Hey Steemians,
This year, I am really putting an emphasis on laying the foundations of my path towards (hopefully) early retirement. I have made some discoveries recently that have really given me hope that retiring within the next 20 years is an achievable target. In my next few posts I want to share some of this knowledge with you.
Today I want to discuss why spending less beats earning more. Now, if you could get paid more to do the same work you are currently doing, that would obviously be the best case scenario. What I mean, however, is that the most efficient way to start working towards early retirement today is to find ways to cut spending. I used to think that it would be fine to keep spending the same way I always had and to get a second job or second income stream to pad my retirement savings. The reason why this doesn’t make sense is that the amount of money you will need to actually be able to retire will be much larger than if you had saved by living a less expensive lifestyle.
A good way to look at this is by comparing it to what would happen in a playoff race. Let’s imagine you are fighting your division rival for the last playoff spot. Finding an extra stream of income to be able to save for retirement is the same as winning a game against a team in another conference, whereas spending less to save for retirement is the same as beating your division rival: you get a win and they get a loss so you are doubly ahead.
What happens when you spend less to save more for retirement is that the amount of money you need to accumulate to maintain the same lifestyle post-retirement as you had pre-retirement will be significantly reduced! Let’s look at an example:
Let’s assume that you earn 65k and spend 57k a year while saving 8k towards retirement. You decide that this isn’t going to cut it and that you should be saving 20k per year towards retirement so you are faced with two options: earn an extra 12k or cut spending by 12k. If we assume that based on your returns and on inflation you could live pretty much indefinitely on your nest egg by taking out 4% per year, we end up with the following required savings for you to be able to retire:
Earn an extra 12k: $1,925,000
Cut spending by 12k: $1,125,000
You can see that while both figures are pretty large, one is significantly lower than the other. Choosing the option to cut your spending makes achieving your retirement goal much more realistic for the same amount of annual contributions towards your retirement fund.
Following the example above, assuming 2% inflation and 8% average returns, your 20k annual contributions would be worth about $1,160,000 2019 dollars after 26 years (or just over $1,900,000 2045 dollars). This means if you are 30 today, you could afford to take early retirement at 56.
Of course, more goes into this calculation. The good news is that most of it is positive in that it reduces how much money you will actually need to retire below the amount calculated above, meaning it would actually take less than 26 years to reach early retirement. We will discuss that in my next post.
What do you think? Has this motivated you to rethink your spending habits or learn more about early retirement calculations? Let me know below and thanks for reading!
Enjoy today,
William
