“50% Rule” To Retire In 20 Years

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Before I left MegaCorp last year, I had the chance to speak with a room of 20 of our newest MBA recruits who were in a leadership development program for the company. While I was wrapping up my career, most of them were just a few years into their career.

I was giving them an update on a digital marketing initiative taking place across the company, but they were quite interested in how I had managed to become financially independent & retire early (FIRE).  I then shared with them a simple rule of thumb that I will share here: if you save half your income, you should be able to early retire in just 20 years.

Most people are surprised to hear that if they start working at age 19-22, you could be living a life of leisure by age 39-42.  When the world tells you that you’ll need to work until 60-65 to retire, the idea of hanging up your career decades earlier comes across as a bit of a shock, but the math is pretty straightforward:

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You can debate the rate of return or what is a safe withdrawal rate for an early retirement, but the math is pretty straightforward.  I plugged in $50K for a year one pay – average for new college graduates, or median for a plumber – but, the starting pay doesn’t really change the math.

The model assumes 4% annual raises on that pay and spending only 50% of what you take home.  I assumed a 7.5% ROI on saved income – about 2.5 pts less than the S&P 500 long-term average – a rate that can be boosted with company or union matches on retirement savings.

The framework certainly would require lifestyle sacrifices (particularly early on), but plenty of people have websites that focus on frugal living that millennials have made trendy.  Doubling up in housing, using public transit, and other money-savers can make a big difference early in your life.  Getting married and living on just one income is another strategy that people use. And, the model doesn’t account for pay raises from promotions that could be invested in housing, education, or other ‘extras’ that have lasting value.

Additionally, just a few more years worked – make a huge difference in the model and “buy” you a significantly enhanced retirement.  If you can make it in just 20 years, perhaps 25 years of working (to age 44-47) doesn’t seem to difficult.

Here is what 5 more years does to the model:

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Now your rate of withdrawal is more than 40% higher ($92K / $65K) above the lifestyle the saver has been living on.  That either buys more security on your withdrawal rate, or gives you a super retirement.

In the end, I hope you see that early retirement may require sacrifices, but it is not complicated.  As Dave Ramsey says, “you have to live like no one else if you want to live like no one else.”  MrFireStation worked a leisurely 27 years before retiring at age 49.  If you are just starting out, you should set your savings goal high!

Image Credit: Pixabay

6 thoughts on ““50% Rule” To Retire In 20 Years

  1. Not to complicate the model, but salary generally increases more (on a percentage basis) early in your working career than later on. Which is good a thing, as you’ll ramp up your total savings more quickly, if you’re living on 50% of that amount!

    Liked by 1 person

    1. Agree – you could probably build a 15 year model to retirement with promotion pay increases. Just tried to keep things simple.


      1. I don’t remember the exact numbers, but in a previous role (~1999) I worked on some retirement planning software. One thing we realized, based on some data sets from the Department of Labor, is that salary increases over the course of a working career are usually not linear. The biggest percentage bumps come in the first decade, followed by smaller raises for the next 10 years or so. For most workers, once they reach their 40s, their inflation-adjusted salaries are essentially flat for the remainder of their working years.

        So we created a “salary curve” for our model and found that the predicted ending retirement balances were approximately 25%-30% more when using this assumption, as opposed to steady increases each year. (Assuming the same starting and ending salary amounts.)

        Liked by 1 person

      2. Interesting. And if people are very good savers, they could FIRE even before their salaries flatten out!

        Liked by 1 person

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