But first, you need to know how your current savings habits stack up. Personal finance blogger Zach of Four Pillar Freedom created a simple chart that breaks down how close you are to financial independence, or early retirement, based on how much you're able to save and invest each month.
The chart assumes a few things:
So how close are you to early retirement? Check it out:
Zach defines the amount you'll need for financial independence as 25 times your current annual income, which typically falls in line with the "four percent rule " used by many early retirees. This "rule" states that, if you can safely withdraw four percent a year from your retirement savings portfolio, you have enough in the bank to quit your job.
However, while it's a useful tool to see if you're on track to kick back early, it's important to keep in mind that not everyone's retirement goals are the same. Some experts recommend using a lower withdrawal rate to be safe.
Another way to figure out how close you are to financial freedom is to calculate your savings rate, which is "the amount of money, expressed as a percentage or ratio, that a person deducts from his disposable personal income to set aside as a nest egg or for retirement," according to Investopedia.
The formula is simple. "It's just your income, less your spending, divided by your income. Multiply by 100," the Money Sloths write.
They break it down into four steps:
Your saving rate should include your after-tax income and any employer 401(k) matches. On the spending side, be sure to include medical expenses such as health insurance, if those don't come straight out of your paycheck, as well as property taxes and interest on any outstanding debt, including your mortgage.
Once you figure out your savings rate, you can get a sense of how close you are to financial independence. This varies according to your personal goals but experts typically recommend having $1 million set aside in order to retire in your 60s.
However, if you want to retire earlier, flipping the four percent rule can help you figure out how big your portfolio needs to be, or what's called your "magic number." Simply divide your annual spending by 0.04, or multiple it by 25, to get your target.
And if you're vying to join the early retirees' club but aren't on track to make it happen yet, take some inspiration from people who have already done it:
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