Transcription
I plan to retire when I've saved $571,428, which I should have saved by the time I'm 28 years old. That's way, way less than what most people need to retire. I'll explain how to do this calculation for yourself later in this video, but most people I know need two, three, maybe even four times as much money to retire themselves.
So, here's what we're going to do. First, I'm going to explain how to calculate how much money you need to save before retiring early and why I only need to save $571,428. Second, I'll explain how I'm saving and investing to build a $500,000 nest egg in my 20s. And third, I'll explain what I'm actually going to do once I've saved enough money to retire and how I'm accounting for the risks of healthcare, market crashes, and an extremely long retirement.
And please, please, please just watch to the end of this video because if you do, you'll understand how to quit your job decades faster than most people without having to live a cheap and miserable life. But we've got to get started with how to calculate how much money you need to save before you can retire early. Because if you don't understand this, then nothing else is going to make sense.
And the most important thing to realize is that how much money you need to have saved before you can retire depends on how much money you spend every year. And this should make intuitive sense. Somebody who spends $20,000 per year probably needs a whole lot less than somebody who spends $200,000 per year. The person who spends $20,000 should need around 10 times less money in order to retire.
And the rule of thumb is that to safely quit your job, you should save up at least 25 times your annual expenses. This rule of thumb is based on decades of historical stock market returns. There's a guide in the description that explains a lot more important details about this rule of thumb and how to calculate exactly how much money you need to save before you quit your job. But just using this basic rule of thumb, the idea is that for every $40,000 you spend in a year, then you need to save $1 million in retirement savings before you can quit. I know plenty of people who are spending $120,000 per year. So, they would need to save $3 million before they can quit.
And the truth is, I will probably be a little bit safer. The rule of thumb of saving 25 times your annual expenses is based on a 4% withdrawal rate. What this means is that you only withdraw 4% of your initial portfolio value and then adjust your withdrawals based on inflation. This is usually really safe and in the vast majority of cases, most people who use a 4% withdrawal rate actually become even wealthier with time. But the issue is that the 4% rule was only based on 30-year retirements, and I'm looking at a retirement that could be twice as long. The good news is that doesn't mean I have to save twice as much money, but I do probably want to use a little bit of a safer withdrawal rate than 4%. So instead of a 4% withdrawal rate, I'll probably use a 3.5% withdrawal rate instead. So instead of 25 times my annual expenses, I'm planning to save 28.57 times my annual expenses.
And last year, I spent $20,045. So, I'll round that to $20,000. Using a 3.5% withdrawal rate, that means I would need to save $571,428 before I can safely quit my job and retire early. And here's the important thing that I hope you realized. Because I spend so little, I also need very little. There are very few people I know who could retire on $500,000. Most people need at least a million.
But even saving $500,000 might still feel far off for a lot of people. And it is a lot of money to save in your 20s. So, let me explain how I'm able to save so much money before I turn 30 years old. And really, this is why frugality is such a superpower. Not only do I need millions less dollars to retire than most people, but it also means I'm saving a huge percentage of my income.
Where I live, the cost of living is about 50% higher than the national average. And considering the average single person in America spends $55,689, the average person where I live must be spending $83,422. And that's probably why the recommended annual income for where I live is over $90,000 for a single person. And remember, this is just single people. This isn't even families. If you spent $83,422 per year, then you would want about $2.1 million to retire. But again, I only spent $20,045. So, not only do I need about $1.5 million less dollars to quit my job, it also means I'm saving an extra $60,000 per year.
Now, I'm able to do that because I'm literally the most extremely frugal person that I've personally ever met. I live with roommates. I don't own a car, and I hardly ever eat out. But the reason I'm able to do that is because I've trained my brain over time to enjoy living frugally. This is my real superpower. Not only do I save a ton of money, I never feel deprived or anything like that.
But even though I'm extremely frugal, it goes without saying that to save such a high percentage of my income, I do also earn a good income. To retire as extremely fast as I'm planning to, then yes, you really do need to earn a good amount of money. I earn just about $115,000 per year and hopefully even more by the time this video releases. And that's not including any YouTube income because I don't earn that much. But if you want to help out there, maybe smash the like and subscribe button.
But in addition to that $115,000, I also earn a really good company match on my 401k retirement contributions. And plus, by maxing out my contributions, I reduce my tax bill by thousands of dollars per year. So, in practice, I earn almost exactly $100,000 even after tax. And I think that's pretty great. But in my area, almost everybody earns a lot of money. In this area, earning an income of $115,000 is probably like earning 70 or $80,000 in an average city. That's still great, but it's not as extreme as it sounds. I looked it up and the average income where I work was $110,000 back in 2022. So, I'm really only about average when it comes to income. Where I'm really extreme is when it comes to spending.
And again, it's worth pointing out that most people do not need to retire by 28 years old. That's definitely on the extreme end, but 98% of people are still working past age 50. You wouldn't have to be even close to as frugal as I am in order to retire before turning 50 years old. And even retiring by 50 is still retiring early. Either way, the real point is there's no magic to my plan. I just earn a good income and I spend as little money as possible. And when you put that together, I'm saving just over $80,000 per year. Hopefully, I'll save even more as I keep advancing my career.
And I haven't even talked about stock market returns, which have been pretty good by the time I'm making this video. So, when I turned 25 years old, which was just 3 years into my career, I had already saved $250,000. That's almost halfway to my financial freedom number. And assuming a 7% return on investment from now into the future, then I should have saved $571,428 that I need to retire at sometime when I'm 28 years old. This does depend on the stock market, but even that might not matter if more people would share these videos with people they care about.
