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Is it Realistic to Retire at 35?
Yes and no. While it is completely possible for the average person to retire in her/his mid-30s, it is not easy. Having said that, it is actually quite simple and not too difficult to retire in 24 years. Today's post is dedicated to show how you could realize early retirement whether that is 24 years from now or 20 or even 10. This is the first post in a mini series focusing on educating people on how to understand some basic rules of planning for retirement. If you want examples without all the math, then just skip to the bottom of this post where it says "For Those Who Hate Math".
The Rule of 72
There is a rule of thumb for making it simple to understand about how long it takes money to double. It is called the 'rule of 72' and work like this: if you want to know how long it will take money to double when invested at an interest rate of 10%, you simply divide 10 by 72. The answer is that it will take about 7.2, or 7 years and just over two months, to double. Another way to do this is by figuring out how long you want your money to double in. For example, if you want your money to double in 12 years, you can divide 72 by 12 and know that you will need to make an average 6% return over that time in order to reach your goal in 12 years.
Note: The rule of 72 really works best when using interest rates between 6-10%. Higher interest rates will become less and less accurate. Keep in mind this is simply a help to do quick calculations in your head. If you want to use a more accurate rule for lower percentages, try the rule of 69.3. While still not perfect, this will give you a number so close to perfect that you don't have to spend a load of time setting up a spreadsheet to know how long it will take to double your money.
Some Assumptions (this gets a little technical)
I am assuming certain things in the numbers I will be using in today's post. The first is that these numbers will allow you to retire with the same amount of income you are making right now. The second assumption is that the interest you receive on your investments are calculated annually. If you are able to receive interest payments at 3% every 6 months it will speed the process. If you receive a flat 6% at the end of the 24 years, it will take much longer to reach your goal. I won't go into details about how this works right now. Third, I assume that you are comfortable with a base retirement income the same as your income at 20 years old (if this isn't the case... as it isn't me, then you can simply increase the interest rate, the amount you invest, or wait a little longer). Fourth, I am not adding in taxes right now. While they are an important part of every retirement plan, I will explain how to not worry as much about taxes in a later part of this mini series. Fifth, I am assuming that there is no deflation, which is ridiculous on many levels... Again, I'm simply attempting to make a point that helps people understand a basic concept. Lastly, I am assuming you begin when you are young and have a lot of disposable income. The older you get, the more you get used to a certain lifestyle and the more difficult it is to put money away into an investment account rather than spend it. At 20 years of age, it should not be difficult to invest 25% of what you make each year, but it will be really difficult to invest 25% of your income if you are maxing out your income at 35 years old with a partner and a couple of kids! I will present a few options to help explain other ways to do this based on your ability and willingness to invest money.
How it Works (this gets even more technical)
Example 1: At 20 years old, you begin to invest 25% of your income each year. If you realize a return of 6% on that money it will double in 12 years and then double again in another 12 years (total of 24 years). What this will provide is an annual retirement income the same as when you were 20. Not only that, if you continue to invest 25% of your income in retirement you will continue to have the same income forever!
Maybe you say: That's great Mark, but I want to retire in less than 24 years or I want to retire with more than 75% of what I was making at 20 years old or I want to invest less than 25% of my income each year. Fair enough... I'll give a couple more examples.
Example 2: If you want to retire in less than 24 years you have two options. The first is to invest more each year, the second is to increase your ROI (return on your investment). I'm assuming here the first option isn't exciting, so I'll work with the latter option. If your investments make 8% each year instead of 6% you will now retire on your current income in 18 years (72/8=9 years to double, then double again in another 9 years). This also fixes the problem of wanting to retire with more money. If you wait 24 years at 8% returns you will retire with 160% of what your income was at 20 years of age. For example, if you are making $45,000 (and living on 75% of that; $33,750) at 20 years of age, you can then retire on a lot more money for two reasons: your money has increased faster and you you don't have to invest as much each year in retirement. In 24 years you would have $71,100 each year. With that money you would only have to invest 16% of your income ($11,376) for the rest of your life to maintain an annual spending income of almost $60,000 ($59,724 to be precise) which sounds a lot better than living on the $33,750 you were living on before. Another factor here is that you will most likely increase your income over your working years and this extra income you could simply enjoy spending on your family or whatever else you have as a priority and still enjoy the $60k in retirement for the rest of your life.
Example 3: If you want to retire in 24 years, but you want to invest less than 25%, this is easy to figure out. Do you want to invest only 15%? Then you will need to realize consistent returns of at around 8.5% rather than 6%. If you want to retire in 24 years while investing 10% of your income, you will need to realize a ROI of just over 10%.
For Those Who Hate Math
I will give some simple summaries for those who hate all the numbers above:
If you want to retire in 24 years on your current income... invest 25% of your income each year at 6%.
If you want to retire in 18 years on your current income... invest 25% of your income each year at 8%.
If you want to retire in 24 years at almost twice your current income... invest 25% of your income at 8% and know that after 24 years you can retire and only need to invest 16% for the rest of your life.
If you want to retire in 24 years and don't want to invest 25% of your income, you can invest 15% of your income at 8.5% and still reach your goal. Or you can invest 10% of your income at 10% and reach your goal.
Final Comments
Maybe you have looked at these numbers and you believe making 8% or even 6% is unrealistic. If you believe this, it is a dead giveaway that your only education about finances and investments comes from banks and very average financial planners. I encourage you to seek out better help in understanding how to invest in ways that make more than the returns banks and poor financial planners suggest. To begin on this journey please start by reading my other posts in this blog or, at the very least, wait until next week and read my second part of this series on retiring earlier than you believe possible.
Here's to your future of risk-averse investing!
If you would like to learn more about investing in real estate please
contact me at the email address listed at the beginning of this article
or go to my website at: www.akerahomes.com/investing-in-real-estate.html
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