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How to Retire Early, Live Off Interest or Returns, and Save for Retirement

Updated on September 30, 2018

The term rich is defined as “having wealth or great possessions; abundantly supplied with resources, means, or funds”. But exactly how much is rich- $1million? $5 million? $10 million? ….or so much money as enough to live purely off the interest.

Outlined below is how a normal working person such as you and I can enter that so called “mega-rich” class and start living off the interest.

Jumping straight to the final figures required:

  • Average yearly income is $45,000 GROSS income. (As in before tax)
  • Capital required to begin living off interest or returns to match this income is $1.7m

For the details workings of these figures, please see the step by step explanation below.

For a normal gross income, deduction tax will give you net income. However, for gross income, deductions of both tax and inflation must be done to find your net interest income.

The average long term return of US shares invested in a broadly diversified index has yielded 8-9% per annum throughout the course of the market.

As of writing, tax for gross income of $45,000 or less is 15%. Thus, in a simplified calculation, average income earners will receive a net income of just under $40,000.

Now to the calculations. We require capital to receive a net interest or net return to match that $40,000 figure discussed previously. With an average return of 9%, we would then need to consider the impact of tax and inflation.

A 9% return less tax would suggest approximately 7.65% return net of tax. Furthermore, at the current economic client of extremely low inflation rates being hovering around the 2% mark, we can conservatively estimate that a net return of 5.65% may be expected in the long term net of tax and inflation.

With the requirement of $45,000 gross income and an estimated return of 5.65%, these figures would therefore suggest that one should have a nest egg of approximately $800,000 to fully retire and be entirely financially independent at a comfort level similar to your usual working person.

The biggest problem now is building up a nest egg up to $800,000 in order to retire. This figure may seem a lot to start with, but the statistics show it is more achievable than we may first presume it to be. As reported by CNNB here, just last year the United States added a further 700,000 new millionaire households. Thus, even as a average income earner, we will be able to retire and live off interest with just $800,000 and be financially independent. If that is the requirement for most people to assume that you are "mega-rich", then we too would be classified as another “mega-rich”.

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