25 Times Your Annual Spending is A Lot of Money
Let’s be honest. If you are reading this as 20 something years old, and you have just started to make some money. GOOD FOR YOU! You are better off than many other people.
But not everybody is that lucky. Some might just get all these “FIRE information” when they are 30, 40 well maybe even 50+ years old.
Nobody told them they could do what they REALLY wanted if they just saved and invested some money.
BUT! Even if you are stoked about the idea of chasing FIRE, and you are 25 years old. If you are a diligent saver and save 60 % of your income. It will still take you 12 years of working, saving and investing. (7 % annual return)
If you start when you are 25 years old, it means that you will be 37 years old when you have reached your goal of 25 times your annual spending.
That is not bad at all.
But you would still have wasted a lot of time being at a soul-sucking job you don’t like.
Psssst… My Little Secret You Can’t Tell Anyone
I got several new friends by being a part of this FIRE community. And many of them are super badass. The ones that are probably the coolest are the following:
Pete Adeney (Don’t know him personally)
They do differ a bit from each other.
When you meet Pernille she seems to have a very normal/glamorous life with expensive vacations with the entire family. And Jacob is a bit more extreme and is spending less than 10.000 $/year with no kids. Pete Adeney has one kid, he does own a couple of cars but prefers to bike around.
But the thing they have in common is that they have all reached financial independence by having a normal job.
Said in another way. They all have more than 25 times their annual spending saved and invested.
But they have another thing in common.
And here is my “secret”.
Not any of them touches the principal of their portfolio.
Yep, that’s right.
All of them have some sort of new business or job, that covers their expenses. None of them uses the money they have in the portfolio. It is more like a nice cushion if they didn’t feel like making an income.
But FIRE is not about not working. It is about doing stuff you like more, and you decide how many hours you feel like doing it.
So why should you save up 25 times (or more) of your annual spending? To “retire”, but never touch that principal.
Why don’t we just save up 2-5 times our annual spending? Do a bit of work, which is nice. Go for a couple of mini-retirements. And let compound interest do the rest of the work?
Do We Even Need 25 Times Our Annual Spending?
“How much money you would like to retire with??”
It is often the question we hear when we talk about personal finance. But it is the wrong angle to ask the question.
How LITTLE money can we retire with is the right way to ask that question.
The “25 times-your-annual-spending-rule” is based on the thought that we never want to run out of money. And why is that?
What if the day we hit the graveyard, that will be the same day that our accounts are empty. If that is the case. We could change our goal.
So if we want to hit the graveyard with no money. AND we don’t want to have an income from when we are 65 years old. (Which is almost impossible because we have the public retirement funds)
That means we only need to have 16 times our annual spending saved and invested. Because we have only have 16 more years to live.
Even with 16 times our annual spending, and a conservative allocation of 50 % bonds and 50 % global stocks (because we are old and worried about stock market crashes). You only have a 5 % chance of running out of money.*
At the bottom 10th percentile you still end up on the graveyard with 2 times your annual spending to your name.*
And we are more than likely to end up with MORE money than when we started our retirement as 65 years old.
You can have as little as 10 times your annual spending in a 100 % global stock portfolio and STILL only have a 45 % chance of running out of money.
And remember the goal was to have an empty account when we were about to die.
Early Retirement 2.0
So how LITTLE money do we need to retire early?
This graph will show you how much you need to have saved and invested to hit 16 times your annual spending at age 65.
The assumptions are the following:
- We spend 25.000 $/year (175.000 DKK) (That is what Pete Adeney is spending, which is not too extreme.)
- We invest in a 100 % global stock portfolio
Or we can put it another way.
How many times our annual spending do we need according to our age, to hit 16 times our annual spending at age 65.
So if you read this at 40 years old. And you would like to spend 15.000 $/year when you are 65 years old.
You are going to be perfectly fine if you have 51.000 $ saved and invested.
From that point, you can just earn what you are spending. Which is probably something you can earn by working part-time or work for a couple of months each year.
Just continue working, stashing up way more cash than you would ever need.
At the moment I have about 75.000 $ (520.000 DKK) invested, which is about 4-5 times my annual spending. If I just leave that money till I’m 65 years old they will probably compound* into something like 640.000 $ (4.400.000 DKK). (After inflation)
Which is more like 36 times my annual spending.
In that case, I will be 65 years old, but I have money for the next 36 years, without relying on interest there is more than inflation.
So take it easy!
You probably have way more money in your portfolio than you need to!
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