Retiring early is normally pretty simple: Just spend less money than you earn, invest the difference in index funds, and follow the 4% rule.
The 4% rule says that once you have at least 25× your annual expenses invested, you can withdraw enough money to pay for your lifestyle each year and likely never run out as long as you live. That’s because your investment growth should outpace your withdrawals, based on historical data.
Recently though, someone raised an interesting objection to this plan:
“Yeah, but what if EVERYONE did that? If everybody spent less than they earned and retired early like you, the economy would collapse, and your investments would stop growing. Back to work!”*
Now, I’m not sure I agree that the economy would collapse**, but this person does have a point: If everyone became good savers, corporate profits might slow down, depressing future stock market returns. If everyone stopped demanding debt to buy giant houses and expensive cars, then interest rates on bonds and savings accounts may permanently fall.
The 4% rule could stop working — and not just for the above reasons, either. Plenty of other circumstances could lead to sluggish long-term economic growth.
Fortunately, early retirement would still be possible in a world without the investment returns of years past. In fact, you don’t actually need any investment returns to retire early…
What Early Retirement Looks Like with Normal Investment Returns
In our lower-earning years right out of college, we were able to save something like 60-70% of our after-tax income by strategically minimizing our household expenses.
According to the 4% rule, a savings rate of 60% would allow you to retire after a career of just 12 years. Starting at age 23, you can be done with work forever by 35. For us, it was even sooner, because by our late 20s, we were saving north of 80% of our net income from higher-paying jobs.
But the above math assumes a real investment return of 6% during the aggressive accumulation phase, and at least 4% during retirement to live on. So, what if that return were 0%*** instead?
The Slightly Less Simple Math Behind Early Retirement Without Investments
With 0% real investment returns, you’d accumulate money slower to start, and you’d have to eat away at the principal of your nest egg to pay the bills during retirement. Instead of living off of passive income forever, your net worth would steadily decline until you died.
But here’s the thing: You are going to die. So, instead of insisting that your money last forever, you just need to make sure you’ve saved enough to last until…you know.
An average 23-year-old American in 2023 is expected to live to age 78. Let’s build in a margin of safety and suppose that they want their money to last until at least age 85, with a real investment return of 0%. How long will they have to work?
Well, if they’re able to save 60% of their after-tax income, then 1 year of living expenses is equal to the remaining 40% of their annual income. Since they’re saving 60%, that means they’re banking 1.5 years of living expenses for every year they work (60 ÷ 40 = 1.5).
After 25 years, they’ll have a little over 37 years of living expenses saved (25 × 1.5 ≈ 37). They’ll also be 48 years old by then (23 + 25 = 48), meaning that they have enough money to get them to age 85 without ever working again (85 − 48 = 37).
As a result, they can retire at age 48, at the end of a 25-year career. That may be less exciting than retiring at age 35 with the help of investments, but it’s still quite an early retirement, compared to the Social Security Administration’s official retirement age of 67!
And just to be clear — we’re putting some ridiculous requirements on our hypothetical retiree here…
Not only have we insisted on 0% real investment returns, but we’ve also neglected the fact that most early retirees make more than $0 after quitting their full-time jobs. Many end up working part-time, starting businesses, or reducing their own expenses by doing more DIY stuff (like mowing their own lawn).
On top of that, we’ve pretended that our hypothetical retiree never takes their Social Security payments! This is truly a “retirement from hell,” and it still works. That’s the power of living far below your means.
Can Everyone Retire Early Though?
When most people hear about FIRE (financial independence / retire early), they fixate on the investing component above all else — it seems like the “magic” that makes early retirement work. And that scares a lot of folks off, because most people don’t know much about investing, other than the fact that it comes with some risk and uncertainty.
Fundamentally though, FIRE has never been about investing. It’s based on something much simpler: consuming less than you produce (which reduces your need to work later on).
It’s common sense: If you pick two apples today and eat one, then you can eat another apple tomorrow without having to pick any at all. The fancy investing part is just a nice accelerant on top of that.
And if everyone consumes less, then total production (and thus total labor) can be decreased proportionally.
Now, for wealthy people in countries like the US, saving more is a simple matter of choosing to spend less. But what about people at the lower end of the income spectrum?
Fortunately for the FIRE movement (and human civilization in general), the output of each hour of human labor is increasing all the time.
Instead of reaping grain by hand with a sickle, modern farmers can harvest ~100× more in the same amount of time with a mechanical reaper. Computers let engineers perform thousands of calculations in a fraction of a second that used to be done one-by-one with a slide rule. And artificial intelligence is automating tons more human labor right now (I actually used it to source those last two examples!).
With labor getting more and more efficient, the FIRE tenet of “producing more than you consume” is becoming easier and easier. If we can produce more output with less work, then we can all work less (as long as we don’t blow that excess wealth on stuff we don’t need).
Early retirement comes into reach for more people every decade because — in short — the world is getting richer.
So yeah…In the long run, I think everyone can retire early — even without any help from the stock market.
* This isn’t the first time we’ve heard this objection, by the way. It’s been raised a number of times by readers over the years, and Mr. Money Mustache wrote an article on a similar topic back in 2012 that’s worth reading if you’d like another perspective. He also wrote one of the most famous blog posts about the 4% rule, which is referenced on this page.
** If every person on Earth cut their consumption by 50%+ overnight, there might be some pretty crazy ramifications. But in reality, resources like this blog are only influencing small cohorts of people to change their behavior over long periods of time, which allows for smooth economic adjustment to a happier world. Somehow I don’t think Apple is gonna have any trouble selling their next iPhone because of us. Frankly, we don’t see any problem with the 4% rule at all going forward, but this blog post is aimed at people who do.
*** Note that we’re discussing real returns (after accounting for inflation), as opposed to nominal returns. To get the 0% real returns assumed here, our hypothetical early retiree could put their money into TIPS with an interest rate of 0%, I Bonds with a fixed rate of 0%, or perhaps some tangible property like unimproved (non-rentable) real estate or bars of gold and silver. They’re not allowed to rely on any growth at all from the stock market or other productive investments.
**** Below is the general formula for calculating your retirement age, assuming 0% real investment returns during both the accumulation and retirement phases. The one debatable variable in our table is the expected age of death, which can be quite different for each individual. This formula will let you play with that and generate your own table, if you’re a nerd: