You Can Retire in 15 Years!

Everyone just starting their professional careers after college should know - With a simple investment plan in place they can retire in just 10 - 20 years of working.

The Math Doesn't Lie - It's very possible!

I'm not sure why everyone isn't shouting this from the roof tops - the Math doesn't lie - you can retire much earlier than 67! I'm talking about having over a $1Million Net-worth and truly being wealth in a fraction of the time people normally take to get there. This isn't a hokey sales pitch or an infomercial scam, its simply MATH and the math doesn't lie!

If you're just starting your career, imagine being able to retire at 45 years old. While all of your peers are starring down another 20 years of work at just 45 you're at a point at which you can decide if this work thing is right for you. Most people wait until they are 65 or even 67 years old to retire just because the social norms and assistance programs are setup with an expectation that you'll work until that age.

It's not up to the government to decide when you retire, and if you rely heavily on Medicare and Social Security for support you'll be lucky to just get by when you do retire... Ultimately, when and how you retire is a personal choice and its a financial decision made when you first start working!

Retiring Early in a Nut Shell

When I originally stumbled across the math behind Financial Independence (FI) or Early Retirement or as some call FIRE (Financial Independence Retire Early) it was shocking. Starting out, no one told me that with some basic financial moves anyone in a middle class job could retire in 15 years. That's an unbelievably refreshing, liberating and life changing statement! If your friends and family don't know this send them this link - Everyone needs to know this.

In order to be Financially Independent so you can retire, at any age, your annual expenses need to be covered by your investments for the remainder of your life. The general rule of thumb is once your net worth is 25x your annual expenses you've Financially Independent. This allows you to withdraw 4% of your investment account every year and still maintain the principle value over time.

Let's take a look at three different scenarios to consider just what it takes to be FI and retiring early.

Early FI Scenario 1

Single Income No Kids (SINK), Midwest Level Cost of Living

Assumptions:

Age = 22

Desired Retirement Age = 45

Average Annual Expenses = $30k

FI Net Worth Target = $750,000 = $30,000(annual expenses) x 25

Interest rate = 8%

FI Game Plan:

In order to reach FI in this case we have to target a Net Worth of $750,000. If you'd like to reach this net worth and retirement by the time you're 45 years old here's the data:

Starting Investment amount = $1,000

Bi-weekly contributions = $435 (that's right every two weeks when you get a paycheck you'll have to invest just $435 to reach early retirement!)

Investment duration = 23 years

After just 23 years you would have contributed just 35% of the cash that your FI fund now has ready for you to sail off into the night. The other 65% of the funds were generated by your money earning money on your money (aka interest and re-invested dividends).

Your Total Contributions = $260,130 ( this is over the course of the investment period)

Total Interest on your money = $491,436 ( This is the power of compound!)

FI Fund Balance after 23 years of investing = $752,566. This will cover your $30k in annual living expenses for life! Not Bad!

Early FI Scenario 2

Dual Income Little Family (DILFs), Midwest Level Cost of Living

Assumptions:

Age = 25

Desired Retirement Age = 55

Average Annual Expense = $50k

FI Net Worth Target = $1,250,000 = $50,000(annual expenses) x 25

Interest rate = 8%

FI Game Plan:

In this case we're after a Net Worth of $1,250,000 to reach early retirement. This will allow the DILFs to have their $50K in annual expense covered for life.

Starting Investment amount = $1,000

Investment duration = 30 years

Bi-weekly contributions = $385 ( You might be asking why is this $50 less per bi-weekly contribution but they have $500k more in their FI Fund compared to the first scenario. This is the magic of compounding interest. I went from 23 years of investing to 30 and this made all the difference in the world. Just 7 years more in time!)

After just 30 years you would have contributed just 35% of the cash that your FI fund now has. The other 65% of the funds was generated by your money earning money on your money; this comes from the interest and re-invested dividends.

Your Total Contributions = $260,130 ( this is over the course of the investment period)

Total Interest on your money = $491,436 ( This is the power of compound!)

Total Balance after 30 years of investing = $1,260,060

Early FI Scenario 3

Ok, if you're interested in just a 10 year window of time or just want to push your savings rate as much as you can early on and want to see what's possible with a 50% savings rate, this next one is for you! I believe for many DINKs (Dual Income No Kids) families this is very achievable. There's never a better time to push your savings rate when it's just you and your spouse.

Dual Income No Kids (DINKs), Midwest Level Cost of Living

Assumptions:

Age = 23

Desired Retirement Age = 33

Average Annual Expense = $30k

Annual Savings = $70,000

Interest rate = 8%

FI Game Plan:

The goal for these DINKs is a little different from our earlier scenarios, in this case they are just looking at maxing out their FI Funds while they don't have kids. They plan on essentially living on one of the partners' salaries and then investing 100% of the others. For 10 years they invest $70,000 annually into their FI fund.

Bi-weekly Contributions = $2,916

Investment time horizon = 10 years

In just 10 years of keep up this FI plan the DINKs have become Millionaires with over $1,159,078 in Net Worth. At this point they could retire with $46k in annual passive income from their investments. Not bad for just 10 years in the work force!

Now just for fun let's imagine this same DINK family never invested another penny into their FI fund after that initial 10 years of saving and investing. Life happens and they have 4 kids, a bigger house, they take awesome exotic family vacations, start expensive hobbies, buy fancy cars, the whole nine yards. To afford this lifestyle they decide to keep working but they don't invest another cent into the FI fund. The FI fund just grows on its own undisturbed, not touched at all for the next 20 years.

FI Fund starting value = $1,159,078

Investment time horizon = 20 years

Total Contributions = $0

In 20 years when these DINKs are just 53 years old they now have a FI Fund worth $5,726,866!!! The kids go off to college and they decide to retire early, they can now enjoy an annual passive income of $230,000. This income is likely as much as they were making while they were employed full time!

Get Inspired

Take a look once more at the above chart. Notice how the interest portion just takes off over time. I can't emphasize this crucial element in investing enough, Compounding takes TIME. These DINKs didn't have to invest another penny into their FI Fund for 20 years once they have that initial nest egg.

The Power of Compounding Interest is commonly overlooked but it's the linch pin in the entire FI equation. You may have an entire career to save and invest but the power of compounding requires TIME. The earlier you start the more runway you provide for your investments to take off!

The Math doesn't lie, early retirement is possible for the middle class in America. You don't need to win the lottery, start a massively successful business or work for a startup with lucrative stock options. Just start your FI fund early in your career and consistently contribute until you have a critical mass. Let compounding take care of the rest!