I get a lot of questions like “How can I retire?”, “What can an average person do to retire?”, and so forth. This post should answer a lot of these.
There are many ways to retire (of course) but I’ll detail four of the most popular/likely options plus add some commentary on each.
Then you can chime in with your thoughts!
Before we dive in, let’s start with why I selected $50k.
I got this number by looking at U.S. median household income ($56,516).
Then I deducted a bit assuming someone reaching retirement saves at least part of their income, which they will no longer need to do once they retire.
BTW, they also may have no house payment as well, and thus need well below $50k, but this seemed like a nice, round number we could all generally agree on.
Plus it’s a number I think I could live on myself (though I don’t want to), so that’s another point in favor of using it.
If your specific number is a bit higher or lower, at least this post will have gotten you in the ballpark.
If it’s a lot different, you can use the same math here to calculate your specific numbers.
Now let’s get to the options…
Retirement Option #1: Save It All
This is probably the most common scenario discussed on the web today.
The idea here is that someone wanting to retire:
- Saves a ton of their income.
- Gets to the point where they have enough to support their spending needs.
- Retires and lives off withdrawals.
We could debate the 4% “rule” until the cows come home, but I’m going to use it here for demonstration purposes.
As with all these numbers, if you want to use something else, simply run the figures with your own assumptions.
Using the 4% rule, if a person wants to withdraw $50k per year she will need a nest egg of $1.25 million ($50k / .04) to do so.
So how does she get there?
Obviously there are a million savings and return rates that could be used, but I’m going to make the following assumptions:
- Our potential retiree currently makes $57k per year (the median).
- We’ll look at two savings rates: 15% and 30% (one more standard and the other double that).
- We’ll assume she can get 8% annual return on her money.
Given these assumptions, that means she’d either save $8,550 per year (15%) or $17,100 per year (30%).
Here are the results:
- It would take her 33 years to reach $1.25 million at 15%.
- It would take her 25 years to reach $1.25 million at 30%.
That’s a long time, but those are the numbers.
From here she can weigh the difference between spending less for 25 years and retiring sooner or living it up a bit for 33 years and retiring then. Different people will make different choices for various reasons.
In summary, we’re looking at 25 to 33 years for option #1.
Retirement Option #2: Start a Side Hustle
Let me begin with a couple thoughts:
- This doesn’t only have to be a “traditional” side hustle. For the purposes of this post “side hustle” could be something like owning real estate, working an extra job (versus owning a business), and so forth.
- This idea will require a bit more art than science to be evaluated.
Here’s the key question as we consider this option:
How long do you would think it’d take you to create a side hustle that churned off $50k in income a year?
Because that’s what we’re talking about here, right?
Some possible answers:
- “An eternity, because I don’t think I could ever get to that level.” If this is your response, then this option is not for you.
- “I don’t know if I could earn $50k, but I think I could earn some decent money.” Ok, that’s what the options below will be about, so stick with me.
- “Less than 25 years.” If this is your answer, you want to start your side hustle immediately as it will get you to financial independence before option #1.
If I had to do it all over again, I think I’d pick the last one as I know with a pretty good bit of certainty that I could develop a $50k business. Maybe not all in a side hustle, but between real estate and a side business, I think I could do it.
That said, my personal spending number is more like $75k rather than $50k, so I’d probably say, “I can pay for a good part of my retirement spending with a side hustle but not all of it.”
Which way would you answer?
Retirement Option #3: Combine Savings and a Side Hustle
This is where the magic begins.
I’ve covered this subject in different ways in How a Side Hustle Business Can Get You to Financial Independence in 10 Years and ESI Scale Financial Independence Calculator, but we’ll review it here again in brief.
The idea is that you keep saving at 15% or 30% PLUS you start a side hustle.
The great part about this option is that the retirement income load is carried by both your savings and the side hustle. For instance:
You won’t have to save $1.25 million, thus lowering the number of years you have to save.
You won’t need a side hustle that earns $50k per year, which could be a bit daunting.
We’ll stick with our 15% and 30% savings rates and add in two assumptions for a side hustle (we’ll assume a standard level of earnings for each year there’s a side hustle but earnings would vary over time):
- The potential retiree creates a side hustle that earns $10k per year (fairly reasonable and achievable by many).
- He creates one that earns $25k per year (a bit more challenging and limiting).
- If he creates a $10k per year side hustle, he only needs to save enough to generate $40k extra income per year (which is $1 million at 4%).
- If he creates a $25k per year side hustle, he only needs to save enough to generate $25k extra income per year (which is $625k at 4%)
Now let’s look at the combinations:
- At 15% savings rate and $10k side income, he reaches an annual income of $50k in 31 years.
- At 15% savings rate and $25k side income, he reaches an annual income of $50k in 25 years.
- At 30% savings rate and $10k side income, he reaches an annual income of $50k in 23 years.
- At 30% savings rate and $25k side income, he reaches an annual income of $50k in 18 years.
Some of the results are rather close to the original numbers (just a few years off). It’s because once the savings reach critical mass, compounding takes over and it outpaces earnings.
That said, the final option can cut seven years off the path to retirement! This is like getting 21 years of life back. Not bad!
By the way, that’s compared to “saving only” at 30% — it’s 15 years better than “saving only” at 15%.
Retirement Option #4: Combine Savings and Savings from a Side Hustle
One thing option #3 does not account for is the fact that if you have a side hustle AND you save a good portion of that income, then you can retire much earlier.
Let’s consider these options:
- If you save 15% of your job earnings plus 75% of your $10k side income you can reach an annual income of $50k in 23 years.
- If you save 15% of your job earnings plus 75% of your $25k side income, you can reach an annual income of $50k in 14 years.
- If you save 30% of your job earnings plus 75% of your $10k side income, you can reach an annual income of $50k in 19 years.
- If you save 30% of your job earnings plus 75% of your $25k side income, you can reach an annual income of $50k in 11 years.
I picked 75% savings since you have to have some fun, so go and blow the other 25%! 😉
Anyway, you can see how much of a difference the combination of saving + saving on a side hustle makes versus simply saving from your job.
At the most the difference is 19 years!!!!
Plus you can see that there’s not much difference between saving 15% or 30% if you have a $25k side hustle.
Anyway, look over the numbers and think through which option might be do-able for you and your family.
And if you’re wondering where you’d find an idea or time for a side hustle, check these out:
- How to Earn Extra Income: Side Hustle Ideas Worth Considering
- Ten Ways to Find Time for Your Side Hustle
But none of these options are the fastest ways to get to a $50k retirement. Why do I say that? Because there are several ideas that speed each of them up.
You might have guessed how, but let me share them in ESI fashion just in case:
- You can earn more. This could be at your job, your side hustle, or both. Earning more means that you’ll be saving more, even if your savings rate stays constant.
- You can save more. It’s not like 30% is the ceiling savings rate. This could go way higher (though at $57k income it might be hard — you may have to combine it with earning more). And you certainly could save 100% of your side hustle income.
- You can make better investments. Maybe 8% is as good as you can do or maybe you’re Dave Ramsey and can bring in 12%. LOL!
The points are probably made, but let’s be super obvious and end with this:
Earn as much as you can + save as much as you can + invest as much as you can at a good rate = retire as fast as you can
P.S. For those who prefer a video version of this post, see the ESI Money YouTube channel.