Changing Your Financial Situation With The Early Retirement Concept

It is soon coming to the 4th year of this blog's existence. Through writing about financial topics, I learnt a lot in the process too. I also read from other blogs and learn from people who have manage to changed their financial situation totally.

These 3 years plus has been a wonderful journey, meeting new friends and bloggers who make this journey a better one. We celebrate each other life journey from marriage to having kids, its really a whole community of friends from online to offline.

Worrying about life?

Through blogging, I also receive several emails from readers who are in tough situations. Many want to seek out solutions to change their financial situation. Most do not know what to do and just want to see light at the end of the tunnel. Finally, there are people who are afraid of their future and worried that they would not have enough money. 

I too was once lost, worried and afraid for my future until I got inspired by a concept that changed my financial situation. It started off with the concept of passive income, then multiple streams of income then early retirement and finally financial freedom. All these concept kept me focused on where I want to head in my life. It was not all perfect and I had to trial and error, fine tune and adjust accordingly. Life is about experience after all isn't it?


The concept of Early Retirement

The concept of early retirement which I chanced upon a few years back set the precedence for my life. Early retirement is often misunderstood as being lazy, doing nothing and not working. This is not true at all. To me, it is more about providing financial security and assurance for ourselves as well as our loved ones. When we are able to take out the money aspect off our minds, we can then truly live our lives purposefully.

So how does this work? How do we do it?

This is the table that summarises how much we need to save in order to retire in how many years:

Savings Rate (%)	Working Years Until Retirement
5%	66 years
10%	51 years
15%	43 years
20%	37 years
25%	32 years
30%	28 years
35%	25 years
40%	22 years
45%	19 years
50%	17 years
55%	14.5 years
60%	12.5 years
65%	10.5 years
70%	8.5 years
75%	7 years
80%	5.5 years
85%	4 years
90%	3 years
95%	2 years
100%	Zero

If we just look at the table above, the traditional advise of saving just 10% of our income will ensure we can never retire at all. This is already base on a 5% annual investment rate of return on our savings. If we don't invest at all, it will be even worse.

Up to this point, maybe some of you are still confused on how the numbers come about in the above table. Let's take an example of saving 50% of our income which means retiring in 17 years. This also means having financial independence after 17 years just by saving 50% of our income.

Here's how it works:

Let's assume a person starts working at the age of 24 with an annual income of $30,000. This person saves half of his salary which is $15,000 and invest it at 5% investment return. At the end of 17 years, his $15,000 saved annually will become $387,605.50. If now he just put these savings and invest in some stocks which can give him a 4% dividend yield, he would have enough dividends to cover his expenses fully. This is the point of financial independence.

Of course, there are many situations which may change in the 17 years such as expenses increases and income should also increase as well. We would have to adjust accordingly to make this work. 5% investment return isn't that difficult to achieve. Most people can invest and get more than 5% return which would speed up the growth of their money.

This concept is an inspiration to help me focus on my long term financial planning. I believe most people know that it is important to invest their money but lack the motivation and the patience to see through the investment process. Knowing this early retirement concept has helped me to invest better and most importantly give me a reason as to why I am investing in the first place. Without a goal and a purpose, investment can get tiring, boring which lead to us eventually giving up.


Where To Start To Change Your Financial Situation?

After knowing the concept of early retirement, we can then identify how many years we want to achieve financial independence. If we are looking at about 10 years, then we need to save 65% of our income. The next question to ask is whether its possible to save 65% of our income?

We can start by eliminating unnecessary expenses. If its not possible to eliminate expenses anymore, we will have to increase our income. If after reducing expenses and increasing income, we still can't reach the desired savings rate, then we have to look at longer years to financial independence. Perhaps saving 50% of income is more manageable than saving 65%. This will take 17 years instead of 10 years but its more achievable for some of us.

Savings is just the first part of the early retirement concept. The next step is to invest the money with at least 5% investment return. Identify the types of investment which you are comfortable and familiar with then keep investing the extra savings and reinvest the profits. Our money will gradually compound over the years to reach our desired amount for financial independence.

There will come a point when we realise the money we get from investing is more than our expenses. The safe rate is at 4% which means if we invest all the savings we have at 4%, will we have enough investment return to cover all our expenses? If yes, then congratulations, you have reached financial independence.

I hope this concept will motivate and inspire you to persevere through your financial journey, just like how I was inspired. There will certainly be some adjustments along the way so do enjoy the process fully. The key is to keep focused and don't give up.

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