Jan 31 / Kyle

Set Aside 10% Of Your Work For Retirement, Not 10% Of Your Income

We’ve all heard the pitches and seen the graphs:  if little Johnny saves just 10% of his income from age 22 until age 65, he will retire a multi-millionaire!  By scrimping and saving his entire life, he will be able to kick back and enjoy like!  What they don’t tell you is that little Johnny develops a heart condition from all those drive-thru lunches working frantically at his desk, trying to meet the next “can’t-miss” deadline (have you ever tried missing one on purpose?  It’s fun).  Consequently, by the time he had finally saved enough to retire in style, he wasn’t healthy enough to enjoy it.  Poor little Johnny!

But This Doesn’t Have To Be You!

Poor little Johnny followed the conventional wisdom of saving 10% of his income year in and year out for retirement using such traditional retirement accounts as his 401k and even a Roth IRA.  Now this is excellent advice, and I definitely recommend you save at least 10% of your income every year for retirement, although I think it should be more like 20-30% of your income just to be safe (some might disagree).  Nobody is telling you not to save money, because compound interest is indeed the 8th wonder of the world.

But there’s a better way, or at least a complimentary way that, coupled with diligent savings, will help you reach your goal of early semi-retirement decades earlier than you would otherwise be able.  It is not inconceivable you could reach the point of being financially capable of quitting the 9-5 world permanently within 5 years of implementing this plan.  How?  It’s simple:  set aside 10% of your work efforts to income-generating side products in addition to saving the regular 10% of your income for retirement.

Tithe Your Earning Power To Compound Your Results

It is often said a person’s earning power, that is, the ability to earn an income, is by far the biggest asset anybody has.  This is entirely true, but what this doesn’t tell you is that you can magnify your earning potential several times over working for yourself rather than somebody else.  This means finding a low-maintenance side gig and banking the earnings.  This is what Tim Ferriss refers to as a muse in his book The Four Hour Work Week.  If you do it right, you can net an additional $15,000-20,000 per year per muse, each requiring only a few hours per week (or month, if you choose wisely) to maintain.

Your muse doesn’t have to be in an area you’re particularly interested in, although that will certainly help keep you motivated.  It doesn’t have to be something you want to turn into a full-time business someday, although that’s great, too (J.D. at Get Rich Slowly did it, and seems to be doing very well for himself as a result).  It’s simply a matter of recognizing a good passive income opportunity when you see it, and taking action.  As it turns out, taking action on an obviously slam-dunk idea is the hardest part for most people.  That is why they continue grinding away at the 9-5 until they get their golden watch:  they are all talk.  But not you.  You’re going to take action.  For ever 10 hours you spend at work,  you’re going to spend at least 1 hour building an alternative source of income (click here for 40+ alternative income ideas and resources).  I chose creating not-really-passive online income using niche sites as my muse, but yours could be literally anything.  Get out there an explore to find out what works for you.

It Adds Up Over Time

Let’s try a different sort of math, but one that is related to all those “if little Johnny saves X% of his salary every year he will have $Y at age 65.”  Instead of saving 10% of his income, let’s assume he spends 10% of his working hours  on side projects that generate an extra $1,000 per month by the end of the year, a number that is extremely doable if you work efficiently, although you will doubtless start out a bit slower as you learn the ropes of your chosen business.  At the end of 5 years, you will be generating approximately $60,000 per year of extra income with a time investment of only 10-15 hours per week.  What’s more, you could probably double or triple that number if you worked more (careful though, we don’t want to create another full-time job for ourselves) or invested a little money to help spur growth.

At this point, you can probably afford to tell your boss what he can do with himself.  Or you can continue working for a few years, pocketing the extra cash flow or reinvesting it in your businesses until you feel ready to quit your job.  The point is, it’s entirely up to you.  And tithing just 10% of your working hours got you there in 5 years instead of 40.  Now that’s what I call compound interest!

Check out Tim Ferriss’s 4-Hour Workweek for more on how to get out there and live the good life now.  Tim goes through some specifics you can apply to your own situation.

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19 Comments

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  1. bob / Feb 8 2010

    Not that I disagree with the advice, but why would Johnny develop heart disease by saving 10% of his income because he had to work frantically at his desk? If he was saving 10% of his income he would not be working any harder than if spent the 10%. Wouldn’t he be more likely to stroke out by working harder because he had a side gig?

