Retire Early on Low Income

Your Salary Size Doesn’t Matter

Not everyone has control over the amount of money they make, but everyone has control over the amount of money they spend. If you spend more than you make, you will go into debt, and if you are in debt, your spending will increase because you will be paying interest in addition to all your other expenditures. This vicious cycle has captured a large portion of the American population. However, the money cycle doesn’t have to be vicious. When you make more than you spend, you are then left with a surplus of cash, which you can then use to earn interest.

When you earn interest, it increases your income without increasing the amount of work you must do. Once the interest you earn is greater than your operating expenses, your job becomes optional. The focus of this page is savings rate which is the percentage of your net income you are able to retain at the end of each month. For each percentage point, and even each dollar you can contribute toward your savings rate, you shave time off your required working years.

Everyone’s situation is different, but if your current savings rate is below 10%, it might take you until age 70 or longer to retire. If you don’t currently have a savings rate, then barring an inheritance, pension, or lucky lottery ticket, you’ll never be able to retire at all! However, if you are saving 75% of your take-home income, then assuming your expenses aren’t going to go up you could retire after just 7 years. This is true regardless of income. A household that makes $50,000 a year and maintains a 75% savings rate can retire just as quickly as the household that makes $250,000 a year and saves 75%.

Lifestyle Makes the Biggest Difference

This might seem counter-intuitive. After all, the former person earning $250,000 a year is saving $187,500 each year while the ladder is only saving $37,500, right? The key here is to understand the difference in base spending. In this scenario, the person with the larger income is still spending more than the person with the smaller income makes in a year. In fact, thanks to government subsidies and lower tax brackets, the person earning $50,000 a year could potentially retire well before the person earning $250,000.

The takeaway is this: If you are truly desperate to exit the workforce, you need to be saving in every way you can possibly imagine. Every dollar you don’t spend puts you closer to retirement. Lowering spending is the most feasible way to claim an early retirement. The downside, however, is that once you lock in an expense rate, that is how much you have to plan on spending forever. (inflation-adjusted of course!) So reduce your expenses as much as you can while still feeling comfortable.

The Secret to Happiness

You may even wish to save past the point where it’s comfortable for you. There’s some very interesting research focused around the idea of hedonic adaption. Basically, when you increase your spending/quality of life, you are measurably happier for a certain amount of time but once the excitement of the increased spending wears off, you go right back to your base state of happiness and to your emotions, it’s like the increase in spending never happened. The opposite is also true, with the right mindset.

As long as you know you’re doing it for the right reasons, you can lower your spending and for a time, you will be less happy than when you were spending more. Soon however, you will get used to spending less, and your happiness will rise back to its stasis level. Long term, your happiness will remain the same, or so you might think. You could be forgetting one very important thing though…

You’re working toward a long term goal! Not only is working toward long term goals associated with higher levels of happiness, but your long term goal will also allow you to do WHATEVER YOU WANT! Once you accomplish FIRE and can switch from doing work that you HAVE to do to work that you want to do, you’ll most likely experience a permanent increase in happiness!

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