To understand this better, let’s look at some numbers. If your disposable income is $100,000 a year after taxes, saving 50 percent means living off $50,000 and putting away $50,000. After 18 years, you will have saved $900,000. Given you were living off $50,000 a year, by definition you have 18 years of living expenses before running out of money at age 58.
But given that you can earn 3 percent risk-free a year by buying a 10-year treasury bond, you will have actually accumulated at least $1,200,000 after 18 years. At a 5 percent rate of return, you will have accumulated $1,476,000. And at a 7 percent rate of return, you will have a handsome $1,819,000. With $1,476,000 – $1,819,000 in capital at the age of 40, you can earn $44,280 – $54,570 in gross passive income assuming just a 3 percent rate of return. Therefore you shouldn’t ever run out of money, especially after Social Security kicks in.
Note: Inflation erodes your long term buying power. The good thing is, so long as you earn at least a risk-free rate of return as dictated by the 10-year government bond yield, about 3 percent, you will be keeping up with or beating inflation. After all, in order for the government to sell treasury bonds, the yield must be higher than inflation to attract buyers.
What I did: From 1999 – 2012, I saved 50 to 80 percent of my after-tax, after-401(k) contribution every year because I had a goal of leaving finance by 40. However, at the age of 34, I decided to negotiate a severance because I had already saved over 30 years of living expenses. The severance gave me an additional six years worth of living expenses, which made leaving my well-paying job that much easier. Today I live 100 percent off my passive income and reinvest 100 percent of any income I make online or from part-time gigs like coaching high school tennis to build even more passive income.