Nobody's saying it's easy to retire early on an average salary, but it's not impossible, either. It took my wife and I 15 years to "get rich slowly," investing steadily month by month until we had amassed a nest egg of nearly $1 million -- enough to safely generate about $40,000 per year. We've been retired for more than six years now and have found we can live comfortably, if frugally, on this amount while still traveling extensively (as shown on ourwebsite).
How much we invested monthly
If you add up the total amount we invested over the 15 years from 1992 to 2006 (the year in which we retired), it comes to $342,000. This is the amount we put in, not counting compounding due to market returns. That averages out to $22,800 per year, or $1,900 per month.
The first three years of this 15-year period were insignificant in terms of investing because we were focused on buying and furnishing our home, paying off loans, and switching to a 15-year mortgage. During our 12 primary investing years, we averaged just more than $28,000 per year, or $2,333 per month, in investments.
Percentage-wise, that comes out to about 33% of our net income on average per year. So if you're saving one-quarter to one-third of your net income, there's a fair chance you're on track for early retirement, too.
Note the big jump in savings that occurred in 2000 and 2001 due to my wife's retraining as a nurse. After paying off her student loans in 2000, we were able to channel virtually all of the extra money she was earning straight into investments. The lesson learned is to invest in yourself first if you want to maximize results.
We kept things simple by investing equal amounts in three Vanguard index funds: the Vanguard 500 Index Fund (VFINX), Vanguard Extended Market Index Fund (VEXMX), and Vanguard Total International Stock Index Fund (VGTSX). We were essentially 100% invested in stocks during our primary investing years and only added a significant position in bonds upon selling our home and retiring.
How much can youinvest monthly?
What you can accomplish depends a lot on your own situation, of course -- financial and otherwise. Let's take a look at three different scenarios:
- 15-year plan: Based on our own experience, about $24,000 per year, or $2,000 per month, is a reasonable investment amount if you're aiming for retirement in 15 years. That amount -- plus compounding, plus any equity if you own a home and are willing to downsize, may be enough to allow for a modest early retirement. In our own case, we were able to downsize to a $100,000 condo once we retired, which let us channel the other $200,000 from the sale of our home into Vanguard Total Bond Market Index Fund (VBMFX).
- 20-year plan: The above goal is frankly overambitious for most parents. We would suggest that parents aim to save $15,000 per year, or $1,250 per month, for 20 years to build a roughly similar nest egg.
- 25-year plan: If you don't want to scrimp and save quite so much, another option is $9,000 per year, or $750 per month, for 25 years. The power of compounding is such that smaller amounts saved over longer periods of time can achieve surprisingly effective results. The investing calculator atdaveramsey.com (under the "Tools" tab) can be a great help in testing out different what-if scenarios and monthly investment amounts.
If all of these amounts seem impossibly large to you, don't get discouraged; just consider how little we saved in our first three years. With a long time horizon, you have plenty of time to make career improvements to supercharge your savings. Here's a tip: When you get a raise at work, channel the majority of it into increased savings before you become used to living on the higher amount. Your monthly savings rate can jump dramatically by following this simple approach.
Image source: Getty Images.
Jobs and kids
Retiring early does not demand a high-powered job, but it does require you to live consistently below your means. We achieved early retirement with no outside financial help and with combinedgross salaries averaging $89,000 over the 15 years from 1992 to 2006. Most people take comfort in hearing we were able to realize our early-retirement dreams with relatively normal jobs.
We can say with certainty that we could not have retired at age 43 with kids, given our modest salaries, but we believe we could have retired by age 50. To give yourself the best chance of success, let compounding do more of the work for you by investing smaller amounts over a longer period of time. This will give your investments (and your kids) more time to grow.
Robert Charlton is a longtime owner of Admiral Shares in all four of the Vanguard index funds listed in this article: the 500 Index Fund, Extended Market Index Fund, Total International Stock Index Fund, and Total Bond Market Index Fund. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
FAQs
Set a Savings Goal
But it's considerably more so if you want to retire early. One rule of thumb recommends multiplying your desired annual income in retirement by 25 to come up with a savings goal. So, if you want to have $50,000 a year for 25 years, you'd need $1.25 million.
