How to Retire Early Using the 4% Rule

I’m 26-years-old and retired on my own terms.

Photo by Austin Distel on Unsplash

I’m 26-years-old and I started saving for retirement two years ago. Prior to that, retirement seemed so far away.

Just as most high school graduates don’t question the norm of going to university, many working people don’t question the 40-year work career.

Then, I came across a blog article titled “The Shockingly Simple Math Behind Early Retirement” which challenged that norm. It was written by a man who goes by a funny name, Mr. Money Mustache. Perhaps you’ve heard of him.

Over the past decade or so, he has cultivated a lifestyle revolution of sorts. Thousands — if not millions — of people are tuning in and changing the way they save money.

As a matter of fact, on his own blog, he refers to the movement as a cult because of how religious many are about the F.I.R.E. Movement.

F.I.R.E. stands for Financially Independent, Retire Early.

Peter Adeney, the man behind the mustache, says the movement isn’t for all people, though. Generally, you must make a middle-class or higher income. And the hardest part: you must uphold a mentality of delayed gratification. If you can meet those two requirements, you can obtain financial independence and retire, oftentimes, much earlier than you would have ever thought.

How does F.I.R.E. work?

Everyone has their own F.I.R.E. journey, but each journey goes by the same basic principle; save now and retire sooner.

Adeney’s core movement is based around the 4% rule known as the Trinity Study. It has been around for decades but, until recently, had never been challenged to this degree or on this magnitude.

The 4% rule assumes that if you only spend 4% of your total net worth each year in retirement, you’ll be able to sustain the same lifestyle for years to come — presumably your entire retirement.

This rule has traditionally been used by financial advisers to help their clients find a comfortable withdrawal rate in retirement.

However, Adeney (who never worked in finance), sought to challenge the rule. He wondered what would happen if he saved up enough money to apply this rule and retire by age 30.

Whereas a traditional retirement would span about thirty years, early retirement could mean 60-years-plus of needed funding.

Adeney knew in order for his nest egg to outlast his life, he had to successfully save 25x his annual spending. This meaning one year withdrawn from his egg would be exactly 4% of his total net worth.

But what about inflation?

At an average 2.5% annual inflation, Mr. Money Moustache wouldn’t be afforded the same purchasing power from his 4% withdrawal rate decades down the line. This is true.

That’s where the second part of the equation comes in. You must invest your nest egg properly.

As the stock market, on average, returns 6–8% annually, it is assumed that the gains can off-balance your 4% withdrawal and a 2–3% inflation rate each year.

The math behind the idea added up. And since Adeney famously became an early adopter (and Godfather) of the movement, many data have been collected to test the F.I.R.E. theory.

In all studies and tests I’ve read, it has never failed.

How to get started on your F.I.R.E. journey

We’re going to walk you through how you can implement this movement into your personal finances, but first, you must realize that it is going to take discipline.

If you’re only half-committed to the idea of delayed gratification, you might need to set your target date back on your retirement.

Let’s get started.

Calculate your golden number

The first step is to calculate your annual expenses.

This includes everything from rent/mortgage to groceries to night’s out to insurance/bills to car repairs and the likes.

Add everything up — if you have to, take one month to diligently track your spending using a personal finance app like Mint. Many people have a good idea of their expenses. Some will be dreadfully blown away at their poor spending habits.

When you’ve calculated your monthly expenses, multiply it by 12 (12 months) to figure your annual spend.

Let’s take my situation as a workable example. To make my golden number lower, I’ve taken advantage of location arbitrage and have found a much more affordable life in Indonesia.

My annual expenses total about $5,000 (not bad, right? You can learn the secrets of location arbitrage here).

Note: I know my expenses won’t always be that low, so I’ve built a few side hustles to supplement the math I will show you next.

If I want $5,000 to total 4% of my net worth, I must save 25x that amount (25 x 4 = 100% of my net worth).

$5,000 x 25 = $125,000

That’s it. That’s my golden number — the amount I need to save to retire.

Is it that easy?

Yes, it can be that easy. However, for the majority, our lifestyles will get in the way of our pursuit of financial freedom.

Let’s look at another example.

Lucy lives in Kansas City. She makes a fair annual salary of $50,000.

She’s normally pretty frugal by society’s standards, but still totals a monthly bill of $2,500 between her expensive rent, car payments, and various memberships and bills. That puts her annual expenses at $30,000.

Lucy saves $20,000 per year and her golden number for retirement ($30,000 x 25) is $750,000.

Conveniently, there are many tables and charts that show us how long it would take you to retire given your normal savings rate.

Lucy saves only 40% of her income which is a great start! However, looking at the table shown on Mr. Money Mustache’s blog, it would take her 22 years to retire.

For kicks and giggles, let’s suppose Lucy is able to tighten her belt so-to-speak and reduce her annual spending to $20,000. Cutting a third of your spending is not easy. It may take sacrifice and attention to detail, but let’s see how many years it saves Lucy on her retirement. . .

Now, saving 60% of her $50,000 salary, Lucy could eventually retire in 12.5 years!

Just by cutting a third of her spending now, Lucy could retire ten years earlier. That’s the power of saving.

The magic secret to F.I.R.E.

There’s not one magic secret to this movement. There are many life hacks to gain momentum on your F.I.R.E. journey.

My favorite hack is, as I mentioned earlier, digital arbitrage.

Let’s look at how location-based savings can improve your time-until-retirement dramatically.

Here’s an example:

Dawn is working remotely (thanks, COVID, for normalizing remote work). She makes $35,000 annually and has decided to take up residence in Costa Rica where she can live for $7,000 annually. That means she is saving $28,000 annually (80% of her salary).

Her golden number is $150,000.

Using the chart, we see saving 80% of your annual salary equates to retirement in only 5.5 years.

Dawn is 24 years old. She will be retired by age 30.

However, it doesn’t matter how old you are. It is only a matter of how much you can save. So, no matter if you’re 24 or 45, F.I.R.E. can apply to your situation.

Don’t spend another day living society’s reality of retirement at age 65. Do something about it so you’re not spending ½ of your life working toward somebody else’s dreams.

After all, this is your life and you only have one of them.

If you’d like to know more about early retirement and how you can get there, feel free to subscribe to my newsletter below.

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