Although many individuals dream of being able to retire in 10 years, few individuals that I interact with that have had these dreams actually have sat down and did the math. However, had they actually sat down and gone through this exercise for themselves they would have found something incredibly interesting; first, that it IS possible and secondly, that it may not take as much money as some financial ‘gurus’ would have you think it takes.
Interestingly enough, in order to be able to retire in 10 years an individual first has to identify how much money they’re going to need in retirement. Traditionally, the financial services industry had first convinced us that we needed to replace 100% of our pre-retirement salary when we retire and then moved onto recommending that we needed to make 80% to 90% of our pre-retirement salary when we retire.
You DON’T need as much money to retire as ‘they’ say you do
There are many theories as to why the financial services industry recommended these levels of retirement income to individuals.
Many innocently would claim that it was in the interest of making sure that individuals would be able to comfortably enjoy their retirement without fear of living a challenged existence when people didn’t have the ability to make an income.
Others would surmise that it was because the financial services industry wanted to make as much money as they could on commissions and fees servicing these individuals for as long as possible. Unfortunately, I tend to believe that is the latter explanation and not the former.
Regardless of how much money the financial services industry believes you need in retirement, the only persons opinion that matters is YOU! No one other than you knows what you want for a lifestyle while in retirement and therefore, will know what it will take for financial resources in your retirement.
Know your ‘Number’
As is identified in the Financial Independence (FI) community, you first need to “know your number” before you can reasonably create a wealth building strategy that will help you build enough wealth in order for you to retire.
This “number” is the amount of income you will need to have in order to be able to comfortably cover all of your annual lifestyle expenses when you are in retirement and no longer working and receiving an income. It is this “number” that you can work backwards from in order to establish how much money you will need to amass in order to be able to stop working.
So as was identified, your “number” is the amount of annual income you will need to be able to draw from your investments in order to cover your annual expenses. This is obviously a net number, needing to take into consideration that taxes will be withdrawn from the amount of funds that have accumulated and then taken out to fund retirement activity.
Figure out what it’s going to take
So how do you figure out what your retirement ‘number’ is? Yup, you guessed it! You have to create a budget. Oh the humanity! The reality is you’re actually going to need to create a ‘prospectus’ budget of how much money you’re going to need when you retire https://thefinancialstoic.com/?p=132
What makes this somewhat difficult is you have no idea what level of expenses you’re going to encounter in retirement. That’s why traditional retirement planning used what your current level of expenses are before retirement.
Doing it that way took any speculation out of the equation, as it would be highly unlikely that you’d actually spend more money in retirement than you would prior to retirement.
That said, however, prospecting what your expenses are expected to be in your retirement will give you a much more realistic projection versus looking at what you’re currently spending. As a result, you’ll be able to much more accurately identify what you’ll need for an annual amount of income.
For ease of the math, I anticipate that my wife and I will need $40,000 of annual income generated from our 401(k). Estimating a 4% annual draw, in line with the infamous Trinity Study, we would need $1,000,000 in our 401(k) upon retirement. Therefore, our ‘number’ is $1,000,000 in accumulated retirement funds and an annual income of $40,000.
Just do the math! It’s easy
In order to find your ‘number’, another formula can be used that’s even easier. You simply multiply the amount of annual income that you need, in this case $40,000, times 25.
Again, this ends up calling for $1,000,000 in accumulated retirement funds needed in retirement.
So how do I retire in 10 years? Well, based on the figures identified using my retirement ‘number, I’d need to amass $1,000,000 in retirement funds before I could call it quits from my day job. The math now is elementary. In order to get to a $1,000,000 in 10 years I’d need to generate $5,850 each month or $70,200 a year, considering a 7% rate of return.
Taking into account that this would need to be an after tax amount, or a net amount, this would otherwise be a very significant amount of income that would originally need to be made in the first place from my job.
Get a side hustle to cut down on the time it’s going to take
However, if I were able to augment the income that I would otherwise have available from my job with other sources of income, the dependency on my ‘day job’ could be reduced.
More specifically, if it was possible to add at least an additional source of income, the job of having $70,200 a year available to invest would be so much easier.
For example, if I were to have a side hustle that could generate even just $1,000 a month ($12,000 a year) my day job would now only need to generate $58,200 a year in funds to invest.
Now if I somehow were in a position to have been able to live in a multi-unit dwelling where one of my tenants was able to cover my rent and another tenant was able to provide $800 net monthly income ($9,600 annually), I would now need to only generate $48,600 annually to invest.
This amount now reflects an investment of $4,050 a month from my day job. Although this is still a substantial amount, augmenting it with other sources of income makes this so much more of a doable task not only for me but for a lot more other individuals as well.
Conclusion
In summary, it IS possible for those people who make a reasonable amount more money than their expenses to be able to retire in 10 years. It really is possible. That said, however, for someone who is pursuing this as a goal you’ll need to adhere to a few core principles:
- You MUST cut your expenses to the bone. Every single one of the dollars that you currently have must be put to work on your behalf building wealth. Therefore, you need to cut expenses and use every available dollar to invest in wealth building assets.
- You need to make sure that you will not have any wealth-depleting committed monthly expenses such as mortgages, car payments, school payments, credit card payments, etc. as you begin your wealth building journey. These are normally the largest of your “fixed costs” and if you can completely eliminate them these dollars can be put to work building wealth.
- You absolutely need a side hustle that can generate income that you can in turn use to buy income generating assets elitelifewarrior.com/what-is-the-best-side-hustle. Not only do you need this income to accelerate the wealth building process, the right side hustle will be able to leverage the time you spend on this venture in a way whereby you can money without even working.
So if you really want to be able to retire in 10 years you not only have to know your ‘number’, you have to know the math and you have to know how to make it happen. It’s probably pretty obvious that it won’t be easy but it should be obvious that it can be done if you’re committed to making it happen.
