Low Expenses Lead To Early Retirement While Still Young

Saving and investing large amounts of money every year is a great way to get wealthy.  Every year your new investments add to your portfolio value, and the investments grow on their own over time.  Eventually you have a lot of money.

Growing your investment portfolio is only half of the secret to reaching financial independence.  The other half is keeping your expenses low.


Why Expenses Are Important

The lower your expenses, the less income you need each year to fund your lifestyle.  In our case, our income during retirement will come primarily from investments like bonds and equities.

If one spends $30,000 per year, then they will need a portfolio value of $750,000 to  $1,000,000 if they plan on spending 3% to 4% of their portfolio value each year.  The 3% to 4% is called a “Safe Withdrawal Rate” or SWR in the financial planning community.


Safe Withdrawal Rate

The Safe Withdrawal Rate is a general rule of thumb financial planners use to estimate how much an investor can withdraw from an investment portfolio each year without running out of money during the investor’s lifetime.  The rate is lower if you want to fund a longer retirement, since you must leave more money invested over time to ensure your portfolio doesn’t run out of money.

For a very early retiree in their 30’s or 40’s, a withdrawal rate around 3% to 3.5% is probably safe and will ensure the very early retiree has plenty of funds available during their lifetime.  Someone retiring at a traditional age in their late 50’s or 60’s might select a 4% withdrawal rate (or higher if they expect significant pension or Social Security payments).

The impact of a slightly different withdrawal rate can be huge.  Since I retired in my 30’s, I plan to use a withdrawal rate around 3%.  In practice, this means I can withdraw $30,000 from a one million dollar portfolio.  If I had a retirement budget of $75,000, I would need a $2,500,000 investment portfolio ($2,500,000 x 3% = $75,000).

Now let’s pretend I was 60 years old and planning on a more traditional retirement with social security starting in my late 60’s.  I could take a little more risk in the amount of my portfolio withdrawals, and I would be able to choose a higher withdrawal rate, like 4%.  To the casual observer, the difference between 3% and 4% seems tiny.  Only 1%, right?

In fact, the 1% difference means the 30-something early retiree must have a much larger investment portfolio than the 60 year old.  Let’s look at the numbers.

At a 4% withdrawal rate, a retiree only needs $750,000 in investments to withdraw $30,000 per year.  A $1,875,000 investment portfolio will produce $75,000 in annual withdrawals at a 4% withdrawal rate.



To summarize, the 30-something early retiree needs $1,000,000 to be able to withdraw $30,000 per year, whereas the 60 year old retiree only needs $750,000, or $250,000 less than the 30-something guy.

For higher withdrawals at $75,000 per year, the 30-something guy needs $2,500,000 whereas the 60 year old only needs $1,875,000.  The 60 year old, using a 4% withdrawal rate instead of a 3% withdrawal rate needs $625,000 less than the 30-something guy!  A seemingly small 1% change in the withdrawal rate led to a huge $625,000 difference in how much is required to fund retirement.  

I have to point out how withdrawing more money each year to fund annual expenses means a larger investment portfolio is required.  Take the 30-something early retiree.  At a miserly spending level of $30,000 per year, the 30-something needs “only” $1,000,000.  Choose the high life by spending a generous $75,000 per year, and the required investment portfolio value balloons to $2,500,000!

The 30-something early retiree would need an extra $1.5 million to fund the higher spending level!  For most people who aren’t rockstars or NBA point guards, saving a million dollars is hard enough.  Saving another $1.5 million could take many more years or decades, meaning retiring to a life of luxury is unlikely in one’s 30’s.

Many people won’t be comfortable living on a mere $30,000 or so per year, and as a result might find that work isn’t so bad and stick with it for many years to fund a more lavish retirement (and spend more along the path to retirement!).  That’s okay too, and a choice each person should make.  The point I am trying to illustrate is that the less you spend, the less you need to save in your investment portfolio to fund your early retirement.

Less Spending Leads To More Savings

At this point, I assume I have done my job of explaining how lower spending means you need less money to retire early.  Spending less money each year also means you can save more money!  It makes perfect sense when you think about it.  If you don’t spend all of your paycheck, you have to do something with what is left over.  Put it in your checking account.  Stuff a bunch of benjamins under your mattress.  Or you could be a responsible and boring savvy saver and put it in your IRA or 401k.  Quite often, boring people have large, exciting investment portfolios.  

