FIRE: If I start today, Can I retire in 10 Years?
A detailed look at a 10 and 20-year plan to financial independence.
If you are like most of us personal finance nerds, you've thought "what do I need to do to retire in 10 years?".
You probably did some simple math and then decided it was impossible.
Maybe. Maybe not.
The reality of the situation is that obtaining financial independence/retire early is no easy feat.
So I'd like to propose, and dive into, the reality of what retiring in 10-years entails.
For the sake of complexity, I'm going to assume you've listened to enough Dave Ramsey podcasts to know that debt is (more often than not) bad and you've paid off any student/personal/credit card/auto debt you may have. Home mortgage debt is ok, but seriously, pay the rest of that shit off - and then come back and read this.
Here are a few needed assumptions we need to make this all work:
Long-run stock market returns average to 6%.
Long-run bank deposit earnings match inflation.
You earn $50,000 per year
You have zero savings & zero investments today.
You also have zero debt* (mentioned above).
You can live off of $2,500/month ($30,000/year - includes rent).
Your employer will pay for your benefits until RE.
Health insurance costs (40-50 YO) monthly/annual: $300/$3,600
" (50-60): $450/$5,400
" (60-70): $550/$6,600
" (70-80): Medicare Part B Premiums - $144.60/$1,740
Dental and vision insurance average annual costs: $400
Average US life expectancy: 80 years old (morbid, but factual)
Current age: 30 years old
Yea, I know. That was way more than you were expecting.
So this is where the FI/RE community separates itself from the rest - we want to use this information to figure out what total asset amount will earn enough interest & allow us to "draw down" (fancy phrase for spending the nest egg) in order to cover all of these expected expenses.
10 Years from Today
So you just hit the big 3-0 and you've decided it's about damn time you take control of your life and escape from that 9-5 boss you cannot stand.
You commit to yourself that by 40, you will be financially independent.
So that puts you at 10 years of work, 40 years of play.
The total cost of 40 years of play -
$30,000 X 40 = $1.2 million (living expenses)
+ 25 years of health = $123,000
+ 15 years of Medicare = $26,100
+ 40 years of dental/vision = $16,000
Total = $1,365,100
Now, remember, we don't need to have all of this money upfront. We just need to save enough where our passive income (interest/dividends/capital gains) is enough to cover our expenses and keeps us on track for the future increasing expenses.
So from 40 to 50, we need $30,000 + $4,000 = $34,000 in income to cover our expected expenses.
We are too early for the drawdown phase, as we need to grow our nest egg for higher future expenses, but we'll total assets that pay out $34,000/year & let us grow our nest egg.
That comes to about $680,000 in total assets needed (if they are earning 6% and you're saving 1%/spending 5%).
Unfortunately, to get to this point, you'd have to save $52,000 per year for the 10 years (unlikely when you're making $50,00 before-taxes).
The pro is if you can hit the $680,000 and the 5/1 split, you will have a $750,000 nest egg at 50.
This keeps you on track for the increasing expenses as you age.
From 60 to 80, you will then have a steady stream of income ($40,000/year) with the ability to drawdown up to an additional $49,000 per year if needed. Obviously, your income will drop the more you drawdown, but either way, you have a strong buffer above your living expense needs.
In summation, the key to the 10-year strategy is to attempt to save $50,000/year. This means picking up a side-job in all likelihood or increasing earnings potential at your current 9-5.
Verdict on 10-years: Unlikely without extreme saving.
On to 20 years -
Fear not, 10-year dreamers.
Your still only 50 when this thing wraps up and it is very likely that you hit FI a few years early too.
So after 20 years, without any raises or side hustles, you would have earned $1 million in before-tax income ($880,000 after-tax).
Not too shabby!
We also cut out 10-years of expenses/insurance costs, leading to our new total "cost to play" of $1,000,000 (I rounded a bit)
Adjusting our math from before, we will need $35,800 of income per year during our 50's to cover estimated expenses. Just like before, we'd like the earnings to be split between spend/save (this time we'll do 4% spend, 2% save).
With that in mind, we need to have $895,000 in savings by the time we're 50 to make this work. Much more doable than before.
With the 2% savings, we'll also increase our total assets by 20% over each 10-year period - this will appropriately cover increased expenses in our 60s/70s/80s.
So to get to the $895,000 nest egg, we will need to put away: $24,500 per year for the next 20 years.
Sure, that's 49% of your before-tax income.
Even for FI/RE, that's a significant chunk - but it's doable.
At the end of your 50's, you will also be sitting on $1.1 million in assets (they would have been growing by 2% per year).
So now with 20 years (of expected life) to go, your nest egg is earning $65,000 each year and you can also theoretically start drawing down your total assets as needed.
Even if you're assets didn't earn any income, this would translate to $54,000 per year in drawdown capacity ($1.1 million divided by 20 years).
Between your interest earnings & drawdown capacity, you are in a strong situation for the unexpected (longer life expectancy, surprise major expenses, temporary market downturns).
Verdict on 20-years - Doable
This is obviously a hyper simplification and adjustments could be made to better match earnings + drawdowns with expected expenses.
With that said, by keeping it simple we are also adding a buffer of safety into the calculations.
A summary for those that tuned out when the math started:
A 20-year timeline to FI/RE is doable if you can save $24,000+/year for 20-years and have a relatively low cost of living needs ($30k/year in our case).
The basic strategy needed is to maximize earnings & savings while you are young and avoid debt.
Inflation is hard to predict but you should be protected by a heavy index equity fund focus over the 20-years.