How to escape the rat race

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This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual for Building Liberating Wealth on a Low to Medium Income.

Escaping the Rat Race

If you don’t want to wait until you’re old to retire, you can still use the same calculators.  Set the age of retirement earlier and see what the numbers say:

www.msn.com/en-us/money/tools/retirementplanner

www.calculator.net/retirement-calculator.html

If you want to do the math yourself, it works like this: In general, if you can live off four percent of your savings then that nest egg should last you a very long time, probably until death.  We will get to the important provisos in a moment.  First, let’s look at an example.  Say you want to retire today on $50,000 per annum.  Nice, hey?  Let’s calculate:

$50,000 is four percent of . . . what?  We can figure that out by multiplying the amount by 25.  So:

$50,000 x 25 = $1,250,000.

To see that backwards, 4% x $1,250,000 = $50,000.

That means you would need about $1,250,000 to retire on $50,000 per year.  That’s rather a lot of money, isn’t it?

Don’t throw this book against the wall!  Especially if you’re using an e-reader.  That was just an example.  If your goal is to become financially independent, you’ll need to fiddle around and figure out what’s possible.  Remember back in Step 2 we looked at making a frugal budget?  Well, here is where your parsimony will really start to pay off.

Let’s say you identified and implemented various savings back in Step 2: Make a Frugal Budget.  Maybe you started cooking at home more instead of going out, downsized, or moved to a cheaper city.  Let’s say you got your annual expenses all the way down to $20,000, which is more than what plenty of students manage to live on.  How are we looking now?

$20,000 x 25 = $500,000.

Therefore you would need around half a million dollars to retire today on an annual income of $20,000.

Let’s take it a step further.  What if you moved to a really cheap location – say Odessa, Hanoi or Guadalajara – and find that you can live monk-like on $10,000 per year?  People do this, you know.  But they are not a lot of fun to go drinking with.

$10,000 x 25 = $250,000.

That means, if you had $250,000, you could theoretically retire today and never work again.  But you’d have to be happy to live in one of those places suggested and not do much once you got there.

Now, to those provisos.  Experts suggest that the four percent rule works for most people most of the time, but not in all cases.[i]  The main thing that can go wrong is when returns on investment are poor or expenses spike just before or after retirement, which has a knock-on effect for future years.

The best way around this is to be flexible.  Pencil in a retirement age but be prepared to work a few years longer if things don’t go as planned.

Another risk is that you will lack financial discipline after retirement.  Either stick to that frugal budget you worked out back in Step 2 or accept that you’ll have to keep working.

A further risk is that you’ll live longer than you expected.  You might make it to a hundred, you know.  Some people do.  Factor this into your plan accordingly.

Finally, living off your investments gives you much less flexibility than having a regular income.  When you have a job, breaking your budget means you save less until you’ve topped your emergency fund back up.  If you’re living on savings, breaking the budget necessarily means cutting deeper into your savings, which are all you have.

Having tried early retirement, I found this stressful.  I also got a bit stir-crazy from the lack of obligations to structure my time.  Working part-time or at an easier, less lucrative career might be better alternatives for you, too.

Achieving self-funded retirement at any age would put you at Level 4 of financial freedom.  If reached when young, it is often called ‘Financial independence, retire early’ because this gives us the catchy acronym, ‘FIRE’.  There are plenty of good resources out there for those who are interested in aiming for this goal, of which I will list three to get you started:

https://retireby40.org/

https://route2fi.substack.com/

https://apurplelife.com/

As I stated in the introduction, almost everyone who achieves FIRE either has a high income, no kids, or both.  Having said that, even a middle-income person with kids has a good chance of retiring in his 50s if he starts working towards it early.  Use the calculators listed above to see what’s realistic for you. 


[i] https://www.investopedia.com/terms/f/four-percent-rule.asp

Also available on many other platforms.

5 comments

  1. dickycone · March 5, 2021

    “A further risk is that you’ll live longer than you expected. You might make it to a hundred, you know. Some people do. Factor this into your plan accordingly.”

    I think this is one of the best arguments for having kids. I don’t think anyone would have even considered trying to save enough for three or four decades of retirement 100 years ago.

    Like

  2. collegereactionary · March 8, 2021

    What would your advice be for getting into the labor market, rather than getting out of it?

    Paul Skallas writes his work on the assumption that his readership aren’t self employed or entrepreneurs, but people with about 4 hours during the week where they can even enter the “payoff space.”

    That seems like a reasonable place to be in, if it’s stable enough. So how do you reach and maintain that position? That seems like a reasonable question to ask.

    Like

    • Nikolai Vladivostok · March 8, 2021

      Most people who reach financial independence do it by getting a good 9-5 job and living within their means over a long period of time.

      Liked by 1 person

  3. Pingback: Friday Finance: what % should I put in cash, shares and bonds? [Updated] | SovietMen
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