The 4% number comes from 7% mean return divided by 3% mean inflation. If you take out 4%, your investment won't grow, but remain constant, keeping pace with inflation. Eventually, you will hit an off year and stumble. The probability of that per year is low enough that it is reasonable to take out 4% every year of a less than 30-year retirement.
Perpetual income, or an early retirement, therefore takes less out every year, such as 3%, and has that 1% growth buffer to smooth over the down phases of the business cycle. You can also avoid spending on life insurance, and just draw up a last will document.
Divide your target income by your withdrawal rate, and that's your target nest egg. To get $50k/year, you need $1.7 million to retire early (3%), but $1.25 million is just fine if you clock out at 65 years old (4%).
If you assume a mean 4% growth in excess of inflation, and your income and expenses rise with inflation, you can hit your target making $80k and spending $50k in just 30 short years. If you want to retire in less than 40 years of working, you'll need to spend less than 73% of what you earn (or earn 37% more than what you spend). Spend only 66%, you can do it in 34. Spend only 50%, and you're working just 22 years. Cutting your expenses can only get you so far, though. You'll have to keep that level of consumption down for the rest of your life. At some point, there's nothing left to cut, and you simply have to earn more if you want to retire. Also, you are likely to earn less earlier in your career, where the compound interest counts for more.
So this is my advice: invest at least 25% of your net income--or more, if you use it to pay off debts--before you buy anything else. When you get raises, don't spend more than 75% of them on your living expenses. Pay your future-self first. By the time you become them, you'll be very thankful for the contributions of your past-self.
Perpetual income, or an early retirement, therefore takes less out every year, such as 3%, and has that 1% growth buffer to smooth over the down phases of the business cycle. You can also avoid spending on life insurance, and just draw up a last will document.
Divide your target income by your withdrawal rate, and that's your target nest egg. To get $50k/year, you need $1.7 million to retire early (3%), but $1.25 million is just fine if you clock out at 65 years old (4%).
If you assume a mean 4% growth in excess of inflation, and your income and expenses rise with inflation, you can hit your target making $80k and spending $50k in just 30 short years. If you want to retire in less than 40 years of working, you'll need to spend less than 73% of what you earn (or earn 37% more than what you spend). Spend only 66%, you can do it in 34. Spend only 50%, and you're working just 22 years. Cutting your expenses can only get you so far, though. You'll have to keep that level of consumption down for the rest of your life. At some point, there's nothing left to cut, and you simply have to earn more if you want to retire. Also, you are likely to earn less earlier in your career, where the compound interest counts for more.
So this is my advice: invest at least 25% of your net income--or more, if you use it to pay off debts--before you buy anything else. When you get raises, don't spend more than 75% of them on your living expenses. Pay your future-self first. By the time you become them, you'll be very thankful for the contributions of your past-self.