In One Chart: The path to financial independence and retiring early, in one simple chart

There are lots of moving parts to the FIRE movement — financial independence/retire early — but one crucial step toward achieving that coveted status is as easy to understand as it is difficult to execute: Focus on making the gap between your income and spending as wide as possible.

The Four Pillar Freedom blog’s “Zach” created this chart to simplify what chipping away at your expenses could mean for your long-term prospects:

As you can see, the grid shows how many years it will take to hit financial independence based on your income and spending. The numbers assume a 5% return on investments and a 4% withdrawal rate once you reach financial independence.

For instance, someone earning after-tax dollars of $40,000 and spending $30,000 a year will have to wait 31.9 years to gain FIRE. In other words, if you have $10,000 left over to invest every year, and get that 5% return, it’ll take that long before you have enough money to withdraw 4% of your portfolio without running out of cash.

It doesn’t go beyond $100,000, but you get the idea.

“If you can earn $90,000 per year and only spend $20,000 you only need to work for 6 years to have enough money to support you for the rest of your life,” Zach wrote. “But if you earn $90,000 and are spending $85,000 it will take you over 60 years to retire.”

He pointed out that the most relevant spot in the grid is in the $40,000 to $60,000 range, where most earners find themselves.

“If you earn $50,000 per year and you are spending $40,000 per year, it will take you about 36 years to reach financial independence,” he said. “But if you can cut your spending to $30,000 per year you would reach financial independence in 21 years.”

But what if investment returns are up at a gaudy 15%, like they have been in recent years? That unlikely figure probably has a lot to do with the increasing popularity of FIRE, particularly among millennials who haven’t suffered through previous bear markets. The whole concept seems a lot more achievable when your portfolio is popping.

At any rate, Zach created another chart to reflect that:

As you can see, the earner waiting almost 32 years to reach FIRE in the first scenario can get it down to less than 18 with those returns, Of course, counting on those kinds of numbers going forward may be a stretch — a BIG stretch — so it’s best to take aim at the factors that you can do something about.

“This means focusing on increasing your income, keeping your spending in check, minimizing investment fees, and maintaining an asset allocation that aligns with your financial goals,” Zach explained. “If you hope to achieve financial independence in a relatively short period of time, you’ll likely be better off focusing on these variables.”

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