Retirement. We’ve all heard that we should be saving for retirement, but how many of us actually are?
According to a recent survey by GoBankingRates, 56% of Americans have less than $10,000 saved, and of the group, 33% have no retirement savings.
If you’ve ever wondered how many years it will take to achieve financial independence based on your current annual income and spending, you’ve come to the right place.
Four Pillar Freedom recently published a chart to help us all answer this very question.
The chart assumes you will invest and earn 5% annual returns. It also assumes that after you retire, you will withdraw and use 4% of your money each year. This is called an Income - Spending Gap.
But just looking at the grid can be overwhelming and confusing, so let’s get into some real examples.
Out of these two scenarios, who do you think comes out on top?
Let’s say you earn $65,000 per year. After taxes, your take-home pay is probably closer to $55,000. If you are spending $50,000 a year, it will take you 51.4 years to reach financial independence.
If you earn $55,000 (after taxes) and spend $50,000 a year, that leaves you with $5,000 to invest every year.
Assuming you earn 5% annually on your investments and don’t take any of the money out for 51.5 years, you will have enough money to withdraw 4% each year without ever going broke.
If you earn $30,000 per year (after taxes) and spend $20,000 a year, that leaves you with $10,000 to invest every year.
Again, assuming you earn 5% on your investments each year and don’t take any of the money out for 25.2 years, you will have enough money to withdraw 4% each year without ever going broke.
Surprised that the earner who makes less per year will be able to retire sooner?
By setting aside more money, the lower income earners will be able to retire 26.3 years sooner than the person making more money each year.
That's a huge difference!
These two scenarios tell us that retirement isn’t all based on how much money you earn per year. Rather, it’s about how much you save and invest.
Retirement isn't all based on how much you earn...it's about how much you save and invest.
Here’s what Four Pillar Freedom had to say about the power of the Income - Spending Gap:
"Clearly from this grid you can see the importance of making the gap between your income and spending as wide as possible. If you can earn $90,000 per year and only spend $20,000 you only need to work for 6 years to have enough money to support you for the rest of your life. But if you earn $90,000 and are spending $85,000 it will take you over 60 years to retire.
"I think the real value of this grid is within the $40,000 – $60,000 income range. This is where most income earners are. If you earn $50,000 per year and you are spending $40,000 per year, it will take you about 36 years to reach financial independence. But if you can cut your spending to $30,000 per year you would reach financial independence in 21 years. That's a 15 year difference! For people in the middle class, cutting spending by a mere $5,000 – $10,000 each year leads to a huge decrease in the amount of time it takes to reach financial independence."
Does this retirement chart surprise you? Share your thoughts in the comments below!