If you put 50% of each paycheck into retirement, that means that you are living simpler, and that you’re able to maintain a simpler lifestyle that costs $25,000 per year. When you put 10% of each paycheck into retirement, you are living a much more extravagant lifestyle that costs $45,000 per year. This is another place this effect works so well – since you have already adapted to living a less lavish lifestyle, it will take you even less time to retire, because you need less money to live off of; 44% less in this example.
“The key to success is to run your personal finances much like a business, thinking about assets and inventory and focusing on efficiency and value for money. Not just any business but a business that’s flexible, agile, and adaptable”, says Jacob Lund Fisker of Early Retirement Extreme.
Assuming an interest rate of 6% on your investments, if you allocate 30% of your income to your retirement, you will have to work for about 28 years before you can retire and live off of your savings for life. You will work for 16 years saving 50%, and if you save 75% of your income, you will only have to work for eight years until you can retire.
These calculations also assume that you won’t make a single penny extra after you retire.
What about a new car? The average person spends $29,217 on a new car.4 If you’re able to live off of $30,000 per year, investing that $30,000 you would have poured into a new car into your retirement will let you retire a full year sooner. And of course, that assumes you don’t get interest on that amount. If your investment returns 6% interest, at the end of only 20 years, that same amount will be worth $99,306. In other words, you would have to work 3.3 years longer because you bought that car.
By the way, if you live off of that same $30,000 a year, cutting out that latte will net you an astounding $87,423 after 30 years at 6% interest. In other words, you would have to work 2.9 years longer because you buy a daily latte.In this example, cutting out your daily latte and a new car means you can retire 6.2 years sooner.
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