Saving 10 Percent of Your Income Per Year is NOT Enough

If you want to retire early and you listen to the advice of many financial experts you will NOT achieve your goal. Many experts will tell you to save ten percent of your income and invest in bonds and mutual funds. Another ten percent towards your debt, and just to rub salt in the wound and make you look really stupid, give ten percent away.

It would be funny if it wasn’t so serious as this advice will get you nowhere in a hurry. Obviously it’s better than doing nothing and it’s more than most wage slaves actually do but you most definitely will NOT be retiring in 5, 10 or even 15 years.

Following the traditional ten percent advice will allow you to retire in twenty or thirty years but so will the government controlled retirement plans like the 401k in the United States and Superannuation in Australia.

Thirty years of hard labor doesn’t really excite me I’m afraid. Freedom and choices do excite me. I’ll hustle, save, invest, and make sacrifices if it means I can be free in 5 or 10 years.

The whole point of the Money is Choices blog is to be free in the shortest amount of time possible without taking too many unnecessary risks. Following the 10 percent guide is not just risky, but a guarantee that you will fail to retire early. Unless you’re a highly paid executive making hundreds of thousands of dollars each year then 10 percent isn’t going to cut it.

So How Much Do I Need to Invest?

Obviously everyone is different but the answer is, as much as humanly possible and then some! The higher the percentage invested the more options you will have to play with.

Lets do some numbers and figure out what we actually need to retire early in 10 years time. We’ll start with a $10,000 deposit, we’re earning $75,000 per year, investing 10% ($7,500) into stocks, earning 5% dividends, dividend growth of 5% per year, share price growth of 5% per year, and we’ll be reinvesting all dividends.

If everything goes according to plan we’ll have a portfolio of $145,974 in ten years paying us dividends of $7,389 per year. You may be the frugal master but if you’re living in a western country then you will not survive on such a small amount.

Obviously things would look much better if we had forty years to play with as we would then be earning $194,366 per year in dividends. We don’t have that long though.

Sticking with the ten year timeframe, lets invest 30% of our $75,000 income per year which is $22,500. We would then have a portfolio of about $385,753 with a passive income of $19,528. Now we’re getting somewhere. If you owned your own home outside of a major (expensive ) city and lived very frugally you could probably live on that amount.

And if you pushed even further and invested 50% of your income ($37,500) each year you would end up with an annual dividend income of $31,667. If you’re more patient and extended your 10 year timeframe to 15 years you could almost double those dividends.

Invest Every Dollar and Find Five New Dollars

We have to work out our magical Freedom number and go after it like it’s the air necessary for life. If someone is holding our head under water we’ll do whatever we have to if we want to breathe again. Our retirement number is the oxygen we have to fight for as we don’t start living until we have freedom and choices.

So the real percentage required to retire is 200% or 500% of your current income rather than the recommended 10%. Whatever you’re earning and investing now is not enough, improve upon it.

It’s not easy and there are at least a million legitimate excuses to not achieve freedom but the alternative is just horrible. Either learn to love your enslavement or do something about it. There are no other options.