Welcome to today’s topic:
5 Steps On How To Retire In 5 years
5 Steps On How To Retire In 5 Years
If you hate your alarm clock every single morning, then you probably are thinking about how to quit your job and retire as soon as possible.
The problem is, if you are at your 30’s today and just saving a retirement rate of up to 15% set from employment, then you probably need to work until you reach the pension age of gray hair.
Unfortunately, according to a survey, there are around 54% of adults Americans who only have $0-$5000 savings to their retirement while the recommended retirement saving should be at least $1 million.
Sadly, and there are 85% of full-time employees around the world who hate their job.
Can you really retire with $1 million in 5 years when you are at the $0 savings today?
Or can you retire extremely early in 5 years by any means?
Let’s find out how can you retire in 5 years and become financially independent.
Here we go…
Step 1: Manage Your Personal Budget
The main key in early retirement is PASSIVE INCOME. That’s clear, right?
Now, passive income is the income you generate without actively working on a 9-5 day job for example.
This is something you can earn through a traditional investment.
Now, how much do you need in order to retire in 5 years?
There’s honestly no fixed amount if you want to retire as soon as possible. The amount should be enough to cover all your fixed expenses every single month.
This means that you need to create a personal budget by tracking all your expenses.
What are your fixed expenses?
- Rent or mortgage
- Property taxes
- Home insurance
- Student Loan
- Car payments
- Car insurance
Other variable expenses:
- Car maintenance
- Heating Gas
Once you arrived at a certain amount of your personal budget then you’re ready to look at your earning. This leads us to the next step.
Step 2: Find Out How Much You Need To Retire In 5 Years
How much do you earn today? $50,000? $100,000 or $200,000 a year?
Now, let’s say you live in New York and you earn $50,000 a year. And your take-home pay (paycheck) semi-monthly would be around $1,550. That’s around $3,100 per month net salary.
Now in order to retire in 5 years, you need to save money and investment right away so they can begin to generate passive income for you.
Well, let’s say this way.
If you save 10% of your net income, it will take you around 9 years to get a one year of freedom. On the other way around, if you save 90% of your net income, it will take you around 1 year to get 9 years of freedom.
What I’m trying to say here is that – it doesn’t really matter how much you earn. What really DOES matter is how much you spend.
Step 3: The 80:20 Ratio
As a general rule, the ratio of savings and expenses you need in order to be able to retire in 5 years is 80:20.
This ideally means that you need to save and invest the 80 percent of your income and spend only the rest (20%) every month.
So, let’ do the actual computations with the about example of $3,100 paycheck a month.
$3,100 X 80% = $2,480 (Savings)
$3,100 X 20 % = $620 (Allowance for your expenses)
$2,480 x 12 = $ 29,680 savings per year.
$29,680 x 5 = 148,800 total savings in five years without interest.
Now using a compounding interest at the rate of 5% per year, then you’ll end up a total of $168,655 after 5 years.
Using the same compounding interest rate if you retire (after 5 years) then you’ll be able to get $8,432.75 per year, which is $703 per month before taxes.
Step 4: Take Advantage Of Taxes
Now, this is the fun part. Or maybe not.
Let’s say you invested in dividends stocks with a 5% return per year. These are not difficult to find.
Luckily, taxes in New York State for the long-term capital gains on assets held more than one year are assessed at 0 percent, 15 percent, and 20 percent, depending on the taxpayer’s income tax bracket.
So, if you only earned $8,432.75 in one year.
You pay $0 for federal, state and local taxes if you are married.
The only thing you pay is the FICA – which is only $645 (7.65%) per year.
So, you still have $7,787.75 net a year or $649 per month. And your original expenses allowance on the above computation is only $620 per month.
If you are single, then you need to pay state and local taxes of only $17 and $13 respectively plus the FICA of $645 per year.
Net will be $8,432.75 – ($645+$17+$13) = $,7757.75 or $646.50 per month.
I know, this sounds extremely difficult but it’s not impossible.
What if you earn more than $50,000? Then the equation will become much better, right?
Step 5: Make An Agreement With Your Spouse Or Partner
Now, you know the math and how much you need to retire in 5 years.
And of course, you can see that’s almost extremely impossible to live comfortably especially if you have much bigger fixed expenses on your personal budget.
This approach requires a definite change of lifestyle and therefore you need to make an agreement with your partner or spouse. You need to support each other in order to achieve financial independence in 5 years.
To make the computation simpler, let’s just say you both earn $50,000 per year. Then your household budget would be $620 X 2 = 1,240 a month. Looks better?
What if you both are earning more than $50,000? Then again, the equation would better then.
How do people live this tight?
Well, you just need to stop eating out, shopping in and stop all expensive hobbies. You need to be creative in your everyday life then.
Let’s take an example computation for monthly expenses:
Total Budget: $1,240
Expenses: (Costs based in New York)
Apartment Rental $640 (a studio type – 1 bedroom 1 bath – Alpha Towers)
Utility cost $95
Transit pass (2) $240
Total Expenses $1,228.00. Still inside the total budget of $1,240.
See, it’s not impossible, right?
Do you also see now why people who already achieve financial independence are traveling full-time?
Honestly, if you have $1,240 per month, you can live much comfortably in other Asian countries like the Philippines, Vietnam, Thailand or China.
I have a full-time blogger friend who lived for one year in Vietnam and he paid only $400 a month for his condo with breakfast and dinner served every day.