• Sagar Agarwal

Rethinking how much to invest for early retirement

Updated: Feb 24, 2021

Things to think about while saving up for retirement.

There is a plethora of literature around how much dollars you must invest for early retirement. By retirement I mean, retire from ever needing to work to cover your expenses. Typically it is said that you should aim for your portfolio size to be 25 times your yearly expenses. At this portfolio size, your gains should cover your expenses for the rest of your life.

To get to this size you have to start small. You might be earning $50,000 a year and saving $10,000 a year. To be able to retire, according to this calculator, you would need to work for 30 years and you would have saved up a portfolio size of $1,020,730. I believe this calculator doesn't have the flexibility to incorporate an increment in your job and that you would upgrade your lifestyle as you earn more. I propose that calculations should be done with a saving rate and not savings in dollars. A saving rate for the above example would be 20% ( $10,000 saved per $50,000 earned). So if this individual in 10 years starts making $100,000 then I'd say he/she would save $20,000. This might be conservative to say that spending would double as well but I will rather be conservative than put retirement plans at risk.

With growth of salary rate of 3%, this investor after 30 years would have a portfolio size of $1,372,371. Doing some sanity checks, after working for 30 years, the salary of this investor would have grown from $50,000 to $121,363 and savings from $10,000 to $24,272. They seem to be reasonable to me.

But there is a catch, remember to retire early you need to have 25 times your yearly expenses. The investor is spending $97,090 and now he doesn't need just ~$1M but ~2.4M to afford his current expenses. So this person can either stop work now and severely cut down on expenses or has to work for a bit more to retire. Turns out he will have to work for 42 years to constantly upgrade his lifestyle. Messing out with a few different cases of savings rate and salary growth rate, while you save a lot more than a constant dollar saving, you are spending at a high rate as well. It shows that how important it is to keep our expenses low at all times. A salary hike of 5% should not equate to 5% more expenses. From an early retirement point of view, a person is will retire earlier without this hike than a person who got a hike in salary and expenses.

I would also like to emphasize how important it is to have a high saving rate and invest a lot of time. I assume,

  1. Starting salary of $50,000 with a growth rate of 3% a year

  2. Return on the portfolio is 7%

We see that a high saving rate of 40% would have a similar portfolio size in 20 years than saving rates of 10% in 35 years. This is very hard to achieve in real life with consistency. All I am saying is that save as much as you can in the early years and be ready to make small sacrifices to save more. These sacrifices will pay off.

Let there be two investors, one invests $1000 a year for the first 10 years and no future investments, and the second investor starts investing 10 years late and invests $1000 a year for the next 30 years. An early investor who would have only invested for the first 10 years would have a higher portfolio size in 40 years than a late investor investing for the last 30 years! This means the early investor would have invested merely $10,000 and late investor invested $30,000 and early investor outperforms in 40 years.


As an investor, you can predict how much returns are your investments going to make with certainty. If there is one thing that is absolutely under your control is to start investing early. It doesn't have to be much but every little bit counts in the first 10 years.


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