Math is the savior we need when looking at retirement. Most people think that high school math is a waste of time unless they are pursuing a career in engineering or a field that requires advanced math skills. The truth is that we use math so often, from counting our coins in our pockets to trying to figure out if the internet company is trying to screw us with a small percentage in price increases.
Could this math help us determine how to retire early? It can be as simple as counting from 1 to 10. Maybe not that simple, but the use of math can make it very simple.
It all comes down to your savings rate. Saving every penny and nickel may not be the most effective way to retire early, as we may need over a million dollars. However, our savings rate can help us determine how quickly or slowly we will reach retirement.
Savings Rate
Your savings rate is determined by several factors.
- Your Take Home Pay
- How much You can live on
Suppose we want to break this down even further to make it super simple for you. If you are spending 100% of your take-home pay, then you have a 0% savings rate. On the other side of things, if you spent 0% of your take-home pay, then you really do not need to work at all since you do not need income.
Those people in between these two extremes need to figure out how to get from point A to point B. That is going from your current savings rate to a point where you no longer need to save. RETIREMENT!!!
Every dollar that you can save and invest for the future is a dollar that is going to make money while you sleep. Investing your money is no get-rich-quick scheme. It is more of the tortoise racing the hare. Slow and steady wins the race, and you cannot get that snowball rolling until you start investing.
If you want to retire in the next 5 to 10 years, it is not a matter of how much you invest. It is determined by how much you save.
Ex:
Your current take-home pay is $60,000 per year. You spend $40,000 a year. Meaning you have a savings rate of about 34%. It will take you 25.2 years to retire with that savings rate.
Assumptions:
If this math is correct, we need to look at some assumptions to get the real picture.
- Your investments earn 5% in real returns, after accounting for inflation. Inflation can range from 3% to 4%. Meaning you could be getting a return of 8-9%.
- You will safely withdraw just 4% from your investments. Maybe a bit less during recessions.
- You will also be able to reap the benefits of this portfolio, ensuring it sustains you for years to come.
The average savings rate in America is 4.9%, according to the U.S. Bureau of Economic Analysis. So, if the average American is saving around 5%, it will take them roughly 65 years to retire.
I’m not sure about you all, but starting work at age 22 and having to work until I’m 87 doesn’t sound like a great idea to me. I would rather be enjoying my hobbies while in my 60s and 70s.
A 10% savings rate means that you will retire in 51 years. At a 50% savings rate, you will be able to retire in 17 years, while a 65% savings rate puts you at retirement in 10 years.
There are a couple of things to consider. First, you may have a spending problem. Secondly, it could also be an income problem.
Spending Rate:
The things we spend on could be killing our future retirement. Do we have too many streaming services? Is that Starbucks coffee (that tastes bad) costing us our future? Excessive spending is a significant problem in America and many parts of the world. The truth is if you can spend less than you make and invest enough of that, then you can break the cycle.
If you make $60,000 a year and you spend that much, then you need additional income to invest for your future. If you can save 10%, you would retire in 51 years, but if you cut out just $10 a day, $300 a month, that would be 15% savings, meaning you can retire in 41 years instead. 10 years saved by cutting $10 out of your spending.
The cool part is you can then live on less.
3 Ways To Improve Your Savings Rate
Here are a couple of ways to help improve your savings rate.
Cut Your Transportation Costs
- The Average car payment in the U.S.A. is $745 a month.
- Transportation is the second largest expense for Americans.
As we can see, reducing the cost of transportation can result in significant savings. That means if you’re going to buy a car, consider a used vehicle that you can pay for in cash. A new one that is going to cost you $745 a month is probably a huge hole in your wallet every month. Also, consider negotiating the cost of insurance with different companies. It never hurts to pick up the phone.
Cut Out Unnecessary Items
I love coffee, but it is time to cut out the to-go coffees. You can probably make coffee cheaper at home that tastes better.Why not save a bit of money and do that?
Unused subscriptions or streaming services could be cut out, too. Do not sit all evening just watching TV. Play with your kids, and get a side hustle to get a head start on your retirement savings.
Grab A Side Hustle
It’s time to start earning some extra money. With every extra dime you earn, put that into your investments. Time is the thing that will make these investments snowball. The more you can put towards them today, the better it will be for your tomorrow.
Final Thoughts:
The math may be simple, but it is all about taking action. Investing in a simple index fund or ETF that tracks the market or the S&P 500 will be a great way to invest your money. So start saving more of your money. That takes action. Track your expenses, cut unnecessary spending, and consider taking on a second job to increase your income. The more you save today can catapult you to a great retirement future.
Steve Cummings is a journalist, personal finance creator that has specialized in saving and investing into ETFs. Steve founded Budgets Make Cents, and has been known for his personal finance advice and his passion for sports.