  2. David / Feb 8 2010

    $1000 per month is $12000 per year, not $60000 per year. This is a very vague suggestions. If you have a financial blog and turn it into a business, that’s one thing. Wouldn’t a better investment be to build a profitable career. $600000 is not much money after five years. If you upgrade your career, you could probably get a $12000+ plus raise.

  3. John Marks / Feb 8 2010

    “At the end of 5 years, you will be generating approximately $60,000 per year of extra income with a time investment of only 10-15 hours per week”

    I’m curious where this went from $15-$20k extra a year to $60k after 5 years. This is assuming your side business is meant to be growing, correct?

  4. Bret @ Hope to Prosper / Feb 8 2010

    This is a great idea.

    I have always done something on the side, but I never considered it the same as my 10% investment. I need to build up my side-hustle from money that comes in here and there, to money that rolls in consistently.

    I think it’s very smart to diversify income, since employers aren’t so loyal to employees any more. It’s very easy to find yourself out of a job, no matter how hard you work.

  5. raddix / Feb 8 2010

    $60k a year? Even at $1,000 a month after 5 years, that is only $60k total @ $12k a year. Is it just me or something missing here?

    Otherwise a very interesting article.

  6. Ben / Feb 8 2010

    Investing more time in your current job could have a similar benefit, depending on the job. If the extra time can get you a promotion, different project, etc, then that may be a more reliable and efficient way to spend a few extra hours here and there.

  7. Kyle / Feb 8 2010

    Ben, I disagree. You’re unlikely to double your salary without going insane in 5 years and besides, it’s better to have 8 medium sources of income than 1 huge one.

    Raddix, you’d be making $5,000 per month at the end of 5 years, since it would take you 12 months to build a project up to $1,000 per month. You’d start a new project every 12 months. This is not an ambitious goal.

  8. Mike / Feb 9 2010

    I’m sorry, but telling people that they’d be likely to make an additional $60,000 a year working a few hours a week is frankly a load of horse doodoo. Most people don’t even clear $60k a year in their main job must less a side-gig. You’re assuming that the project you start every 12 months is going to be self-sustaining and cost-free. Most people are going to be lucky to break even on a side-gig.

  9. Kyle / Feb 9 2010

    Mike, why is it a load of doodoo? Have you ever actually tried it? It’s easier than you think it is.

    “You’re assuming that the project you start every 12 months is going to be self-sustaining and cost-free.”

    No I’m not. I’m assuming no such thing.

    “Most people are going to be lucky to break even on a side-gig.”

    How do you know? It’s amazing how often I’m told I can’t do something I’ve already done.

  10. Darek / Feb 9 2010

    Any one who started a small business and then started another and another can tell you that this idea is not scalable and ultimately becomes a real business with staff overlooking your ventures, if advice is to start your own corporation to retire early then just say so.

    Another point:
    Reason humanity adapted money is because it is easier to exchange money for others labor/product rather then exchanging Labor directly. Investment in more hours of work is equivalent of investment of more money with out tax benefits, how you get more money to invest is a diffrent story.

    Ultimatly article is stupid and there is no new idea here.

  11. Kyle / Feb 9 2010

    Darek,
    what’s not scalable about it? Hiring staff to do the work while you check up on them every once in a while seems like a very scalable business model to me. The whole point is to remove the bottleneck: you. Hiring somebody to manage things for you is the easiest way to do that.

    And investing more hours of work is better than investing more money because you can earn an astronomically-higher return that way.

    Instead of criticizing random articles as stupid, you might do well to actually take action based on their advice every once in a while. You know, actually TRY it before criticizing. If you did, you just might find the advice isn’t so stupid after all.

  12. akthe47 / Feb 10 2010

    Interesting article, though you have to wonder where the 10% of effort is going to come from, esp. from individuals (like readers of this blog) who are already highly productive and spread thin with their time.

  13. Kyle / Feb 11 2010

    I would argue that if you’re spread thin with your time, you’re probably not all that highly productive.

  14. adrian / Feb 12 2010

    I make 14k / year.. sooo… how can I even make 1k / month on a side gig if that’s what i earn working 160 hours a month?

    teach me master..

  15. sanme98 / Feb 13 2010

    Never too diversify. Anyway, have extra 1 beside current job is quite OK.

