Financial independence and retiring early is commonly abbreviated as the acronym FIRE. If you’re an avid reader of this blog, you’re very likely trying to strive for each of these. But how would you define financial independence? How would you define retiring early? At what age is early?
Financial independence could mean a lot of things to different people. For the sake of this article we will define it as the amount needed to live off of a yearly safe withdrawal rate of 4%. For example, if you have $1,000,000 in index funds and withdrawal 4% each year, you’ll have $40,000 to live on and cover your expenses for the year. Depending on your cost of living, you may be able to live off of $40,000 a year, especially if you own your home outright and do not have any debts. That comes to $3,333 a month. With housing and transportation as the most expensive costs, if those two debts are paid off (mortgage and no auto loan), living off of $3,333 a month is plenty for most people. The idea is to adjust this number up or down with your savings amount and how comfortable you are with living off of that amount.
Retiring early is defined in this blog as retiring before the standard age of 65. Those who are looking to retire early have done so in their 50s, 40s, and even 30s. If you have done really well for yourself then it is possible to retire in your 20s as well.
The million dollar (literally) question is, how do you save up $1,000,000 to retire on? It depends on how much you make and how much you save.