Save half your money, work half as long

Try, save half your money and only work for 13 years.

I haven’t always saved half my income, but I have always saved more than the average American. Often in the 10-30% range at the low end. When using online tools such as the “retirement checkups” offered by many online brokers and retirement plans, they really didn’t account for someone like me. They would have you enter your current pay and current assets and tell you how much you need to save to retire on time with the same pay you earn now.

But, I don’t need to replace my current income. I already live on only 50-70% of my current income. Instead of replacing my whole income, I only need to replace 50-70% of it.

When you are living on investment savings, you’ll typically be in a lower tax bracket than you are while earning a paycheck. Your income will be a mix of capital gains and dividends which are low tax, and return of capital/savings that is already taxed/tax-free; if you save $50 and buy stock with it that appreciates to $75 and you sell it after a year, you would pay long-term capital gains tax on $25 and no tax on your original $50 (return of capital).

If you spend $75,000 in retirement, it’s very possible only half of that will be subject to any kind of tax, and even that will be a preferentially low tax rate. In other words, you’ll be keeping almost your whole paycheck.

The bottom line is that if you are a high saver, you don’t need to replace your full paycheck. You only need to replace the amount you actually spend as cost of living.

If inflation didn’t exist and you couldn’t invest money but could only store it in your mattress, it stands to reason that if you set aside half your income, your career could be half as long.

However, it’s actually even better than that.

Example
Household Take-Home Income: $75,000
Savings Rate: 50%
Cost of Living: $37,500

In order to retire at the same standard of living, you would need to invest enough to replace $37,500 of take home pay. Using our rule of thumb of a 4% safe withdrawal rate, or 25x the amount of income you are trying to replace, you would need to have $937,500  invested.

On average, this takes around 13 years based on historical US stock market performance if you save and invest $37,500 per year; if married, that’s about the same as maxing your 401(k)s for 13 years. You could set it and forget it.

Save half your money and work half as long? Try, save half your money and only work for 13 years.

It doesn’t matter if we are dealing with $75,000, $50,000, or $500,000. If you save half your money, it takes about 13 years of historical US stock market returns to cover the cost of living you are accustomed to indefinitely – give or take a couple years based on market conditions.

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