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How to Retire in Under Ten Years

Are you on FIRE?! I’m referring to the acronym FIRE (financial independence retire early) and not the literal definition (I hope that goes without saying).

If you’re on FIRE (again, referring to acronym) - yaayyyyy!!! One of the best things about FIRE is the freedom you have to spend more time with your family and friends, to explore your hobbies, to focus on your health, to travel, to do . . . whatever it is that you want to do!

Amon and I achieved FIRE in eight years - two years earlier than we expected! At the ages of 39 and 41, we quit our government jobs, retired, and moved to Portugal. Most people are shocked when we tell them we retired so young. Even more people are shocked when we tell them we were able to retire in less than ten years after devising our retirement plan. In general, I think the shock comes from a lack of understanding. Who really understands how to retire in less than ten years anyways?! Well, we do!!! And . . .

It all begins with . . . Savings Rates!

The key to retiring in less than ten years is all about increasing your savings rates. Your savings rate is the amount of money you make minus the amount of money you spend. Simple, right? Even better - there are two tried and true methods for increasing your savings rate: 1) making more money while keeping your expenses the same; and 2) decreasing your expenses, thereby saving more. Technically, there’s also a third way - making more AND saving more! Whatever method you choose, the goal should be to increase your savings rate by as much as possible. When you do this, you can invest more, and when you can invest more, you can grow your wealth more.

If your plan is to grow your wealth in the stock market (which is what Amon and I did), you’ll want to grow your stock portfolio to twenty-five times your annual expenses. This equation comes from the 4% Rule. The 4% Rule is “all the talk” in the FIRE community. The rule became popular from the Trinity Study.

Not familiar with the Trinity Study? Quick break down:

It’s a study conducted by a group of finance professors at Trinity University in Texas. The study calculated retirement portfolio success rates with various monthly withdrawal rate assumptions and various portfolio asset allocations. In other words, it looked at portfolios that had a mix between stocks and bonds and it looked at different withdrawal rates - at 3%, at 4%, at 5% and so on. And it looked at the success rate of people withdrawing that money and being able to withdraw that money throughout a 30-year retirement. The success rate was based on whether money remained in the investment portfolio throughout the life of the portfolio. Based on the numbers, the study concluded that someone with a retirement portfolio of 100% stocks could safely withdraw 4% from their investment account (adjusting for inflation) each year and not run out of money over the course of 30 years. The study also showed a 100% success rate for an investment portfolio that consisted of 75% stocks and 25% bonds with a withdrawal rate of 4%. BUT, when a portfolio was more heavily weighted in bonds, the study concluded that the success rate for the portfolio decreased.

So, what does the Trinity Study mean for you if you want to retire in less than ten years?

Assuming you want to grow your wealth in the stock market, it means you need to grow your stock portfolio to twenty-five times your projected annual expenses in retirement so that you can safely withdraw four percent from your portfolio.

Let’s work with some numbers to better illustrate my point. The average American family makes $60,000 a year. Let’s say that your projected annual expenses in early retirement are $60,000. Based on the 4% Rule, you would need an investment portfolio of $1.5 million ($60,000 x 25) before you could safely retire with a high likelihood of never running out of money during retirement. This is because, historically, the average stock market return has been about 8%. If you only pull 4% from your stock portfolio, even adjusting for inflation (about 3%), you would only be pulling the interest from your portfolio. In other words, you wouldn’t have to touch your principal balance!

Mathematically, the 4% rule makes sense. But, how can you grow a stock portfolio to twenty-five times your projected annual expenses in retirement? It all goes back to a high savings rate AND compound interest. Another illustration with numbers: