{"id":143359,"date":"2022-06-06T09:41:14","date_gmt":"2022-06-06T15:41:14","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=143359"},"modified":"2024-02-13T17:09:29","modified_gmt":"2024-02-14T00:09:29","slug":"financial-independence-savings-rate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/financial-independence-savings-rate","title":{"rendered":"Financial Independence: How Much of Your Income Do You Need to Save?"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC4246367124&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Can you reach financial independence and retire within the next 10 years?<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Yes, but it would take a huge savings rate.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I\u2019ve never subscribed to the idea of retiring at 65 years old with an office cake and a gift watch. You can&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/retirement-accelerator\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">retire at any age<\/span><\/a><span data-preserver-spaces=\"true\">\u2014if you\u2019re willing to live on a fraction of your income and invest the rest.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The higher your&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/50-30-20-rule\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">savings rate<\/span><\/a><span data-preserver-spaces=\"true\">, the faster you reach financial freedom.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Savings Rate, Living Expenses, and Replacement Income&nbsp;&nbsp;<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Your savings rate is the percentage of your income that goes toward investments, paying off debts early, or cash savings such as your&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/emergency-fund\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">emergency fund<\/span><\/a><span data-preserver-spaces=\"true\">. If you bring home $5,000 per month after taxes and save and invest $2,000 of it, you have a 40% savings rate.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">This means you live on $3,000 per month. Those lower living expenses not only let you save more each month, but they also mean you don\u2019t need as much passive income to reach financial independence. In this example, you would only need $3,000 per month in passive income\u2014or $36,000 per year.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Compare that to someone with a 10% savings rate who spends $4,500 per month. They need to replace $54,000 per year in income\u2014a feat that will take them far longer if they\u2019re only saving $500 per month.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">The \u201cSafe Withdrawal Rates\u201d Model of Retirement<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">We all need to answer the question, \u201cHow much do I&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/retirement-savings\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">need to save for retirement<\/span><\/a><span data-preserver-spaces=\"true\">?\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The classic&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/renewsblog\/4-percent-retirement-rule\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">4% Rule<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;offers one way of answering this question. It posits that if you withdraw 4% of your nest egg in the first year of retirement and adjust upward by inflation each year after, your nest egg should last at least 30 years. So, if you have $1 million saved for retirement, you can withdraw $40,000.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Following the rule\u2019s logic, you can multiply your annual living expenses by 25 to reach your target nest egg (25 x 4 = 100%). So, in the example above, annual living expenses of $36,000 would require a nest egg of $900,000. Annual living expenses of $54,000 would need a&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/7-steps-to-7-figure-retirement-savings\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">seven-figure nest egg<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;of $1,350,000.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Even at these modest annual retirement incomes, older Americans lag far behind the savings they\u2019ll need. The&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/listwithclever.com\/research\/baby-boomer-retirement-savings-by-generation\/\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">average baby boomer\u2019s retirement savings<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;is only $136,779, which would yield only $5,471 per year in income according to the 4% Rule.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Note that this rule was calculated based on a portfolio of stocks and bonds, not real estate. More on that later.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How Long It Takes to Retire Based on Savings Rate<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">So, we calculated how quickly you could retire based on the 4% Rule. It required an assumption for return on investment, so I used a generous 10% return for these calculations. Why so generous? Because the average return on the S&amp;P 500 since its inception is around 10.5%.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The average stock investor doesn\u2019t earn nearly that much because they try to get fancy by picking stocks or timing the market. But I digress.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">To illustrate these numbers tangibly, I ran them for someone with a $100,000 take-home income ($8,333.33\/month). But the same number of years would apply to each savings rate, regardless of the amounts.&nbsp;<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"987\" height=\"889\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/Savings-Rate-to-Retire-Early.jpeg\" alt=\"\" class=\"wp-image-143360\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/Savings-Rate-to-Retire-Early.jpeg 987w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/Savings-Rate-to-Retire-Early-300x270.jpeg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/Savings-Rate-to-Retire-Early-768x692.jpeg 768w\" sizes=\"auto, (max-width: 987px) 100vw, 987px\" \/><figcaption class=\"wp-element-caption\"><em>Calculation of target annual incomes based on savings rate<\/em>.<\/figcaption><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">Even with extreme savings of 80% of your income, you still couldn\u2019t retire in under five years.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But for real estate investors, that doesn\u2019t represent the whole story.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">How <span data-preserver-spaces=\"true\">Real Estate Tweaks the Math<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">We\u2019ve all read&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/retire-early-real-estate-investing\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">case studies of people who retired young with real estate<\/span><\/a><span data-preserver-spaces=\"true\">. How could they do it if even an 80% savings rate wouldn\u2019t let you retire in under five years?