How To Retire Early (The 3 Numbers You Need To Know)
In a Nutshell
The three numbers that determine early retirement are net worth, savings rate, and your financial independence (FI) number. Track your net worth as assets minus liabilities, aim for a high savings rate (50% cuts work time roughly in half), and calculate your FI number by multiplying annual expenses by 25. Your savings rate controls how fast you reach your FI target, which is the amount your portfolio must reach to cover all living costs without a paycheck.
These notes were generated by AI and may contain inaccuracies.
There are three numbers that determine whether you retire early or work until you're 65. Most people don't know any of them because nobody ever taught them. Income isn't one of these numbers. There are people making $200,000 a year who are completely broke on paper, and people making $50,000 who are multi-millionaires on track to never need a paycheck again. The difference is these three numbers.
Net worth is your financial report card. It is every dollar you own minus every dollar you owe. Assets weighed against liabilities. Most people avoid looking at it because they're scared of what it's going to say.
According to the Federal Reserve Survey of Consumer Finances, the average American's assets break down roughly like this: about a third is sitting in retirement accounts, 28.5% is home equity, and only 12% is actually in stocks. The rest is a mix of vehicles, business assets, rental property, and bonds.
The speaker's own breakdown is: roughly 45% in stocks and equities, 33% in real estate, 13% in alternative investments, and the last 9% in cash.
Think of your net worth as a pie where each slice is a different asset class. Once you've added everything up on the asset side, subtract your liabilities. The most common ones are student loans, credit cards, medical debt, and auto loans. Whatever is left over is your net worth.
Benchmarks by Age
Fidelity's research recommends aiming for:
- 1 times your salary by age 30
- 2 times your salary by age 35
- 3 times your salary by age 40
- 4 times your salary by age 45
- 6 times your salary by age 50
- 8 times your salary by age 60
- 7 times your salary by age 67 (retirement)
These are benchmarks. Start tracking and give yourself an honest grade on your financial report card.
It doesn't matter how much money you make. Your savings rate is what determines how long you have to work. Someone making a million dollars a year and spending a million dollars a year has a savings rate of zero and will never retire.
Minimum Income Threshold
You need to make at least $75,000 a year. Inflation will eat you alive below that because you won't be able to afford to invest.
How to Calculate Savings Rate
Take your monthly income, subtract your monthly expenses, divide that by your income, and multiply by 100 to get your percentage.
Example: You make $5,000 a month. Your expenses are $4,000. That leaves you with $1,000. $1,000 divided by $5,000 is 0.2, or 20% savings rate.
What the Numbers Mean
- A 20% savings rate means you'll need to work for roughly 37 years before you can retire.
- The average American savings rate is between 3% and 4%.
- A 15% savings rate is the next real target after beating 3%.
- A 50% savings rate cuts 37 years down to roughly 17 years.
- A 75% savings rate gets you to about 7 years.
Every percentage point you add is time that you're buying back.
Warning Against Extreme Frugality
Don't become a hermit or miser to reach financial independence. Enjoy your life while you're young. Don't eat Subway sandwiches at a nice restaurant to save $10. The book "Die with Zero" is recommended.
Your FI number is the amount of money you need invested so that your investments alone can cover all of your expenses. You don't need a job or paycheck—just your portfolio paying for your bills.
How to Calculate FI Number
Take your yearly expenses and divide by 4%. Or multiply your yearly expenses by 25. Both give the same result.
Example: If you're spending $4,000 a month ($48,000 a year), $48,000 divided by 4% gives you a $1,200,000 FI number.
The 4% Rule
The 4% figure comes from decades of research into how long portfolios survive in retirement. Historically, withdrawing 4% per year has allowed portfolios to last 30 years or more across most market conditions. This is based on the Trinity Study.
FI Number Is Not Fixed
Your FI number moves based on what you spend. If you cut your monthly expenses from $4,000 to $3,300, your FI number drops from $1,200,000 to $990,000. You just bought yourself a finish line by trimming expenses.
Once you reach Social Security, you don't have to come up with the full monthly amount because Social Security will cover a chunk. A taxable brokerage is important for people who want to retire sooner because you can access funds without penalties.
There is not just one version of financial independence. There is a whole spectrum:
LeanFire
Built on super frugal living, typically overseas. People work 10 to 15 years, then take their portfolio and live in places like Latin America, Portugal, the Philippines, or the Balkans for significantly less than they would in the United States.
BaristaFIRE
Semi-retired FIRE. Your portfolio has enough money so that an easier job (like being a barista) offsets your bills, combined with your retirement portfolio.
CoastFIRE
The speaker's favorite. You frontload the portfolio early (in your 30s or 40s) with $100,000, $200,000, $500,000, or a million dollars. Then you can stop contributing because the portfolio will coast to your FI number. Assuming a 4% return (7% ROI minus 3% inflation), the portfolio grows on its own.
Full FIRE
Calculated as annual expenses times 25 or divided by 4%. This number will coast to your target without adding another penny, assuming the return assumptions hold.
FatFIRE
The final boss. A very comfortable retirement, typically living off multiple six figures a year.
These three numbers aren't separate ideas—they're all connected:
- Your net worth tells you where you're at today (your financial report card).
- Your savings rate tells you how fast you're getting to the finish line.
- Your financial independence number tells you exactly where you're going (the finish line).
Most people are wandering financially because they have no map. They never reverse engineered their final destination.
You can't outwork a bad diet and you can't outsave a spending problem.
- Calculate your net worth: Add up every asset, subtract every debt, write the number down.
- Calculate your savings rate: Take last month's income, subtract last month's expenses, divide by income, multiply by 100.
- Calculate your financial independence number: Take your monthly expenses, multiply by 12 to get your annual number, then multiply that by 25.
Look at the gap between your net worth and your FI number. That's your mission.
These three numbers aren't complicated. The reason most people don't know them is because they simply haven't learned.
You need to make at least $75,000 a year. If you aren't smart enough to earn it, work hard enough to earn it. If you're smart, increase your education and get a better paying job. If you have both the hard work ethic and intelligence, start your own business.
The speaker recommends checking out whiteboardfinanceuniversity.com for those who are at that income level and still feel lost. It's $10 a month for access to a private community with live streams, full courses, and shared trades. The speaker is mostly invested in a taxable brokerage because he doesn't want to wait until 59½ to access funds without penalties. Long-term capital gains tax applies after one year.
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