#Simple math to early retirement how to#

To solve for a cash flow, you need to use this equation (where PV is still the present value, CF is the cash flow needed each year, and i is the interest rate):īut you have to take into account inflation, the fact that prices rise over time. So what you need is this money as what’s called a Cash Flow. But remember, you need this per year, and every year, throughout your retirement. Thus, let’s assume you need 70 percent of your pre-retirement income. Financial planners say to expect your expenses to fall to 60-80 percent of your pre-retirement expenses (less commuting, you can now travel during off-peak times, etc.). To do this, we first want to think about how much money we need each year in our retirement.

This is contingent on your life expectancy, which is very difficult to predict – but one strategy is to set up a personal endowment (money that will last forever because you only live on the interest earned – which means you cannot outlive your money).

Now that you have hit your retirement, what you need to figure out is how much you need to retire comfortably. Filling in the equation above (with the cross-multiplication) is: Thus, in your last year of work, you will be making $268,596.37. Also, assume they receive 3 percent raises per year (which is approximately the national average in the United States). Then assume you work until you are 70, meaning you have to work for the next 48 years (tip: this is why you should pick a job you like). Let’s set up an example where you graduate from college at 22 years old, and you have a starting salary of $65,000. This equation allows you to figure out how much your money is worth in the future (if you have a certain amount now) or how much you need now to get to a certain amount in the future. Where PV is the Present Value, FV is the Future Value, i is the interest rate, and n is the number of years. But before we walk through it all, I want to give you the equation I learned in high school (thanks to my favorite teacher, Mrs.

And I think the math to make this work is easy, in fact, I think we should walk through it here (and you are welcome to put in your own numbers too). In the article, Veksler states, “By my estimate, a majority of American households would be worth a million dollars by their 40s if they start early and make a concerted effort.”

#Simple math to early retirement how to#

On FEE’s website, David Veksler has an article: How to Become a Millionaire by 40. I like to ask my class what it takes to be wealthy, and someone always says, “one million dollars.” I typically respond by saying, “well, that is true for a lot of people, but one million dollars is easy – I’m going to show you how to have much more than that!”