Did you know that you can retire in 16 years time?
Anyone can do it. Believe it or not you can retire in 16 years time and have the same level of income you are living on now, if not more. Let me show you how to prove this to yourself using Excel, and some simple formulas based on your income. The great thing about this model is that it doesn’t matter what level of income you are on. You don’t have to be a high earner, or rich - it works on the principle that it doesn’t matter how much you earn, it just matters how much you keep.
The model isn’t flawless, in fact it does make some assumptions, but you can work these out yourself, all I want to prove with this, is that it is possible to build wealth and essentially retire within 16 years. What are you waiting for? Read on…
It’s not how much you earn, it’s how much you keep!
This is a principle that has been stated many times over by most of the guru’s of personal finance. Robert Kyosaki in Rich Dad, Poor Dad (Rich Dad)
First, enter your current annual income. Let’s assume that you earn 38k per year.
Next, enter a calculation for 20% of your annual income. Using our example. this means that you save 7600 per year, and you live on just over 30k per year.
The plan here is that you have to pay yourself 20% of everything you earn. Can you do this? The key to building wealth is that you have to live on less than you earn. 20% is a lot, but you can alter this value later and see what effect it has on the length of the plan.
Now, if you’re planning this in Excel, draw out 16 columns for each year of the plan (or more if you’re saving less than 20%). In the first column you add up your savings for the first year (7600) plus your starting amount (0).
Now we make our first assumption, and it’s that we can invest this amount for 10% return. In time this will involve a spread of investments, some lower, some higher returns, but we need to aim for a return of 10% - you can rework the model yourself if you want to use a higher, or lower return on your investments.
Now for the first year, add your 10% return to your investment. This gives us a first total of 8360. Next year we reinvest the interest returned, and save another 7600, we then calculate the 10% return and add that in and we have 17556 for the total of the second year of the plan.
Now the power of compound interest kicks in, and in the third year we have 27671.60 and then 387898.76 in the fourth year of the plan.
Run these calculations for 16 years and the total is then at 300539.7 - You can now take the 10% returned and use this as your income! This is because the 10% figure is now above the value we calculated in step one for the amount you had to live on each year.
A couple of side notes:
This model doesn’t take into account inflation - you’ll need to adjust for this.
It is interesting to note that you can change the figure for your income, and as long as the amount saved stays at 20% and your investments return on average 10%, you still get to retire in 16 years according to the plan.
That goes to prove that it’s not what you earn, but how much you keep.
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