Is $800,000 enough to retire at 60? ›
If you have substantial income from sources like a pension and Social Security, an $800,000 portfolio could last for many years. That's especially true if your expenses are low and you don't have significant health care expenses.
How much does Dave Ramsey say to invest in retirement? ›
Ramsey's recommendation, which he shared on his website Ramsey Solutions, is to invest 15% of your gross income into your 401(k) and IRA every month. There's a good reason you should invest 15% of your income.
What is the $1000 a month rule for retirement? ›
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
Is $1,000,000 enough to retire at 55? ›
While retiring at 55 with $1 million may be possible, it requires planning and a watchful financial eye. "Most people are living into their 90s, so the $1 million will have to last 35-plus years," says Aviva Pinto, managing director of Wealthspire Advisors in New York City.
Is $500,000 enough to retire at 70? ›
The short answer is yes, $500,000 is enough for many retirees. The question is how that will work out for you. With an income source like Social Security, modes spending, and a bit of good luck, this is feasible. And when two people in your household get Social Security or pension income, it's even easier.
What is the average Social Security check? ›
Social Security offers a monthly benefit check to many kinds of recipients. As of December 2023, the average check is $1,767.03, according to the Social Security Administration – but that amount can differ drastically depending on the type of recipient. In fact, retirees typically make more than the overall average.
Can I retire on $4,000 a month? ›
Bottom Line. With $800,000 in savings, you can probably cover $4,000 in monthly living costs. However, retirement accounts alone cannot safely sustain that spending for a 25- or 30-year retirement.
Can I live off the interest of $800 000? ›
Can you retire at 50 with $800k? It is certainly possible to retire by age 50 with $800,000 in the bank, but you would need to adopt a relatively frugal lifestyle. Using the 4% safe withdrawal rule, you could take out $32,000 per year, or $2,667 monthly. This should sustain you for 25 years until age 75.
How much does Suze Orman say you need to retire? ›
Suze Orman is right. In order to retire early, you need at least $5 million in investable assets. With interest rates so low, it takes a lot more capital to generate the same amount of risk-adjusted income.
Understanding the 7% Rule for Retirement
Let's illustrate this with a simple example: if you have $100,000 in your retirement savings, under the 7% rule, you would withdraw $7,000 each year.
What are the 4 funds Dave Ramsey recommends? ›
And to go one step further, we recommend dividing your mutual fund investments equally between four types of funds: growth and income, growth, aggressive growth, and international.
How much do I need in 401k to get $2000 a month? ›
Understanding the $1K Per Month in Retirement Rule
With the $1,000 per month rule, if you plan to withdraw 5% of your savings each year, you'll need at least $240,000 in savings. If you aim to take out $2,000 every month at a withdrawal rate of 5%, you'll need to set aside $480,000.
Can you live off $3000 a month in retirement? ›
That means that even if you're not one of those lucky few who have $1 million or more socked away, you can still retire well, so long as you keep your monthly budget under $3,000 a month.
Can I live on $2000 a month in retirement? ›
Retiring on a fixed income can seem daunting, but with some planning and commitment to a frugal lifestyle, it's possible to retire comfortably on $2,000 a month. This takes discipline but ultimately will allow you to have more freedom and happiness in your golden years without money worries.
Is $10 million enough to retire at 30? ›
And given that the average American spends $66,921 per year (as of 2021), $10 million is more than enough to retire at 30 in most cases. However, that may not be true if you have an expensive lifestyle when you retire. Factors like inflation, healthcare costs and a volatile stock market can derail your retirement.
Is $2 million enough to retire at 40? ›
Retiring at 40 with $2 million is possible, though it is a lofty goal, especially if you don't have a large inheritance or some other windfall. But it can be done if your income is high sufficient and if you are aggressive with your savings strategy.
Can I retire at 60 with $2 million? ›
Said another way, $2 million may be enough to retire for some, but it's certainly not enough to retire for others. That's why it's so important for individuals nearing retirement to create a personal retirement income plan and not rely on generalizations.
Can I retire at 60 with 500k? ›
Generally speaking, you can retire at 60 with $500,000, but you may not like how much income you have or it may not be enough for your needs. However, some people can retire on less.
