In this podcast I will answer the question: When can I retire?
I wish I could give a quick and easy answer to that question – such as use the 4% rule for retirement (see podcast #3 for the limitations to this rule of thumb). The reality is that everyone’s situation is different and it requires individual evaluation. The 5 primary questions that will determine how much money you need to retire are:
- What income will you have going forward (social security, pension, …)?
- What will be the return on your investments?
- How much will you spend in retirement?
- What will be the inflation rate? And how will that impact your income, expenses and investments?
- How long will you live?
Of course, no one has the answer to these questions, but you can make some reasonable assumptions and develop a plan. It comes down to choices and priorities. Is your goal to stop working sooner even if that means spending less or is your goal to spend a certain amount even if that means working longer.
I use an excel spreadsheet to evaluate retirement plans. I look at everything in today’s dollars. This makes the numbers presented easier to relate to. We look at return on investments above inflation. If you assume you can earn 3% above inflation with your investments, if inflation is high (say 6%), you will actually need to earn 9% that year. If an income source stays constant in the calculations (in today’s dollars) that means that it is increasing with inflation. We can add in a reduction over time, if you assume that an income source does not increase with inflation.
We calculate year by year. This allows you to make adjustments for each year. Such as, trips, replacing vehicles, education for children, major home repair, … Please contact me if you would like a free copy of our spreadsheet: bill [at] aiofinancial.com – note that this is just a template for you to modify as you need. It is not super user friendly, so let me know if you need help with it.
I recommend updating it each year to account for any changes.
If your goal is to spend a certain amount each year and your income increases slowly, the calculations can show you how long you need to work. You can adjust it to account for increases in income above or below inflation.
I am often asked about retiring early. If that is your goal, it requires sacrifice but it’s possible. I know that early retirement can seem impossible, even retiring at 65 or 70 may not seem practical. If it is a priority, this can be a reality for diligent savers. One well-known example is the man behind MrMoneyMustache.com, who retired with his wife at age 30 after just nine years of working. They did this on two normal salaries. They are very careful with their spending and feel that they are living full lives.
How quickly you can retire depends on how much you can save. If you are able to save the often-recommended 15 percent of your take home pay, it will take about 45 years to retire. Assuming your investments earn a real return (after inflation) of 5 percent, and that you live off of 4 percent of your nest egg once you do retire.
If you are careful and can save 30 percent of your take home pay, your working years fall to about 30. At 40 percent, the necessary work years before retirement falls further to about 20. If you are able to save 50 percent of your take home pay, you’ll begin enjoying retirement in less than 20 years.
While each early retirement story is different but there are some commonalities. The two largest expenses most people face are housing and transportation. Most spend less than is typical on cars and transportation, often able to bike or walk most of the time. Most spend less on food and eat out less than average. Many are more self-sufficient, choosing to handle home and car maintenance and repairs on their own, rather than paying others for these services. Most avoid expenses that many of us assume are needed, such as expensive cable and cell phone packages.
If you are not happy in your work, I hope you feel empowered to retire early or to find work you like even if the pay is lower. It may be comforting to know that there many of people with full lives getting by on less than you may think you need.