The superior man makes the difficulty to be overcome his first interest; success comes only later.
After reading the preceding series on traditional retirement advice, you might well be feeling like it’s all hopeless. Well, I am here to tell you otherwise. Not only is it possible to build a lifetime of sustainable wealth, it can be done in far less time than you might imagine. What’s more, the essence of what’s required is actually quite simple.
Of course, as I’ve mentioned before, simple and easy are two very different things. When I first lay it out, you may well be tempted to throw up your hands and call it all impossible again, but try to keep an open mind.
The truth is that whether you wish to retire after five years or thirty, there is a plan that can get you there, if you are willing to do what is necessary.
A Visit to Crazy Town
Let’s consider an example of a fellow who chooses a very different plan. We’ll call him Bill. Like our hypothetical boomer from the previous series, Bill starts work at age 22 and wants to retire at 65. The thing is, Bill is a terrible investor. During his working years, he earns a real return of precisely zero. He manages to match the rate of inflation, but that is all.
What Bill is very good at, however, is saving. Bill manages to sock away half of his income every year (never mind how for the moment). And let’s say that Bill learns a tiny bit about investing over the years, so that when it comes time for him to retire, he has found he can manage a consistent 3% real return. How do things look for him when he wakes up on his 65th birthday?
The answer is, things look pretty rosy for Bill, seeing as he already retired, ten years ago. That’s right — despite earning zero on his nest egg for his entire working career, and only managing a paltry 3% in retirement, Bill gets to hit the golf course ten years early. How can this be?
It’s quite simple, really. When you save half your income, then every year that you work, you bank a year’s worth of living expenses. That means that after 33 years, you’ll have saved up 33 years worth of expenses. With that much socked away, a 3% return earns you a year’s worth of expenses every year. It really is that simple.
It Gets Crazier
Let’s consider an even more outlandish example. Let’s say Bill manages to save a full 75% of his income, still earning the same 0% return during his working years, and expecting a 3% return in retirement. How long before Bill can retire, now?
The answer is a mere 11 years. Bill gets to retire at age 33, if he so chooses. Why? Because in this scenario, Bill is saving three years’ expenses for every year he works, so it only takes 11 years to save 33 years’ worth.
You may be rolling your eyes right about now. “How the heck can I save 50% of my income? I’m barely able to pay my bills now! And 75%? That’s impossible.”
Well it isn’t impossible. There is a growing community of people out there — people like Mr. Money Mustache, and Jacob from Early Retirement Extreme — who are proving that it is quite possible, and in fact, not nearly as difficult as you might imagine. Jacob in particular managed it on a graduate student income, while living in one of the most expensive cities in the world.
So no, it is not impossible. It will, however, require a fundamental shift in thinking from the standard consumerist narrative you probably grew up with.
Over the next few articles, we’ll look at how to get you moving in the right direction. I ask only one thing of you — try to set aside your urge to rattle off all the reasons why it can’t be done. This urge is only natural, but do your best to fight it off. Instead of “impossible,” call it “challenging,” and devote your mental energy to finding ways to make it happen, rather than excuses not to.
Remember also, you don’t need to get all the way to 75%, or even 50%. If you are unwilling to go that far (and note I said unwilling, not unable), it will just take longer to reach your goal. Chances are that if you make an effort, you’ll still get there far faster than most.
And here’s another bit of good news — you’re probably already closer than you think. More on that soon.
Those Crazy Chinese
I will leave you with this eye-opening fact. Most people would consider China to be a poor country, relatively speaking. The typical American earns vastly more than the typical Chinese person. Yet according to recent reports, the average household savings rate in China is over 38%.
I doubt the average Chinese person would consider a 50% savings rate insane. So why should you?