Saw this article on USA Today about early retirement. The article hits on a lot of really good points that I've felt for a few years now. I personally believe that all the retirement mumbo-jumbo out there is a little wrong, or at least non-optimal. My personal goal is not so much to retire early but to be finished saving for retirement early so I can maximize the value of compounding (and have a lot of fun after its off the list). For example finish saving by 35 then just topping up for fun as I get older from there.
The basic nature of compounding or from the article "nest-egg mathematics" (sorta) easily allows for this. Each $1 saved while young equals a lot more than $1 when you finally decide to retire. For example if you are retiring at 65, each $1 saved while 25 would equal roughly $8 at retirement at 65 while someone who is a little behind the game and playing catch-up at age 55, each $1 saved would be roughly $2 at retirement; a huge difference!
This compounding math that makes a dollar worth more going forward can also be dialed backwards to see what that nest egg would require earlier. Using this number as soon as you hit the desired growth line you can take your hands off the retirement nest egg and let it grow on its own for the rest of your life while you do what you want with the rest of your money.
Lets look at some numbers. Note these are rough napkin numbers, nothing official. They assume an account doubles in 10 years which is roughly 7% interest.
First, how much do we want in retirement. I'm setting an arbitrary $100k a year, I think this would be enough for me to be pretty comfortable. Assuming 7% growth, if you withdraw 4% a year your savings will still grow by 3% a year, allowing you to increase payments throughout your life to keep up with inflation. So following this 4% rule we'd need $2.5M to retire (100k/4*100). So based on 7% growth, 100k income and $2.5M nest egg; here's the table of goal numbers we want to try to attain.
| Nest Egg | Age | Years to Retire |
|---|---|---|
| $2.5M | 65 | 0 |
| $1.25M | 55 | 10 |
| $625K | 45 | 20 |
| $312.5K | 35 | 30 |
| $156.25K | 25 | 40 |
| $78.125K | 15 | 50 |
| $39K | 5 | 60 |
Super! So if we can save roughly $312.5k by the time we hit 35 then we're done! I'm around 25 (just to keep the numbers easy) so in order to attain this savings amount by 35 I'd need to put away roughly $3,654 a month or $43,848 a year. This is roughly the same as maxing out two 401ks and IRA accounts (46K) for 10 years. From here each contribution over this amount pushes the day of retirement closer to us, if we can hit $625k then retirement is just 20 years out instead of 30.
I know these numbers are way simplified. If I get around to it I'll write more in-depth blogs on the analysis of the retirement numbers and the figures required for early retirement. If you have any questions comment or shoot me a line and I'll work to expand those areas out.
Finally, if you want to really help your child out, forget the college savings plan. Put $39k into a savings account for them at age 5, retirement = done.