like a neat trick.. but it would sure be pessimistic today, if you are assuming you can only do a <1% safe withdrawal rate now just because savings accounts pay nothing. I would disagree and suggest that 4% is still not all that far off the mark.
  - Mike June 5, 2014, 12:47 pm
    
    I think by “interest rate on savings”, he means any investment return, not necessarily the interest rate on a savings account in a bank. If you plug in 4%, you’ll get numbers close to what you have in the table above:
    
    ln(.50) / 0.04 = 17.329 years to retire at 50% savings rate
    ln(.80) / 0.04 = 5.5786 years to retire at 80% savings rate
    
    Of course, if you do plug in a <1% return instead of 0.04 because your stash is entirely in a savings account, you'll see the numbers look much worse!
Eva July 15, 2014, 11:58 am

Hi, this is the first time I found this blog, I read 5 articles in it so far, all very interesting. I start by saying that I do not live in US so some things do no apply. Where I live the credit cards don’t offer almost anything in return, so I don’t use them, as they really have no value. I am currently 35 years old. I am working full time for 10 years now. I have my own apartment, fully paid off. I spend only about 50% or less of my income. And I have saved 6 times my yearly spending, so I still have a very long way to go to get to 25. My question is about investments. Where should I invest my money, so when I get to retire I will have the money working for me. right now I only have the money in saving account getting 3%p.a. That is the one thing I’m really bad at. Thank you for any pointers.
- Dang December 17, 2014, 10:35 am
  
  Eva,
  
  I know this is a bit late but I hope you’ve seen MMM’s other posts on investing in index funds. Personally most of mine are in Vanguard’s index funds along with some side experiments on the Dogs of the Dow http://www.dogsofthedow.com/ The biggest thing I’d suggest against is day trading. Not worth the risk or time. Looks like you’re in a great position though!
McDuffy August 6, 2014, 6:47 pm

Hi MMM,

I like that basically all time-dependent functions are simplified to scalar quantities by defining variables as averages through two time periods: the “career” and “retirement”. A lot of the comments seem to address specific strategies to convert daily observed numbers into averages so as to better apply the plot.

Two questions:
1. Since retirees probably don’t have the same purchase habits as the CPI, would the “inflation” more correctly be called “purchasing power”?

2. Does the relationship assume cost-of-living (or “spend level”) in the “before” and “after” timing buckets (with all the averages, assumptions, escalations applied) to be the same? With your own experiential arguments that spending drops in early phases of retirement, it seems unlikely that average real spend is exactly 1:1 before and after retiring. What would a retired mustachian at various ages today spend and how would that average spend compare to pre-retirement spend? Even better, such a relationship could easily build into the “time to retirement” plot with a single coefficient.

Anyway, just some random thoughts…
missj August 16, 2014, 2:50 pm

cool! I cannot believe I am so close! (which is still 17-20 years away, or retiring at age 50-53 but I thought I was going to have to retire at 67 like my social security statement says).

Question: How would i go about figuring this out if I have previously been saving less and spending more and now I’m going to switch…but I should get some credit for the years of saving I’ve already done (even if it’s small).

Ex: for 15 years I’ve been saving 10-20% of my take home pay. probably averaging 12% savings rate over the last 15 years.

NOW, I will be switching to a 50+% savings rate. which says that I am 17 years from retirement but the previous 15 years has to count for SOMETHING, right? FYI: I have saved about 14 months of take home pay, or a little over 2 years of living expenses. Does that mean I get to shave 2 years off the total remaining working years, or does that also compound to shave off even more than 2 years?

Does your graph/table take into account being in a better tax situation once you are earning less?

How might we estimate our needs if we plan on retiring to a state with lower taxes and lower cost of living?

I currently reside in a state with 7% income tax and no sales tax (though they try to get us to vote in a sales tax every couple years and I’m sure soon they’ll succeed.) I need to live here to earn a bunch more money than I could in any other state.

I plan to retire in a different state state that has no income tax and a 6% sales tax, but I can just buy most of my items across the border which I think is technically illegal but loads of people do it and it doesn’t seem to be monitored or enforced.
Daniel August 19, 2014, 1:23 pm

I love this post and have never thought about what I need to retire comfortably as a percentage of my current take home pay, savings rate, and expense rate. I do have one question though. How do you figure in contributions to a 401K from a company match? My company contributes a straight 3% plus matches up to an additional 6%, which of course I am taking full advantage of. So that is 9% additional savings, but in my mind does not correlate to my take-home pay. Thoughts?

Thanks,
Daniel
- Mathieu August 28, 2014, 12:33 pm
  
  For the calculation to work, you simply add back the match to your top-line income. But if you use Mint or otherwise track your expenses properly, you can just use that figure.
  
  If you recognize that “Total Take-Home Pay” – “All Expenses” = “All Savings”
  
  Then simply add up two figures that you know well: all savings, including all matches, and total expenses, then that will give you your “correct” take-home pay figure. You can use that figure as denominator.
DoItYourself August 22, 2014, 10:04 am

“The most important thing to note is that cutting your spending rate is much more powerful than increasing your income.”

I’d also like to add that cutting spending becomes more and more powerful as your savings rate increases. Consider two scenarios, both with an income of $100k.

In scenario #1, we have a savings rate of 20% (spend $80k, save $20k). To increase the savings rate to 21%, you could increase your income by $1,265 (holding spending constant) or decrease spending by $1,000 (holding income constant).

In scenario #2, we have a savings rate of 80% (spend $20k, save $80k). To increase the savings rate to 81%, you could increase your income by $5,263 (holding spending constant) or decrease spending by $1,000 (holding income constant). That is over a 5:1 ratio!

Now, I understand that as your spending gets lower and lower, it gets harder and harder to trim fat. Cutting $1000 from a wasteful budget is much easier than from a lean budget. But, I think the important thing is that trading your time to save money is more powerful than than trading your time to make money. If you make $50/hr at work, doing something that saves you $10/hr is just as powerful at a 80% savings rate. High income (and savings rate) people that hire a house cleaner and claim their time is better spent at work than cleaning their house are wrong.
- McDuffy August 22, 2014, 10:48 am
  
  Good point on the ratio while in the saving phase. It’s also worth pointing out that if you plan to retire on this logic, the higher your savings rate, the smaller your nest egg and the more important controlling your retirement cost. If you ever have a bad year and need to dip into principle, the extra $10,000 of principal loss becomes much more dire for the person who retired on only $500k because they assumed a $20k annual cost and a 4% safe withdrawal rate.
  
  Retiring on $500k is not necessarily good or bad (it may actually be good cause it means you’re extremely frugal!), but it does increase certain risks not immediately obvious in the plot.

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