za3k > finances > how to retire for infinity years

This is the first in a short series of articles. This will be by far the longest (and therefore the least interesting). But it's the one that people ask me about the most, so I figured I'd get it out of the way.

I retired at 31, which is pretty unusual. And I get asked about it a fair deal (and even more people want to ask but are too polite). So I wanted to go ahead and answer "how did you retire early?". The basic answer is

• I made a bunch of money
• I don't spend much
• Math

There's a good chance you're imagining you need to make six figures a year, spend about what you are already minus the frills, and basic subtraction means you'll have enough to live on until you're dead. All three guesses are wrong.

Once you read the article, you might think "well, I don't really want to be retired at 30 or 40". At least not with the sacrifices it requires. That's fine, you know what you want. Or, you might do the math and realize you can't retire early. Either way, I still recommend the rest of the articles. They're 80% about normal stuff like how to save money. I just go a little further than most people.

I'm going to walk you through retirement math in today's first article, because until you see the math, you will think the remaining 20% of my later advice is insane.

Finances innately need math. Financial rules of thumb are bullshit, and only numbers actually work.

Most finances, hopefully including the rest of these articles, only need addition, subtraction, and maybe multiplication. This article, and this one alone, we're doing interest calculations (division and multiplication). That means, you invest $100K per year, at 4% interest, you need to know you make $4K every year. You can use a calculator to follow along if you want, you only need the answers, not any deep grasp. But you should check if what I'm saying is true. Never take financial advice on authority or faith. The footnotes have the really advanced math for the really advanced skeptics, but you can skip them if you're not a math person.

The math

• Suppose you make $70K a year, and you spend $20K a year. That means you're saving $50K per year. (These numbers were my actual plan A, although it didn't work out that way.)

• After 10 years, you will have saved up $500K.

• Assuming 4%¹ stock market returns on that $500K, you are now making $20K/year from stock market investments.

• This means that you can now, in theory, stop working forever and live on your investments.

• Not retire for 10 years, not retire for 20 years--forever. If you live to 10,000² you'll be fine, as long as the stock market makes about 4%.

That's it, that was the basic math. Now you can retire in 10 years, no matter how old you are. Just make $70K every year, spend $20K, and wait. And don't have the stock market collapse.

Well, there is a caveat. You need an additional safety margin, even if the stock market doesn't collapse. You probably want to retire in 12 or 15 years, at 35. Here's why:

• Imagine your balance was "only" 400K, rather than 500K. Now you make 16K investment income each year. You still spend $20K each year. So you're now losing $4K per year! 25 years later your balance hits 300K, and you're losing $8k per year. It "snowballs" down exponentially until your savings hit zero, although fairly slowly at first (40 years to go broke).
• Imagine your balance was all the way up at $600K. You make $24K investment income each year. You still spend $20K each year. So now you're making $4K per year. 25 years later your balance hits 700K, and you're making $8K per year. It "snowballs" up exponentially instead, and you just make more and more money indefinitely. Also slowly at first.
• So there's this "magic" line at 500K. If you're above $500K, you expect your savings to grow forever with no work. If you're below $500K, you expect it to shrink forever unless you get a job.
• The 4% per year from the stock market is an average. Stocks don't actually make 4% per year--they make 20%, 1%, lose money, whatever. So in practice, your bank balance is going up and down the whole time. That means if you're close to $500K, whether it snowballs up or down is basically random based on the first couple years. You want to have more like $600K instead, so you definitely snowball up, even if the stocks do badly for a year or two.
• There's another advantage to "snowballing" up. If you start making $25K, you can spend $22K now and still make money. The rich literally get richer with no work. Another reason to aim a little high--you want to enjoy retirement!

To summarize, if you live on $20K/year, and work at $70K/year, you can retire indefinitely in theory, after 10 years (maybe at 32). In practice, add a safety margin (maybe 34 or 37). Now you're secure against random stock market problems, and you make more money over time.

Well, what if you're not making $70K and spending $20K? I'll walk you through the general formula. You need to know three numbers

• Your yearly income (I)
• Your yearly expenses (E). And, these need to stay the same after you retire!
• How much you expect to make on the stock market, which I'm just going to set for you, at 4%¹ yearly. Sometimes you'll see 0.04, sometimes 25³.

