How to Retire in 5 Years

I have read several books on financial independence but have not found, that I remember, a clearly laid-out formula of what one's expenses should be to retire after five years of only working a day job with no second streams of income. Here it is, with the caveat that this is subject to revision over time:

(take-home pay, plus any pre-tax contributions like 401k) * 0.167 = expenses

Another way of saying this is that if your expenses equal 16.7% or less of whatever your take-home pay is plus any pre-tax contributions, then you will be able to retire after five years of work.

Example: if you have a take-home pay of $100,000 after taxes, annually, with no pre-tax contributions like 401k, your expenses are at or below $16,700 per year, and you sock the remaining $83,300 into index funds, then you will be able to retire after five years of this job, assuming no raises, no debt, and no inflation (let's keep the math simple for now).

The 16.7% comes from the formula of annual expenses x 25 = retirement number. This is just 25 divided by five years, plus a sixth part per year to actually live off of: 1/6 (one part for the year's expenses, and five parts for index funds) = 16.67%.

The reason we have the bit in the formula about pre-tax contributions is because you are of course putting those into index funds also, and so your real amount of money that you're putting into index funds every year is that 401k contribution in addition to the massive take-home pay amount.

More examples, assuming no 401k contributions:

• If your take-home pay is $50,000, then your expenses need to be $8,350
• If your take-home pay is $60,000, then your expenses need to be $10,020
• If your take-home pay is $70,000, then your expenses need to be $11,690
• If your take-home pay is $80,000, then your expenses need to be $13,360
• If your take-home pay is $90,000, then your expenses need to be $15,030
• If your take-home pay is $100,000, then your expenses need to be $16,700
• If your take-home pay is $110,000, then your expenses need to be $18,370
• If your take-home pay is $120,000, then your expenses need to be $20,040
• If your take-home pay is $130,000, then your expenses need to be $21,710

If your expenses are above the max allowed, then you either need do one of the following:

• Be alright with a longer time horizon for retirement since it will take longer to save up
  
• Lower your expenses to below the limit
• Do some side work to bring your income level to match that required by your expenses

If you are single this should be insanely easy. There is no reason that a teenager couldn't spend a year or two in deliberate practice gaining a solid skill, get work as an employee or a freelancer, and retire completely from mandatory work by the time others are graduating from college. If they are planning to marry and have children, they may need to work a few years longer if their to-be spouse has not also been working this same plan, since now the amount of money needed is at least doubled. But raises will factor into the equation, as will compounded interest, so the additional funds needed won't take near as long. Worst case: retirement by 25. Not so bad, is it? This is my goal with my kids.