&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Because real estate changes the math of early retirement.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">You don\u2019t have to worry about safe withdrawal rates because you aren\u2019t&nbsp;<\/span><em><span data-preserver-spaces=\"true\">withdrawing&nbsp;<\/span><\/em><span data-preserver-spaces=\"true\">money from your nest egg. You keep earning ongoing income from your rental properties without selling any assets.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you only need $3,000 per month to reach financial independence, and you can earn $500 per month in cash flow from each rental property you buy, you only need six properties to retire. And while that might still sound daunting, remember that you can finance the bulk of each property with other people\u2019s money.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Using the&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/guides\/brrrr-method\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">BRRRR strategy<\/span><\/a><span data-preserver-spaces=\"true\">, you can invest without leaving a single dime of your own money invested in each property post-refinance.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Real estate buffers you against inflation as well. You can raise rents to adjust for inflation\u2014it\u2019s one reason I&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/high-inflation-bonds-and-real-estate\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">replace bonds in my portfolio with real estate<\/span><\/a><span data-preserver-spaces=\"true\">.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">All of this means real estate investors can earn higher cash-on-cash returns than 10% and withdraw\u2014or more accurately&nbsp;<\/span><em><span data-preserver-spaces=\"true\">collect<\/span><\/em><span data-preserver-spaces=\"true\">\u2014more than 4% of their nest egg each year.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Working Before and After Financial Independence<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The overwhelming majority of people I\u2019ve interviewed who have reached financial independence didn\u2019t actually \u201cretire\u201d to never work again. Instead, they went on to work on fun or fulfilling projects that didn\u2019t necessarily pay quite as well as their old day job.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But they still earned money. In retrospect, they could have quit their day job much earlier, living on a combination of their passive income from investments and their new active income.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Continuing the example above, you wouldn\u2019t need to wait until you reached $36,000 per year in passive income from investments before quitting your day job. You could quit when you got halfway there, as long as you found other fun ways to bring in the additional $18,000.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">For example, many real estate investors get their real estate license to help their investing work. While a real estate agent\u2019s income is variable based on the number of sales made, you could potentially earn enough commissions to bridge the gap after quitting your day job.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Or become a freelance writer, flip houses, pour wine at a winery, or do consulting work. Personally, I&#8217;m not yet financially independent. However, I still live something akin to a good lifestyle\u2014living overseas most of the year on a combination of my online business income and a few fun side gigs.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Final Thoughts<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">The chart above is a starting point for plotting your own course and timeline to financial independence, not the final word on the subject.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Invest in a mix of&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.biggerpockets.com\/blog\/real-estate-vs-stocks-performance\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">stocks and real estate<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;to bend the math of cash-on-cash returns and the 4% Rule. Start planning your ideal side gig after you quit your day job but before you\u2019re completely financially independent. Don\u2019t succumb to the mainstream tendency to spend almost every penny you earn in a vain attempt to keep up with the Joneses.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">If you want real wealth, save more money, invest it, and get off the hedonic treadmill.&nbsp;<\/span><\/p>\n\n\n\n<div id=\"hero-block_6414b8af3a8be\" class=\"first:mt-0 hero-block py-4    has-background has-slate-200-background-color has-text-color has-theme-gold-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-slate-800-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Early financial freedom is possible.<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-slate-900-color has-text-color\" style=\"font-size:16px\">Building wealth is always possible, even while working full-time, earning a median income, and paying off debt.&nbsp;<em>Set for Life&nbsp;<\/em>gives young professionals the action plan they need to conquer their financial goals and achieve early financial independence.<\/p>\n\n\n\n<div id=button-custom-event-block_64134fe56b103 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/set-for-life-revised-edition%20%20?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Set for Life&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/financial-independence-savings-rate&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-gold-background-color has-text-color has-white-color\" target=\"_blank\">Get Your Copy<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/06\/SFL_cover_mockup_04_transparent-1-e1684415871792.png\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>\n\n\n<p><em><span data-preserver-spaces=\"true\">What\u2019s your plan for reaching financial freedom and retiring? How does real estate fit in? Let us know in the comments below!<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Can you reach financial independence and retire within the next 10 years? Yes, but it would take a huge savings rate.&nbsp; I\u2019ve never subscribed to the idea of retiring at [&hellip;]<\/p>\n","protected":false},"author":158586,"featured_media":143365,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7398,7119],"tags":[6213],"class_list":["post-143359","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-retirement","category-biggerpockets-daily","tag-financial-independence"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143359","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=143359"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/143359\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/143365"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=143359"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=143359"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=143359"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}