The Easy Math Behind Retiring Early

The Rule of 69 and 4% Safe Withdrawal

Imagining being able to retire in only 10 - 15 years from now, where every dollar you make is yours to spend freely. Where going to work is completely optional. Where you can travel wherever you want without worrying about the cost

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Luckily this doesn’t have to be a pipe dream, and the numbers don’t lie. The biggest indicator in your ability to retire is not how big your house is, or how nice your car is, or even how much money you take home each month. Instead, it’s actually much simpler than that.

Which brings me to the Rule of 72 (I'll call it the Rule of 69... more on this later), and the 4% safe withdrawal rate. If you want a Youtube video on the Rule of 72 you can find it here.

Let me be clear that there certainly are a lot of nuisance and specific details that can be used to argue against these points. But for right now, let’s not get into semantics. If you learn what these two concepts are and follow them even remotely close, you will be well on your way to being financially independent and have the option to retire early.

To save you exhaustive reading I will keep these definitions as simple as possible.

Rule of 72: This is a math concept that tells someone how many years it will take for their money to double, given a specific interest rate. You simply take 72 and divide it by the interest rate. In reality, the rule is actually close to 69.3, so I will use that number for a more accurate calculation.

Example #1: You have $100 dollar in a bank account, and you are unfortunately only given a 0.01% interest rate (which I sadly have through one of my banks right now). Using the Rule of 69.3, it would take it 6,930 YEARS for your $100 to double and become $200.

( 69.3 / .01 ) = 6,930 years

Example #2: You have $100 dollars in a bank account, and you are lucky that it pays you 1% in interest (Check out CIT bank and Marcus by Goldman Sachs for online bank accounts paying just over 1%).

Using the Rule of 69.3, it would take it 69.3 years for your $100 to double and become $200.

( 69.3 / 1 ) = 69.3 years

Example #3: If however, you were investing that $100 in something that made 10%, instead of letting it just sit in a bank account, your money would only take 6.93 years to double from $100 to $200.

( 69.3 / 10 ) = 6.93 years

Using this rule, investors can estimate how much money they will need to be able to retire, given the 4% safe withdrawal rule (more on this below). Long story short, by leaving your money in a subpar bank account, you are going to be waiting a long time to actually begin making any money off of your money, which brings me to the next pivotal concept: the 4% safe withdrawal.

The 4% safe withdrawal rule: The most important pillar of the FIRE movement (Financially Independent, Retire Early), is being aware of your yearly spending amount, as this directly impacts how much money you need to save up in early retirement. Based on what you spend in a year, simply multiply that yearly spend number by 25. Boom. Done. That is your FI number.

Why Multiply by 25?

The math works out to be that an investment account (making an 8% return per year) can safely withdraw 4% each year when the value of the account is 25x a person’s yearly spending amount.

To boil this down, once you hit 25x your yearly spend amount, you have reached your FI number, and you can live the exact same life you have always lived, AND never touch the original amount; you are simply living off the interest that your money makes!

When you figure out what your yearly spend number is, you are just a couple steps away from figuring out your FI number.

For example, say a family of 4 spends $5,000 per month. That equates to $60,000 per year.

$5,000 x 12 = $60,000.

Take that yearly spend number ($60,000) and multiply that by 25. That comes out to $1,500,000. This family would need to save up $1,500,000 before being able to retire.

$60,000 x 25 = $1,500,000.

Now that seems like a lot of money, but the awesome thing about the FIRE movement is that the less a family spends, the less money they need to save up. Shocking, I know. For a lot of us, $5,000 seems absurdly high, even if there are things like car payments, mortgages, and student loans to worry about. Let’s take a look at a married couple, who spends $1,000 less, only $4,000 a month.

$4,000 a month x 12 months = $48,000 spent per year.

$48,000 x 25 = $1,200,000 to reach FI number.

Let’s look, however, if this couple decided to get on a budget and spend only $3,000 per month.

$3,000 a month x 12 months = $36,000 spent per year.

$36,000 x 25 = $900,000 to reach FI number.

Simply by cutting out $1,000 a month (which I am sure is quite possible for a couple spending that much with no kids), they cut down their FI number by 25%. Think about how long it would take to save up another $300,000! This equates to fewer years working simply by making a few informed decisions.

Finally, I will give you my own life numbers as an example. I like to think I have a pretty great life, taking short vacations here and there, eating out at restaurants and bars every so often, and being generous when a good opportunity arises. Looking at my EveryDollar Budget App, I spend anywhere from $1,400 - $3,500 a month. Now, on those higher months, it is due to the fact that I am paying for my entire graduate school degree out of pocket. Each class costs just under $1,000, so some months have a much higher overall spend amount. At the time I am writing this, I only have two classes left that I need to pay for, so those large costs will no longer be affecting me.

For variety sake, I will use a couple of different example models.

Let’s start with spending half of the average American household, at $2,500.

$2,500 a month x 12 months = $30,000 yearly spend

$30,000 x 25 = $750,000 to reach my FI number.

Simply by living on less than the American household, which relies on consumption and spending to impress others, my number to be financially independent was half as big! That means half as much time working!

Finally, I will use an extremely low number, where I live on just the bare bones, a term commonly referred to as “LeanFIRE”.

After totaling up the bare essentials for my current life, such a rent, food, utilities, car insurance, gas, etc, my monthly spending on necessities is only around $1,000 - 1,200 a month.

$1,200 a month x 12 months = $14,400 annual spending

$14,400 x 25 = $360,000 FI number

Of course, this monthly spending is certainly not realistic for almost any person, but it is a good benchmark to think about. I am also sure this spending amount will likely go up in the future, so there is definitely some flexibility to be had in these numbers. However, if I were to have saved approximately $360,000, my essential expenses would be taken care of for years to come.

Overall takeaway: the more you can cut out unnecessary spending, the smaller your Financial Independence (FI) number is, the fewer years you have to grind at your job, and the sooner you can be financially independent and have the option to retire.