It's the dream for many to be able to retire in 10 years â€“ having the time to spend with your family, and indulge in your passions, without the stress of worrying what your boss thinks or worrying about how you're going to survive if you lose your job.
This article is split into two parts. The first part outlines a general process you can follow to retire early, and the second part shows you some maths you can use to determine when you can retire given your particular circumstances.
First, let's look at a step by step process we can use to help us to retire early:
1. Get rid of debt. If you think that your investments are your money working to make you money, then your debt is someone else's investment working to make them money. You need to get rid of your debt as soon as you can so you can then use this money to invest
2. Learn about investing. Whilst paying off your debt start reading as much as you can about investing. What you need to remember is that once you have some money to invest, the better the return you can earn on your investment the sooner you will be able to retire. This is the reason you need to learn as much as possible about investing
3. Invest. Once you have paid off your debts and learnt how to invest it's time to start investing. Make sure you invest without fail every month â€“ you want to make investing a habit, something you do automatically every month, and not just something you do at the end of each month if you have some money left over.
4. Repeat step 3 over and over until you can retire. If you are not happy about the amount you are able to invest each month then you have two choices:
a. Reduce your outgoings so you have more to invest: cancel the cable subscription, make lunches for work at home rather than buy them from a cafe each day etc
b. Increase your earnings: get a pay rise, sell stuff on eBay, blog, or do whatever it takes to increase in income
The process above gives you a general scheme you can use to retire early, but here is the maths to show when you can actually retire (assuming a 4% drawdown rate in retirement):
Number of saving years = 25*(outgoing% / saving%)
Using this equation we can see that to retire in 10 years we need to live off 30% of our net income and save the remaining 70%, as follows:
10.71 = 25*0.3/0.7
As you can see you actually need to save for 10.71 years, but once you take into account interest on your investments during the years you are saving then it will be possible to retire in under 10 years. You can adapt this equation to see when you can retire, but remember, if you don't like the answer you get then you need to either reduce your outgoings or increase your earnings to retire in 10 years or less.