  16. Chris Eggleston / May 14 2010

    First of all I love this post! The way that Kyle laid out the idea and concept turned on a lightbulb in my mind. The idea was not new to me. Something I had heard people say for years. I guess I just never completely understood it until I read this post a few months ago. I come back and read it again and again, to help keep it fresh in my mind.

    I noticed a comment made here by Adrian in February and I do a lot of consulting for people that are interested in starting a business, but just need some guidance.

    The question posed by Adrian:
    “I make 14k / year.. sooo… how can I even make 1k / month on a side gig if that’s what i earn working 160 hours a month?”

    This question is the same question I get every time I start working with a new client. My follow up question is always, “are you passionate about what you do at your day job?”. The answer is usually, NO! I then ask a second question, “do you think you could make an extra $200 a month doing something you absolutely love to do, even if you only spend 2-4 hours a week working on it?”. The answer is typically, YES!

    What I think happens to us all is that we do two things, (a). we think to hard and too big about the money, and (b). we let our income determine our potential.

    Point A.
    In order for Kyle’s suggestion to work, you do not have to start out making an extra $1000/month. If you are spending (to use Adrian’s example) 160 hours a month or 40 hours a week at a job then you would only spend 16 hours a month on your side business. Is it possible to make $1000/month in only 16 hours?…absolutely, but it is more realistic and easier to comprehend that 16/hours of work will generally result in something more like $200/month. What could you change or improve with an extra $200/month or 2,400/year?

    If you can produce an extra $200/month doing something you love, then you can eventually get to that $1000/month marker and then even replace your 14k/year job. Because you will be doing what you love, not just punching a clock. When you are passionate about your job or business the money is not what is most important. The thing that matters the most is the difference you are making and the happiness you are experiencing.

    Point B.
    Our income does not determine our potential. What one company is willing to pay you does not mean that is all you are worth! You are the only person that can truly determine your worth. Sure you can buy into your bosses opinion of you and assume he is right, your not worth that raise, or your only worth a 50 cent raise every year. Or you can happily accept the money your employer pays you and determine to expand your worth by making more money working 10% of the time doing the thing you love the most.

    Some people I work with are only interested in finding a way to make an extra $500/month because their salary is just a little short each month to cover their needs. Some people want to get way from the grind and the rate race. Some want to be able to stay home with their children and need to find a way to replace their income and work from home. Some people love their 9to5 and just what to start a small business they can run on the side. They have no intentions of quitting their jobs, they just want to do more.

    For example, I work with a lot of Dr.’s and they love their careers and are not going to quite practicing medicine, but they have written a book and they want to startup and online business for selling their book.

    Whatever the reason or motivation behind you applying Kyle’s idea, you can be successful at it, if you are willing to work hard and plan out your success.

    Get help form people who have done it before, ask questions (I am happy to help @chrisegg), and read some books.

    I suggest two books:

    CRUSH IT! by. Gary Vaynerchuk
    Making Ideas Happen by. Scott Belsky

    You may also find these two post on my blog helpful:

    This one I wrote after reading Kyle’s post for the first time: http://blog4biz101.com/blog/business/leaving-a-legacy-its-not-to-late-act-now/

    This one is my stance on economic recovery and how anyone with a passion can be part of the solution:
    http://blog4biz101.com/blog/consulting/economic-recovery-it-starts-with-passion/

    Best of luck to you all!
    -Chris

  17. Celie@promopenscheap.com / Mar 14 2011

    Great advice but as I am now retired, it is a bit late for me to follow. Happily I did start my own business and that was successful enough to give me a happy retirement. However I am creating a book for my grandsons to give each of them when they reach 18 and this piece of advice will be in there. Hope they take it.

  18. Donna Ostrus / Mar 18 2011

    I love how you compared tithing to how much you should use to save. Very novel idea.

  19. Retirement Age Guru / Aug 27 2011

    Having a side-business or side-job while working for someone is very attractive. However, many people would prefer to build up their career and move up the corporate ladder. They do see results much faster. As for a side-job, that could be answering some surveys or doing some part-time data entry, the payout is not so fantastic and there could be disappointments such as being exploited to do work that did not pay you. Regardless of the cons, I agree that diversifying your income source, is a smart way to protect yourself from retrenchment/economy downturn.

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