The magic formula that decides how early we retire

Nima Abu Wardeh says it comes down to a simple equation: how much you save versus how much you earn. So how are you faring?

Answer this: how many working days before you can retire?

The traditional question is: how much money do you need to retire. But I think we’ve become desensitised to it – as though the numbers (often plucked out of thin air rather than worked through based on factual information) don’t have real ‘value’ or meaning. We’re emotionally detached from what reaching that target really means.

The word retire is wrong for a start. Instead think financial independence, and the freedom that brings. Especially if you’re young enough to earn (doing something you love), learn and yearn (to do/ experience things).

So let’s start again: how many working days before you are financially free? It might seem an impossible question to answer. It isn’t.

I recently read about a 62-year-old woman, who approached the ‘I don’t need to work again’ issue by deciding on a specific amount of money - when she reached the target, she was free - free of the binds of work, but also free to pursue her work.

Ironically, she still does what she did before, but now doesn’t have to worry about anything to do with money. The fact that she is a part-time librarian and writer means that her pot wouldn’t have grown as it did, if she had to rely solely on her earnings.

She was lucky enough to inherit US$50,000  in the 1980s and invested it all in stocks and bonds. She then reached her target, and cashed in. The day after, the market soared, but she took the theoretical loss on the chin. She doesn’t need much, and now has the cash to sustain her well into her 90s.

But for the rest of us, the magic formula is how much we save versus what we earn. That’s it, assuming we live beneath our means. This is how much money comes into your life versus what you live on. It should be easy enough for you to work these two numbers out.

To simplify further: those who don’t need to earn to live spend 0 per cent of their income. They somehow live for free, and can maintain this. They are ‘retired’ whenever they want to be.

If you’re reading this, you don’t fall into this camp.


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On the other end of the spectrum, far too many belong in the ‘spend more than 100 per cent of take home pay’ group. They are in debt and will never be able to afford to retire.

Hopefully, you are somewhere in between. First off, it isn’t all about compound interest.

This is how - a website for 'savings extremists and early retirement savants' puts it: compound interest is powerful but takes a long time. To retire in five or 10 years, the most important number is not your return on investment, it's your savings rate.

It’s a cool, and scary, platform; terrifying is more to the point. Click on their ‘When Can I Retire’ calculator, punch in your numbers (basic: earn, spend, save) and see where you fall on the chart.

If we take the often quoted 20 per cent savings rate, we need to work 36.7 years. Now consider how old you are today, and what you have set aside for the rest of your life. Do you have 36.7 in you? Don’t you want to be doing something else other than work?

If you were to save 60 per cent of take home pay, we are talking 12.4 years of slog.

Go on, play around with it and figure out what you’re willing to sacrifice: your money (save more) or your life (work more).

Saving 50 per cent of take home pay means 16 years until you can retire. Scroll down the page to the next chart and it shows you how this is achieved, boiling the numbers down to compound interest - and compound interest on the compound interest.

But, how many people do you know save 50 per cent of their take home pay?

According to data from the US, the latest savings statistics for 2017 shows that the average American only saves about 4 per cent of their income a year! In other words, it takes the average American 25 years to save just one year’s worth of living expenses.

The latest UK household savings ratio during the first quarter of 2017 is 1.7 per cent. Contrast this with 9.2 per cent - the average savings ratio in the past 54 years of disposable income; 1.7 per cent means retirement in 88 years, going up to 4 per cent brings that down to 70.4 years. This is a disaster.

What about you? How many working days before you are financially free?

Work it out and then get saving.

Nima Abu Wardeh is a broadcast journalist, columnist and blogger. Share her journey on