Want to retire sooner? Just up your savings rate!

 In Canada and the United States, the average age of retirement was heading down in the ’90s but the recession of 2008 and 2009 reversed that trend. The recession hurt a lot of people who were thinking of retirement and they realized that even if financial independence could be achieved it had to be combined with reducing lifestyle ambitions.

In Canada and the U. S. most of us retire by 63. We struggle and worry about being able to retire because according to the financial experts we are expected to have hundreds of thousands (maybe even millions) of dollars in our retirement accounts, get additional money from Social Security, and get some government assistance with healthcare insurance. The reality is that most of us retire with far less. So, we adjust our lifestyle expectations in retirement. According to some research, I have read the average person will spend over $2,000 a month on home, car, and food.

In retirement or if you are thinking of retiring early, you need to spend less on these three items. If you do so before you retire you may save more money and you will not have to make a big adjustment when you retire.

When do you want to retire? According to Mr. Money Mustache (MMM), who retired when he was only 30, the math is supposedly simple, MMM made it even simpler by putting together a target savings rate table which you can find here.

There is no formula that is going to work for everyone. However, if you want a simple formula here it is. So, when do you want to retire? In 5, 15, 25 years? If you currently have zero and want to retire in:

5 years, you’ll need to save 80% of your income.

15 years save 55% of your income.

25 years put away 35% of your income.

The most important thing to note is that cutting your spending rate is much more powerful than increasing your income. The reason is that every permanent drop in your spending has a double effect:

·  it increases the amount of money you have leftover to save each month.

·  and it permanently decreases the amount you’ll need every month for the rest of your life.

So. your lifetime passive income goes up due to having a larger investment nest egg, and it more easily meets your needs, because you’ve developed more skill at living efficiently and thus you need less.

Most of you have already been working for a few decades, so these numbers might not mean as much as it does for those that are just starting out (especially if you haven’t been putting 80% of your income away all your life). So, what numbers are relevant for you?

If you have consistently put away:

10% of your income, you’ll likely have to work for 51 years before you retire.

15% of your income, your time in the workforce is 43 years.

20% of your income, you’ll probably have enough money to retire after 37 years in the workforce.

Want to retire sooner? Just up your savings rate!