hi, my name is phil. i’m a video creatorand online instructor. i’m also a personal finance nerd. because of that, i want to create a seriesof videos that breaks down some of the most mystifying topics that plague our society. in a world where people’s finances are typicallylocked away and not-talked about, i believe opening up the gates of financial conversationwill help everyone live a better and smarter life. in this first video, i want to explain theshockingly simple math behind early retirement - thanks to one of my biggest heroes, mr moneymustache.
while the ability to retire may seem likea distant and unreachable goal for many, the premise comes down to one thing. you needto invest money so that it earns more money. this could be investing in stocks or bonds,real estate, or any other of investment vehicles. as soon as your investments earn enough moneyfor you to live on each year, you are able to retire. let’s break it down further to know whenyou can retire. the most important concept is knowing yoursavings rate, basically how much you make minus your expenses. if you spend 100% of your income, you willnever retire… because you will never be
able to invest any money that earns moneyfor retirement. if you spend 0% of your income, you can retireright now… because somehow you are living without needing to make any more money. between 0% and 100% are a number of savingsrates that correlate with the years it will take to retire. for this, let’s assume your annual investmentreturn is 5% (which is conservatively low) and your withdrawal rate is 4%… meaningyou spend 4% of your net worth each year. for example, if you have a $1,000,000 networth, and you live on $40,000. if your savings rate is 10%, you will be ableto safely retire after 51.4 years. safely,
meaning you will never run out of money. if your savings rate is 25%, you can retirein 31.9 years. 50%, you can retire in 16.6 years. and if you can somehow save 75% of your income,you can retire in 7.1 years. now getting to that savings rate might notbe easy in our world of societal pressures, keeping up with the joneses, and bad habits.but you can get closer by making smart decisions, avoiding debt, and living simply. the key take away is…cutting your spending rate is way more powerful than increasing your income because no matterhow much money you make, decreasing your spending
will speed up the process. a note, the math behind early retirement worksif you are working a minimum wage job or a 7-figure ceo salary.it’s all about the savings rate. so if you want to retire in 10 years, themath tells us that you need to save 66% of your income. now there is a lot that i didn’t talk about- like how to invest, and how to cut expenses to get to a high savings rate. those willcome in a future video. for now, get excited about the honest truthabout retirement (and early retirement at that!)!
let me know what you think in the commentsbelow? is this exciting or bogus? until next time… start being money smart.
