How Much Do You Need to Save for Early Retirement?

After the popularity of the 34 year old Millionaire article, I started to think a little more about early retirement, and how much someone would have to save to achieve financial independence at an early age.  With that, I updated an article that I originally wrote in 2009 about the relationship between after tax savings rate and financial independence.

What exactly would be required to walk away from the day job and live completely off a portfolio?  Am I saving enough money to realize my goal of becoming financially independent and how long will it take?

With those questions, I broke open a spreadsheet and evaluated the percentage of savings required to build a portfolio that would cover my expenses in the shortest period of time possible.  I kept it simple and used after tax (or take home) salary, percentage saved, and a long term market return of 5% after inflation.

The Numbers


  • Combined Household After Tax (or take home) Salary: $85,000 (assume grows with inflation)
  • Annual Stock Market Returns: 5% (after inflation)
  • Withdrawal Rate: 4% (assume only dividends are withdrawn from a dividend portfolio, thus highly efficient taxation ~0%)
  • Assume invested in a non-reg portfolio with no capital gains tax.

I created a simple spreadsheet to go through the various scenarios at increasing savings rates.  Instead of displaying all the numbers, here is the savings rate spreadsheet so that you can do similar calculations of your own.  Within the spreadsheet, you can edit your “savings %”, your “annual after tax income”, and “market returns”.

After running through the scenarios, I came to the following conclusions on the years to financial independence (fi) based on after tax/take home savings rates.

Savings Rate Years to Fi
10% 51
15% 42
20% 36
25% 31
30% 28
35% 24
40% 21
45% 18
50% 16
55% 14
60% 12
65% 10
70% 8.5
75% 7
80% 5.5

Based on my assumptions, it’s apparent how guys like QCash were able to retire so early (in his 30’s).  QCash has indicated that during their working years, they saved approximately 50% of their income.  It’s also really interesting to note that if you can manage to save 65% of your household after tax income, then you can potentially be considered financially free in 10 years (providing that the market cooperates).

If you have a two income household, with roughly equivalent salaries, then perhaps a strategy that you can try is to live on one income.  As you can see from the table, saving 50% of your household income puts you on the fast track to financial independence.

There are some weaknesses of the spreadsheet though.  First it assumes a steady income and does not account for raises or reduced income. Second, as mentioned above, the shorter time frames to financial independence will result in greater market risk.  While the stock market has never lost money over any 20 or 30 year period, the market has lost money over 10 and 15 year periods.  Third, it assumes tax efficient Canadian dividend income with very little or no taxation.  You may need to rework the spreadsheet a little if you have other sources of taxable income.


It’s pretty obvious that the higher percentage of income that you save, the closer financial independence becomes.  However, what this article demonstrates is how powerful aggressive saving can be.

If you only save a small portion of your income, don’t be discouraged by the large number of years before financial independence.  My calculations did not account for Canada Pension Plan or Old Age Security. Both of which could provide a family with up to $36,000/year providing both spouses qualify for maximum benefits (at age 65).

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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3 years ago

I would consider market returns of 5% over inflation is not achievable over the long haul.

It is sometimes achieved, but not for the average person over all time periods. One can say, I’ve done this for the past ten years, but
1. The current US bull market is around 10 years (when its typically 5).
2. Canadian bank stocks have been doing really well for many years. Not so good if you were invested in Oil and some other resources (the former darlings of the canadian stock market)
3. Do you recall that Northern Telecom use to be the number one stock by market cap in Canada, bigger than several banks ! If I remember correctly, its market cap was greater than 10% of the TSE.

3 years ago

Sometimes I wonder about whether the relatively low taxation of dividends on Canadian residents will remain a fixed and safe assumption for the next 50 years.
I have recently heard a politician mutter about being able to fund her grand new ideas by taxing what I assumed were stock dividends. Grrrr….what is your take on that?

S. B.
7 years ago

The savings rate / years to FI table looked too simple, but we’ve been saving 40% for a number of years, and, well, yes, it is looking a lot like 21 years is the right number. Hmmm. Maybe the math is simpler than I realized…

7 years ago

I guess a lot of this discussion depends on what your definition of early retirement is. For my DH and I, we will consider ourselves retired when our investment income will be sufficient to cover our basic living expenses.

At this point, we will both continue to work – so there will still be additional income – but greatly reduced hours or in different fields entirely. Once we have this CHOICE to do whatever we please with our time, we will consider ourselves retired.

I know this variable would be very difficult to incorporate into any type of calculator, but I feel like this situation is very possible at an earlier age for many people who are “paying attention to their finances.” (I cannot currently think of a better way of putting that) :-)

7 years ago

I enjoy this blog (FrugalTrader’s older posts are a great resource, especially for Canadian investors — I modeled my smith manoeuvre strategy around his), but this post is strikingly similar to Mr Money Mustache’s post from well over a year ago. Down to the wording, structure and so on:

Obviously, a powerful message regardless.

7 years ago

I think the question how much one needs to save to retire is a subjective one as it depends on the individual’s lifestyle. In general, one should keep trying to save 20-30% of his/her income every month, and doing that should keep everything in balance automatically, leaving the person with enough for early retirement in most cases.

7 years ago

Great comment and good points Dwilly. One thing I did not mention in the article though is the use of a TFSA. Although some international dividends would face a 15% withholding tax, it would be a tax free withdrawal and offer diversification.

And about the withdrawal rate, the assumption was a dividend portfolio with a 4% yield and withdrawing distributions only, no capital. So theoretically, the capital should last forever.

7 years ago

I like how you’ve structured this article because it highlights what I think is the most important point here, and the point that most of the cynical commentators in the “34-yo Millionaire” article were missing: It is not your ABSOLUTE level of income or savings that is important, it is your SAVINGS RATE as a percentage of your income that matters!! Granted, in theory, a higher income ought to mean that one could achieve a higher savings rate, but I find that in practice, they are less correlated than you’d think, and most people don’t understand the distinction anyway.

Now having said all that (and being among the ones that defended the author in the 34-yo millionaire post), I think your scenario is a bit rosy for a couple reasons.

1) Assumes no taxes. If you’re in a very low income bracket and manage to collect all as Eligible Canadian Dividends, this may be possible. I think for most this is not realistic due to (a) portfolio size and (b) it would be dangerous/undiversified to have your entire portfolio in Canadian equities that pay Eligible dividends. So I think some taxation rate has to be included and this will increase your “time to freedom”.
2) I think the 4% rate of withdrawal is too high, especially when the portfolio has to last potentially decades. There are monte carlo similators all over the web for this, most will show you the confidence interval for 4% withdrawal is maybe in the high 80s or low 90s at best for a 30yr period, and lower for say a 40-50yr period. I think 3.5 or, even better, 3% is more conservative here, particularly if you are “retiring” at 40. This again will obviously increase your time.

But overall I think the message is exactly right. Get used to saving more/spending less AS A PROPORTION OF YOUR INCOME, whatever it is, and you’re on your way to freedom.

7 years ago

Note that I have changed the spreadsheet calculator since the original post. The original used gross income and this one is simplified with after tax (or take home) salaries.

12 years ago

Blogging Banks,

Thanks for the tip to that site. Although I’m frugal (comparatively to the populace) I couldn’t come close to doing what he’s doing. Especially with a wife! She must really love him and subscribe to his philosophy to some degree.