On the long list of Imaginary Reasons Why Early Retirement Wouldn’t Work, many of the concerns are variations on the theme of “I won’t be able to retire early myself, because I wouldn’t have enough money to do X”.
The “X” can be anything. Often it is something family-related like raising a large number of children, funding one or more university educations, or taking care of elderly parents. Other times it is lifestyle choices that happen to cost more, like planning to retire in San Francisco or New York, or regular international travel and sightseeing. In certain dark cases, it may even be the desire to continue to regularly purchase brand new four-wheel-drive luxury trucks and drive them around town instead of riding a bike.
Everyone has a different picture in their mind of what expenditures are necessary and life-enriching to make. Even here in the supposedly-frugal Mustache family, about half of our $25,000 annual spending is on optional luxuries like living in an expensive house, eating a low-carb mostly organic diet, owning two barely-needed cars, and traveling for three months every year. The point is that every expense profile is unique, and every person will eventually need to find a way to make expenses and income match when retirement comes – whether retiring at 25 or 85.
That’s all obvious. But these bleak projections of future poverty are often missing something that is not always obvious to the beginner student of financial independence. And that is this graph:
See, what the graph shows is that the longer you work at saving, the faster your saving becomes. While initially you might be saying “Duh, thanks for the refresher in compound interest”, consider the implications on funding those niceties you were mentioning earlier.
To put some numbers to the graph, imagine a family with a 50% savings rate. They are earning a $75k take-home pay and spending $37,500. Their retirement savings will look like this, assuming a 5% after-inflation return:
End of Year Amount Increase in Wealth Passive Income Percent of What you Need
1 $37500 $37500 $1875 5%
2 $76875 $39375 $3844 10%
3 $118219 $41344 $5911 16%
4 $161630 $43411 $8081 22%
5 $207211 $45581 $10361 28%
6 $255072 $47861 $12754 34%
7 $305325 $50254 $15266 41%
8 $358092 $52766 $17905 48%
9 $413496 $55405 $20675 55%
10 $471671 $58175 $23584 63%
11 $532755 $61084 $26638 71%
12 $596892 $64138 $29845 80%
13 $664237 $67345 $33212 89%
14 $734949 $70712 $36747 98%
15 $809196 $74247 $40460 108%
In this example, our savers start from scratch and end up financially independent (passive income at least 100% of expenses) in just over 14 years. But look at the difference in wealth accumulation:
- in Year 1, $37,500 was saved, which started to generate $1875 of annual passive income (5% of their spending)
- in Year 14, over $70,000 was saved, boosting passive income by about $3500 (almost 10% of spending)
In other words, as you approach financial independence, your savings rate goes off-the-hook. Very short periods of earning additional money result in very large boosts to your permanent passive income. One extra year of work would boost your income by 10% ($3500, or enough to pay for a friend-in-need’s grocery bills forever, or take an extra plane trip around the world each year) – permanently.
Another way to marvel at this effect is to just look at the quantity of extra wealth. One year generates $70,000 of savings, enough to pay for a complete four-year university education in most places. The next year adds a further $74,000.
This effect isn’t just for 50% savers, either. Lower savings rates result in even bigger changes in saving power over the course of a working lifetime. It takes longer to get to independence, but at that point you will be even more amazed at the boost you are receiving by surfing on the front of the money wave.
So while I’ll agree that the financial newbie has a few years of ass-busting ahead of him to buy his freedom, I think he is in for some positive surprises when it comes to ‘stashing enough to fund any niceties that might need to be added.
This exponential nature of wealth accumulation leads to a surprising feeling of confidence, which you could call “Having Enough… and Then Some”. Not only are your bills covered, but you now have confidence that it would be easy to cover any additional expenses that might come up. Mr. Money Mustache is often accused of “cockiness” in this regard, when in fact the confidence is just the result of simple math. Income = Principal x Investment return rate.
You have an array of options open to you, that may never even be used in your lifetime. But just knowing they are there for you, opens up an airy new Dojo in your mind that allows you to do mental Kung Fu that would have been impossible before you were free. Those options boil down to just three concepts:
- You designed your retirement income to be at least slightly higher than your retirement spending. So there is a frequent feeling of surplus and safety.
- You always have the power to spend less, if you ever choose to do so.
- You always have the power to earn money, again at your own choosing. During the extended freedom of an early retiree, this is very likely to happen at least occasionally.
The last two are possible at any time, but neither is likely to be truly necessary. But any time #2 and #3 are practiced even if just for fun, it reinforces #1 even more, for the rest of your life.
This feeling of control gives you the “And Then Some”, to add to the feeling of “I have Enough”. And for truly joyful living, I recommend adding both feelings to your plate as part an early retirement diet.
That feeling of “And Then Some” is also referred to as “Abundance”, a concept often used on some financial blogs as an excuse to earn more in order to be able to spend more. But a truer form of Abundance is just knowing, right to your core, that you already have more than you need, and this condition will persist as long as you live.
Experience these feelings on a regular basis both before and after retirement, and you will be enjoying a truly rich life.
It’s really fun to generate your own graphs taking into account your own income and goal savings rate. Currently my graph is actually similar to the one shown here. But hopefully if the wife and I continue to earn more and spend the same our graph will just get steeper!