In my next post, I review the story of a set of fraternal twins, separated at birth, but both prone to saving.  One twin is a Super Saver and manages to retire at a very early age.  Stay tuned!

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  1. Your numbers are dead-on, Justin! I wish I could find a way to convince every young person how much their spending will affect them later. It’s quite hard to illustrate with words.

    Couple other points:
    – Having your real estate costs under control (for example, paying off your mortgage) greatly affects the dollars you need coming in each year.
    – It’s interesting looking at things as a single person vs. as a married person. If you consider that YOU only need 1/2 of the $30,000 each year (which is my case), then your financial security is probably more attainable that it seems when a typical financial planner arbitrarily sets your goal at $1,500,000 for you.

    1. Thanks for both those points! Yes, paying off the mortgage before you retire or as you become financially independent greatly reduces your income needs in retirement.

      We are in the same position regarding splitting expenses and having two incomes to save. That helped tremendously over the years (to keep expenses down and to save money).

  2. I’m a proponent of spending less too. 3% is good for early retirees like us. Of course, if we keep our living expense low, we can fund most of it through other sources too. A part job goes a long way if you have low expense.
    Now I’m wondering how much you have in your portfolio. 🙂

    1. The “4% rule” includes adjustments for inflation each year. In very simple terms, if you get 7% returns each year, 4% goes to fund your withdrawal, and 3% is kept in the portfolio to increase the portfolio value for inflation. In real (after inflation) terms your portfolio value would stay the same each year.

    1. Saving money seems pretty boring and daunting, especially when you put that first dollar into a savings account or investment. But when you look at it long term and think about making a couple of small trade offs in exchange for retiring 15 years earlier, it seems like a no brainer.

  3. You numbers are right but isn’t this a bit about life-style choices? I would rather earn and have some of the things I spoil myslef with (none of these are silly, I can asure you) than go for extreme saving and minimal expenses.

    1. Sure, it is absolutely all about trade offs and lifestyle choices! I was trying to lay out a simple case of how anyone could trim a little bit from two large expenses (housing and car) and end up retiring 15 years earlier.

      Maybe some people value a slightly nicer, larger house and a slightly nicer, newer car even more than 15 extra years of leisure time to do anything they want. That’s ok! And you could always go to the other extreme, and be like me and drive a 13 year old car and retire at 33!

  4. Justin, I am really enjoying this blog. After plowing through Mr. Money Mustache’s posts, my eyes were opened to possibilities I did not know existed. Your blog, in like kind, is opening my eyes even wider. Sven months ago, my wife and I increased our savings rate from about 12%, to over 65%, with seemingly no real reduction in our roughly 28k per year lifestyles. A lot of that extra savings was being pumped into our mortgage, which we paid off this month. Instead of just spending an extra 3k on crap, that money will be funneled directly into savings. I’m dead serious about getting out of this rat race!

    1. That’s incredible! 12% to 65% savings rate! Yeah you will be FI in no time with that kind of savings rate. And once that mortgage gets paid off you can redirect the funds toward investments (and maxing out any tax-deductible savings accounts to cut taxes even more!).

  5. That last paragraph is key. I’ve always been cheap (I mean frugal) and when I got to hate my job (I mean dislike) I decided I’d rather be poor (I mean free). So I thought I would try living on less and artificially lowered my income maxing out all the retirement options. Shortly after I quit I became annoyingly cheap, overtime I realized I over did it a bit, now I spend about the same as when I worked, maybe only a little bit less. Being thrifty will probably make the biggest difference on how soon and how well one will retire.

  6. We are spoiled in America, it is the norm to have a big house and multiple cars. Some are accustomed to this lifestyle and like you said that is okay. Everyone gets to make choices with what they do with their income.

    We decided that driving older Subaru’s and living in a modest house is worth the trade off of being able to live a more care free lifestyle later in life. The one flaw I think the early retirement crowd has is thinking that they will be the same person in their 50’s as they are in their 30’s. Things change and having a cushion down the road will be nice vs. retiring to early and being on a low income and having to return to the work force later in life.

    Just my opinion, thanks.

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