When Will You Reach Retirement?

June 5, 2017

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THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.

Would you still work the job that you have today if you were completely financially independent?

Is there a dollar amount in your bank account that would make you secure enough to leave your job right now?

At some point, most of us desire to leave the pressure of the office even if we love the job that we have. You think to yourself, there’s more to life than just earning a paycheck.

Honestly, days when I’m sitting in a meeting and people are arguing about font color or other minutia details cause me to daydream and think about all the other things I could be doing with my time.

I could be doing relief work, traveling overseas, or anything else!

For the longest time, I had no idea how much I needed for retirement. On the internet, it seems like it is the wild wild west when it comes to investment advice.

Most experts tout that you need to have 80% of your work income in retirement.

This is a completely false.

You need 100% of your retirement spending in retirement. See what I did there– I changed it from income to spending. It doesn’t matter how much you make at the end of the day. It’s about how much you spend.

We read about the countless millionaires, who spent it all and ended up bankrupt. On the other hand, there are many other wealthy individuals who are much wiser with their money and have the ability to give much of it away.

So how much you need for retirement will completely depend on you. If you plan to jet set around the world after you retire, you may need more than 80% of your work income in retirement. Or, if you plan to retire to a beach and lay low, you may only need 30%.

Only you will know the correct spending outcome for your own self, but knowing that figure is the only way you can actually reach FIRE.

So, how much do you really need?

The Trinity Study

The Trinity Study was derived from a paper written by several Trinity College finance professors. One of the main aspects of this study was determining the safest withdrawal rate from a retirement account. The study proposes that one should be able to withdraw 4% of your portfolio per year and have it last the rest of your life.

Yes, 4%. The researchers confirmed this figure when they studied a period from 1925 to 1995. At a 4% withdrawal rate, it was very unlikely to exhaust an entire portfolio.

Some of you are probably thinking that you have no idea what your expenses are going to be in the future. How can you figure future expenses today?

The 25X Spending Principle

I recommend using Personal Capital to track your expenses, so you can have an idea of how much you spend per year. I wrote a review of Personal Capital touting all the wonderful benefits this free valuable tool can provide.

Once you arrive at your yearly spending figure, you can determine if this is an accurate baseline for you. For example, some might expect an increase in expenses in the future or may foresee a decrease if you are eliminating debt.

Determine whatever amount you believe is “right” for your yearly spending expenses. Then, all you must do to come up with the retirement is number is multiply that yearly expense figure by 25. So if you expect a yearly spending of $40,000, you will need one million dollars for retirement.

Let’s go into a little more detail. If you plan to work until retirement age, which is 66, the average Social Security check is $16,000 a year. So using that average figure, you would only need $24,000 per year, or roughly $2,000 a month. That means instead of the $1,000,000 that you needed for retirement (from the 25X Principle), you would need to reach $600,000, which is lofty but more attainable than a million dollars.

Starting Early Pays Off

If you start at the age of 22 and invest $125 every month in the S&P 500, you should have over $600,000, based on the historic 8% return this passive index fund has provided since 1926.

If you wait just 8 years and don’t start until you’re 30, based on the average market returns, you lose about ⅔ of $600,000, leaving you at just $200,000. You will need to double the amount that you put in for retirement ($250/mo instead of $125/mo), in order to catch up. Compounding interest is really invaluable in this case.

You’re Not Average

Since you’re reading this article though, we know you’re not average. You want to reach FIRE as soon as possible.

What does is it take to get there faster?

Well first things first, if you’re not going to rely Social Security, you’re going to have to increase your portfolio to cover the deficit. So based on the information above, one could contribute $125 over 44 years, and it would return $600,000. But how to get to $1,000,000?

In order to do that, we now know that it will take 52 years to achieve the goal. By doubling the contribution to $250, it would take 44 years. Now let’s start getting crazy and double the contribution again to $500. Now it’s only 35 years to reach $1,000,000. Are you noticing a pattern? Every time you double the contribution, roughly 8 years is eliminated. If you don’t believe me, let’s do it again by raising the stakes by increasing our contribution to $1,000. It drops now to 27 years. Now let’s double it again, to $2,000, and it’s down to 19.5 years.

So as you can see, the more you increase your contribution, the quicker you will get to your desired number. I’ve linked a chart that I created so that you can play around with the numbers. Enjoy!

Are you closer or further away from FIRE than you anticipated? Will you make any changes based off this chart? Share your thoughts below.

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