The Secret Math Behind Early Retirement

Some super-savers are able to retire after 20 or fewer years working.

early retirement
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By Robert Berger

Early retirement often seems impossible. It's difficult enough these days to retire at age 65, so the thought of retiring early is a pipe dream for most people. Yet somehow this dream has become a reality for some diligent savers. In extreme cases, a few people have retired at an age when most of us are just getting started.

One well-known example is the man behind, who retired at age 30 after just nine years of working. While he is the exception to the rule, he thinks that should change. He views early retirement as something most people can attain.

To understand how it works, let's take a look at the math behind early retirement. These numbers have implications for all retirees, not just those looking for an early exit.
So even if you think you're too late for early retirement, these strategies will still improve your retirement finances.

The math. How quickly you can retire depends on how much you can save. If you are able to save the often-recommended 15 percent of your take home pay, it will take about 45 years to retire. This conclusion assumes investments earn a real return (after inflation) of 5 percent, and that you live off of 4 percent of your nest egg once you do retire.

Now let's say you are a frugal and committed saver. If you are able to save 30 percent of your take home pay, your working years fall to about 30. At 40 percent the necessary work years before retirement falls further to about 20. And if you are able to save 50 percent of your take home pay, you'll begin enjoying your golden years in less than 20 years. As my mom would say, now we're cooking with gas.

The magic behind this math is the result of three related factors. First, as the saving rate increases, the amount saved increases more quickly. Second, with the passage of time, the nest egg benefits from compounding of investment returns. Finally, as the savings rate rises, the amount of money needed for living expenses goes down.

Let's get real. I know what you're thinking. The math may be accurate, but saving 30 percent or more of take home pay is impossible. Don't tell Mr. Money Mustache or the bloggers at "Early Retirement Extreme" and "Can I Retire Yet?" The fact is that early retirement is a reality for many people, including those who earned an average income during their working years.

While each early retirement story is unique, many share several common themes. Early retirees shun certain expenses many of us take for granted, such as expensive cable and cellphone packages. They tend to spend less on cars and transportation, often living close enough to work to either bike or walk. They also spend less on food, eating out less frequently than most. Finally, they are often more self-sufficient, choosing to handle home and car maintenance and repairs on their own, rather than paying others for these services.

Implications for baby boomers. For those already approaching retirement, stories of early retirement may at first blush seem unhelpful. After all, baby boomers are long past retiring at age 30. However, study after study reveals that many older Americans are not prepared financially to retire. The principles behind extreme early retirement may be the answer. If extreme saving can enable some people to retire at age 30, the same methods can help prepare those in their fifties to retire by age 65.

Rob Berger is an attorney and founder of the popular personal finance and investing blog, He is also the editor of the Dough Roller Weekly Newsletter, a free newsletter covering all aspects of personal finance and investing, and a weekly podcast.

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Bryan Danger

There is no "secret math" because a secret implies that the answer is only one thing.

In fact the answer is that you must do many or all of the above in order to retire early. You must be willing to make difficult choices to spend less, work hard and invest wisely. You also need to have the desire or drive...and the guts to do take the leap.

The people described in this article may not be the norm, but that doesn't mean there aren't many out there living a lifestyle where money doesn't have to equal hours spent. If you love your job by all meas keep working it- i envy you! If you prefer a life if lavish goods than keep working to buy them.

I personally would rather enjoy the freedom of financial independence while i'm young enough to fully enjoy it. I can also say (from the other side) that i'm FAR happier having given up the security of the job i knew for daily freedom and happiness...and if worse case scenario ever hits or my planning is flawed, i can always go back to work. Who knows, one day i might even decide i WANT to! ;)

December 30 2013 at 2:52 AM Report abuse rate up rate down Reply

Read your comments! At 77 years of age, house paid, cars paid--and new, helping grandkids in college, and three sons I adore. Which could I live without? All but my family--when you are old, that's all that counts. Retirement is a "to each his own thing, not eay to adjust to for some, others want to work, volunteer--whatever you choose. Just make sure your retirements are secure, they are plentiful and never, never plan of Social Security! If I was in my 50's today, I think I would do what alot of you suggest, be more frugal.

December 26 2013 at 3:44 PM Report abuse rate up rate down Reply

Living a balance life including saving a reasonable amount for retirement is my goal. I've seen too many people that think their fun life will begin at retirement only to find they die a couple years into it.

December 26 2013 at 2:43 PM Report abuse rate up rate down Reply

There is no secret math to early retirement : get rid of your bills, don't buy anything you don't need and voila.

December 26 2013 at 2:30 PM Report abuse rate up rate down Reply
Hey Jude

I've got the best idea, pay cash for your home and let's don't even have a mortgage. That's how we got so far ahead of everyone else. That leaves you with a lot of money for investments especially maxing out your 401K plan and Roth IRA's. Do everything yourself, don't eat at restaurants very often, and quit buying new cars constantly. It also helps tremendously to leave the procreating to others!! You know, the ones who are committed to their kids and their needs.

December 26 2013 at 2:25 PM Report abuse rate up rate down Reply

All things being equal, It's better to have a large mortgage when interest rates are below 4%. When inflation hits, this has the effect of shredding you mortgage for you. That's what got all those Savings and Loan in trouble in the 80s. That was the biggest transfer of wealth from banks to home owners. The same thing is happening now. Keep a mortgage!

December 26 2013 at 2:00 PM Report abuse rate up rate down Reply

buy a small condo, like 800 sq feet (not a house). Condo fees are miniscule compared to the monthly bills associated with a house. My condo fee is 248 a month and covers all my heat and water....not to mention all the upkeep on the building. A house is a money pit

December 26 2013 at 1:41 PM Report abuse +1 rate up rate down Reply

Why Pay off a mortgage if the property is providing cash flow to pay the note? You get a tax deduction on interest. You also get to depreciated (1/27 of the cost of the building) as a credit, insurance and taxes are also deductions. Let the renter buy you the property. You make a solid profit as well. You other peoples money. That's what I've done in 5 states. My trip to Vegas is also a deduction. My LLC is in Nevada. You got to learn how to work the system. Aren't to many Smart poor folks.

December 26 2013 at 1:19 PM Report abuse rate up rate down Reply

Mortgage or rental's a wash...Both are too expensive for this plan to be feasible, unless you live in the absolute worst of the worst neighborhoods--in which case, the likelihood of living to retirement age is negligible...

December 26 2013 at 1:00 PM Report abuse rate up rate down Reply

It's quite obvious that people that live paycheck to paycheck don't even need ot read this along with people that are wealthy.
As far as tax goes the first $250,000 or so isn't taxed and i think it went up recently.

December 26 2013 at 12:49 PM Report abuse rate up rate down Reply