But look, I get a lot of questions about what I plan to do after I've saved enough money to retire. Things like how to deal with health care costs, if I ever want to start a family, and if I plan to be this frugal for the rest of my life. And these are great questions. So, let me walk you through my personal plan for retirement.
The first thing I want to say is that I'm still considering a lot of options. I'm not entirely sure exactly what I'll do, but I'll walk you through what I'm thinking. For one, no matter what, I've been interested in entrepreneurship for a very long time. I'm just not sure what form it will take once I'm financially free. One option is to just keep making these YouTube videos and publishing my Fire Friday newsletter and just going allin on this. This is probably the easiest option since I'm already working so much on it and I find it really, really rewarding to help other people reach financial freedom or at least whatever their financial goals are.
But I've also been really interested in working for startups for a very long time. And once I don't need a consistent paycheck to afford my lifestyle, then maybe I'll take that risk and just go work for a really, really small startup where I don't need to worry about consistent pay. This would still be a lot of work and a full-time job. So it really depends on how busy I want to be. And the other thing I've considered for a really long time is working at a startup accelerator. So instead of working for an individual startup, I'd go work for a company that helps other startups get started and get off the ground. I probably know the least about this option, but it's been interesting to me for a really long time. So, we'll see what the options are.
But either way, this is one of the reasons that I'm not that concerned about a stock market crash when I'm in retirement. At the end of the day, I just get way too bored to actually do nothing. So, I'm almost certain that I will have some income coming in even after I quit my job, even if it's just ad revenue from these YouTube videos. This should give me a pretty safe buffer even if the stock market is very volatile. After all, I don't need that much money to cover all of my expenses anyways.
And the 4% rule of thumb, which I talked about earlier for calculating how much money you need to retire, does already take into account stock market crashes. The average return of the stock market is actually much higher than 4%. So 4% is a much safer target that accounts for the volatility of the market. Again, there's way more details in the guide in the description. But even so, if I do truly plan on having no income, then I will use a safer withdrawal rate, like a 3.5% withdrawal rate, like I've been talking about in this video. At least historically, a 3.5% withdrawal rate is extremely safe. So, I'm not that worried about stock market crashes.
Now, another big challenge with early retirement is that so much of my money is in retirement accounts rather than super easily accessible accounts like a bank account or a personal brokerage account. I've made entire videos on how to get access to money in retirement accounts. So, I don't want to go into all of the details right now, but what you really want to understand is the Roth ladder strategy. The Roth ladder strategy basically takes advantage of a Roth individual retirement account or Roth IRA. What's great about these accounts is that you can withdraw your contributions to a Roth IRA at any point in time. The reason you can do that is you have to pay taxes on your contributions before you can contribute to a Roth IRA. So the government has no issue with you getting early access to those contributions.
But what you can do is you can roll over money from any other retirement account, even a pre-tax 401k, and you can move that money into a Roth IRA. You will have to pay taxes on the conversion, but there's a smart way to do this so you don't have to pay too much tax. And then after making that conversion and waiting a few years, you can start withdrawing that money from your Roth IRA so that you have access to that money in your retirement. Again, you can Google this or watch the videos I've made on this to understand the strategy in a little more detail. It's super, super powerful, but that's why I'm not worried about having access to my money.
But no matter what, there's a good chance I'll be able to keep spending the same amount of money in retirement while still living a much more comfortable lifestyle, and that is by moving. I live in a super expensive area right now. So, no matter what, some of my costs should go down when I reach financial freedom and almost certainly move out of this area. The savings I get from this will really depend on where I move, but my hope is that these savings will hopefully at least offset the cost of increased healthcare. Healthcare is an expense that I expect to go up. Right now, my company pays 80% of my health expenses, but this will obviously increase when I have to cover the entire value.
So, just moving to a cheaper city in the US will probably be enough to keep my expenses the same while still living a comfortable lifestyle. But, if I really wanted to be extreme, I'll probably move abroad. Now, I've wanted to do this for a long time anyways, so I think I probably will. And what's important about this is moving around in the US might save me a few thousand dollars per year, but if I move to a country like Thailand or Vietnam, I could probably live a much nicer lifestyle for literally half as much money as I spend now. It's not uncommon for things to be 5 to 10 times less expensive in a country like that than they are where I live. And truthfully, if I really wanted to, I could probably retire to one of those countries today. But again, I haven't totally decided. I'll run the numbers again when I'm getting closer to a decision, but right now there are still some things up in the air.
Another really common question I get is, "Do you really want to live this frugally forever?" The answer is probably not. I don't really mind being frugal. I actually kind of enjoy it. But the truth is, I am still making some trade-offs in order to be financially free even faster. I would never spend that much money, but I would spend more money than I am right now, and other things may also increase my expenses. I've never personally wanted kids so far, but I do expect to marry at some point and who knows if I'll ever find somebody as frugal as I am.
Now, again, I'm not that worried about this. For one, I'll probably keep earning money at least in some form that will at least partially offset my expenses. And second, with a 3.5% withdrawal rate in retirement, I'll probably become even wealthier in retirement, at least if the stock market continues to perform the way it has for the last 100 years.
But here's the thing, I don't really make these videos just to talk about myself. The real point is that early retirement is not nearly as far out of reach as so many people think. And this realization literally changed my life. So, it's only fair I pass it on to as many people as I can. So, if you found this video insightful at all, it would mean the world to me if you would share this video with someone who you think might learn something from it.
And one last thing, I want you to keep in mind that you don't have to be even as close to as extremely frugal as I am. You could still probably retire faster than 98% of people, even if you only save $24 per day. And I made this video right here to prove it to you. I think you'll get a ton of value out of this video.