Years To Financial Independence

Came across this article recently in our local Business Times.

I purposely posted this in Social Media stating that if you are only able to save 10% of your income and put them all in the bank, you can retire in about 460 years.

I do not know what people who "like" the posts think.

Do they think this article is funny, the truth, or it's a joke?

The financially savvy will know this is true, the non-believers will be skeptical.

...

Is this really accurate? I'll prove it.

Notice in this chart that we're referring to Financial Independence (FI) - which is different from Retirement. Being FI means having enough assets to generate enough income for your current standard of living.

Really? I can attain FI in 10 years if I save 50% of my income and invest them at 7%?

How is that even possible?

I'll do a back of the envelop calculation here:

To make things simple, assume you earn $2K a year and spend $1K a year.

In 10 years, you'll save $10K. Compounded over 10 years, this $10K will grow to roughly $14K.

From that point forward, you can stop working: 7% of $14K generates about $1K of passive income (i.e your yearly expense)

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It doesn't matter whether you earn $20K and spend $10K, or earn $1 Million and spend $500K. The math is all the same. The only thing that matters is your saving rate and yield.

This is, of course, assuming your expense remains the same.

Which is why I said FI = Current Standard of Living.

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An interesting case:

Assuming we save 20% of our pay (e.g we actually save 37%, but let's assume 17% of it is use to pay for house), at the rate of 4% (roughly what the CPF retirement account pay), guess how long you need to retire?

Consult the chart, it's 40 years. Pretty accurate.

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I think this chart brings "fear" and "relief" at the same time:

Fear because it shows how you'll never achieve FI if you have a pathetic saving rate and yield.

Relief because it shows how quickly you can achieve FI with the right strategy.

If you decide to involve yourself in the race to "haolian", to show off on social media, to chase after other people's lifestyle, then you deserve the mental stress and debts.

Buying and maintaining a car adds 10 years to your retirement for the average person. Ask yourself if it's worth it.

Do you want to forever be a slave to your own greed?



Word of advice from the Oracle of Omaha:



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That said, don't ever save at the expense of denying yourself a comfortable life. I believe in accumulating wealth through saving, not scrimping. Eating dirt cheap, no nutrition stuff is a classic case of penny wise pound foolish - but that's story for another time.