It is important to understand the simple math behind early retirement. Your savings rate, and asset returns will determine how long it takes for you to retire. Minimizing taxes and investment costs results in more money compounding for you.
If you save 70% of your income, invest in dividend paying companies yielding 3% and growing earnings, dividends and share prices by 4% per year, you will be able to retire in approximately 10 – 11 years. If you only save 50% of income, you will be able to retire in 17 - 18 years. At a 40% savings rate, it takes 21 - 22 years to reach the dividend crossover point. If you only manage to save 30% per year, you will be able to retire in 27 - 28 years.
This chart shows how long it would take for the investment income to exceed the amount of savings, given the return, the dividend growth, dividend reinvestment and savings assumptions. You can view the spreadsheet behind the calculations from this link. You can download it, and play with your own assumptions.
I assume a “real salary” that does merely keep up with inflation, and investment returns that are also “real” and therefore are after inflation. I also am ignoring the effect of taxes on investment income, since everyone’s taxes are different, and I didn’t want to complicate too much this simple truth. More complications are probably going to confuse people, rather than make it clear for them. I am also assuming that this investment income is the only income to provide the essentials for a basic retirement income. In most situations, a person would have pension income and social security income or even some part time job income to rely upon, when they retire. For those who strive to retire early, it is quite possible that they will exclusively rely on the income produced from their investments.
This post was inspired by this article from the Mr Money Mustache blog. What this exercise shows you is that you need to focus on things within your control, in order to reach your goals. We have no control over stock market returns, or expected dividend growth rates. However, we can somewhat control our savings rate, and the investments we make. Starting out as early as possible helps tremendously too. I started out in my early 20s, and am pretty close to being financially independent by my early 30s.
- How to retire in 10 years with dividend stocks
- Types of dividend growth stocks
- Front Loading Savings for a Successful Dividend Retirement
- How Much Money Do You Need to Retire
- Use these tools within your control to get rich
I invest in companies that have a long track record of annual dividend increases. This is usually a result of a strong business model, that...
In the past few days, I have noticed that a couple of dividend growth stocks have been selling at lower prices than before. Those are compan...
Imagine you have a certain amount of cash in your possession, which you do not plan on using for say 10 – 20 years. Or imagine that you are ...
I believe in a bottom up method of evaluating each individual holding separately, and then if it holds up, not worrying about the portfolio ...
There are many misconceptions about dividend investing. I have tried itemizing several of them, outlining them, and providing a brief comm...
There are two schools of thought when it comes to dividend reinvestment. One of the options is to automatically reinvest dividends , wherea...
I have highlighted below several frequently asked questions about dividend investing. This is not an all inclusive list, but more of a runn...
For the first three to four years of my transformation into dividend growth investing, I managed to develop a process of identifying attract...
Apple Inc. (AAPL) designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music ...