Let's dig into what this means a bit more with a simple hypothetical example. Mr. and Mrs. Walleye make $100,000 combined after taxes, both are 39 years old with two kids. They save 20% per year for retirement and have $100,000 in investments. Not too bad and way above most Americans. Based on the information given, they live off of $80,000 ($100k-20%, the money has to go somewhere). They have new cars, a mortgage, go on expensive vacations to Disney, eat out a few times per month and have an eye for expensive items like Coach bags. I made a spreadsheet with their expenses and it it reasonable to spend $80k/year based on their lifestyle. Overall, they are not extravagant. Their only debt is in cars and a mortgage.
What does this mean for their retirement? To be fair, lets reduce their needed income after retirement to $60,000. They will not have a mortgage and their work expenses (commuting) will not exist. However, they are still the same people wanting new cars, expensive accessories and to travel to posh resorts. So based on the retirement rules above they will need to save $1.5 million (25 x $60,000). This means they will need to work for another 21.9 years. They would be able to retire at age 61. Not too shabby.
Now, lets look at the same couple, Mr. and Mrs. Muskie, same age, same income and same investments at age 39. The only difference between the Walleye's and the Muskie's is that the Muskie's have reduced their spending habits and increased their retirement savings to 50% of their income. Mr. and Mrs. Muskie found away to pay off their mortgage early by making these changes when they were 36. Instead of investing 50% of their income into stocks, they used the surplus it to pay off the remainder of their mortgage in 3 years. Now at age 39, their house is paid for, they have adjusted their spending to be able to invest 50% of their income. This philosophy allowed them to cut their living expenses to less than $30,000 including property taxes. And, by the way, still live a rich and fulfilling life.
Mr. and Mrs. Muskie's timetable for retirement is quite different from the Walleye's. The Muskie's goal is $750,000 (25 x $30,000). Now that their house is paid for, they are now able to save almost 70% of their income. At this savings rate, they will be able to retire in 6.6 years. Wow, financially independent by 45 years old. If they learned these principles when they were out of college, 45 might have been 35.
Stephanie and Mike want to be like Mr. and Mrs. Muskie. Our numbers are quite a bit different. We have much more invested, so we have a good head start. Aside from mortgages and property taxes, we have pared our living expenses down to under $25,000 thanks to How we pay for stuff. We are now focused on paying off our mortgages, yes plural.
The important part of the formula is cutting down your spending. I equate this principle to fitness and weight loss. Eating healthy is the foundation for dropping pounds and keeping them off. You can work out like a maniac everyday, but you can easily negate the workout by making one bad food choice. A 30 minute run can burn 435 calories, but can be quickly wiped out by a hotdog. Saving money is eating healthy and investing wisely is working out. Both are needed, but have different benefits on your body and wallet.
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