The rough⁴ estimate is that you can retire in: 25 * expenses / (income - expenses) = 25 * 20K / (70K per year - 20K per year) = 500K / 50K per year = 10 years. Substitute your own numbers to find out your own situation.⁵

Now let's say you make $50K/year, and spend $40K/year. The same math says it will take you 25 * 40K / (50K-40K) = 1,000K / 10K = 100 years to retire. You will never be able to retire indefinitely; you'll die first. That is a huge difference between those two examples! We'll talk about that in a second, and how to best reduce the number of years. But first, what gives? That's a pretty typical person, right? Why is everyone not starving on the street at 80?

Normal retirement

In practice of course people do spend a lot of what they make and then retire. There are many reasons.

• The formulas assume you're going to retire indefinitely. Actually, you only need enough money until you die. It's a 2.2X difference⁶, if you retire at 65. That's a 55% discount for being mortal.
• People just retire. They're going to, frankly whether they can afford it or not. Some people retire at 65 because they're told they can or should, or they feel they deserve it. Even past that point, others can't work starting at a certain age.
• Some people just go broke. Some go back to work, some starve on the street when they can't. It does happen. You can retire when it was a bad idea.
• Beyond that, some people realize they don't have enough money, and cut back significantly. The imaginary people in my head do this when they're running out of money, not immediately when they retire. Cutting back may or may not fix the problem.
• Most people in the US have special retirement accounts, which they must or are heavily encouraged to pay into. Employers may "match" retirement money (paying an equal share), or it may have special untaxed status. Usually you can't take money out of a retirement account until you're 65, to force people to actually use them for retirement. The account may also be designed so you can't take all the money out at once even after that point.
• The USA has governement programs to help. Medicare provides free health care for almost every old person. Social Security sends monthly checks to old retired people, although rarely enough to live on comfortably.
• We have social support programs. Families often support older relatives. Churches and other social groups can offer help too (as well as for broke and poor people).

If you're retiring at 30, almost none of the above apply to you. You need to get by on savings, no external support. You don't get a 55% mortality discount on retirement, you get a measly 15% discount. You probably don't have much in your standard retirement account, and even if you do, you can't access it for another 35 years. You don't get medicare (though you may get medicaid). You don't get social security. Expect no social support. If people see a healthy 50-year old go broke from poor retirement planning, they should tell you to get a job. I would.

Retiring early

Returning the the topic of the retirement formula, we can see that there are exactly two numbers that affect you. How much you make (income), and how much you spend (expenses). Making a lot of money is good. But not spending money is at least as important. Imagine you made a lot, say six figures ($100K) but spent $50K per year. It would take you 25 years to retire. Not bad! What if you wanted to retire faster? If you spend $25K per year instead, you can retire in 8.3 years. If you make $200K instead, you can retire in 8.3 years. Both are equally good. You can halve your expenses, or double your income. They have the same effect.⁷⁸⁹

To me, that's 16 years of my life I get back. If I make twice as much, I can get 16 extra years to do anything I want, instead of working a job I kind of tolerate. If I spend half as much (remember, for my whole life, not just until I retire!) I get 16 extra years. That's a huge chunk of time. How much would you pay to live 16 extra years? And I get those years now, when I'm healthy and energetic. Prime years. I would do a lot of things¹⁰ to live 16 extra years however I want. Changing my job or spending is just a no-brainer. And the reality is that for most people, it's more than 16 years--it's going from retiring at 65, to retiring at 40 or 30. 25 or 35 years, that's a massive chunk of your life.

Of course, this assumes the value of time when you're at work is next to nothing compared to free time. That's actually how I feel¹¹. If you don't, if you think it's only a bit better, then it's not as amazing. But basically, do the math. 15 years is a HUGE chunk. Even if it's just 10% better, having every day be 10% better for 15 years is still a huge impact.

It could be someday I'll change my mind, of course. I could go back to work. I could decide I don't want to live on $20K into my 50s, or have kids and need to change my plans. But there's nothing really irreversible involved. You're just saving up some extra money and not spending as much. No big deal to have some extra cash if you go back to work, right?

Now you've heard why I think it's really important to spend half as much, or save twice as much. Because it can get you 15 or 25 or 35 years (or 8 hours a day of them!). Way more important than you might have thought without the math.

For most people, finding a job that pays twice as much is very hard. Spending half as much is also very hard. Which is easier depends on your situation.

How to make more money really depends on your field of work, and to some extent where you live. On the other hand, people generally save money the same way--everyone has the same basic expenses. So I'm going to focus on teaching you how to save money in later articles. That doesn't mean it's a better plan. It's just the one I can teach.