Early retirement or financial independence means a lot to me. In this entry, I outline what it means to me on a numbers level.
I aim for the 4% rule, also known as the safe withdrawal rate (SWR):
(annual expenses / net worth) x 100% = 4%
This means that if your expenses are less than 4% of your networth, you can withdraw 4% per year to live off of without running out, thus becoming financially independent. Hurray! Assuming your networth earns you more than 4%.
For comparison, the S&P 500 gave an average return of 5.5% over the past 10 years, 7.6% over the past 20 years, and 8.6% over the last 30 years according to this S&P 500 calculator.
So it’s entirely feasible to earn more than 4% on investments using a passive investment strategy such as index investing (if you are so inclined!).
Our withdrawal rate is currently 13%.
Which is not yet ‘safe’, but luckily we have jobs and are on track to reaching 4% in 9 years.
However, this is a very conservative projection, and assumes that nothing will change.
I used a low savings rate, didn’t account for the raises / bonuses / tax refunds that we will get every year, or that we will soon start investing and will
hopefully likely earn more than my estimated 2%. There is also room in our budget to slash rent, and perhaps reduce other expenses further.
Our goal is still to retire in 7 years (at age ~40), or sooner!
What I like about the SWR calculation is that it’s not just about how much you have, but also how much you save and spend. Both numerator and denominator are affected by these factors, and you can play around with the formula to see how small tweaks here and there can affect your withdrawal rate, allowing you to see how your lifestyle delays or improves achieving financial independence.
It’s extremely empowering to know that we have the control to make this happen. We can drop out of the rat race early if we choose to live mindfully, rather than fall into the consumerist trap.