Years Until Retirement - 5 Simple Seconds to Calculate
Table of Contents
The Wake Up Call
Often when I ask most people how much they need to save for retirement, they will probably estimate that they will need around $1.500m to $2.500m dollars.
If I then ask how them many years until retirement, i.e. how long it will take them until they reach that dollar amount they will probably guess somewhere around age 60 to 67.
These are the same broad numbers that I had in my head for a long time as well.
This stressed me out, because I really hate being trapped at a desk and slaving the best hours of my life away.
It was the pain of considering a retirement at 67 that got me thinking… “there has got to be a better way”.
And it was this thought that eventually led me to the FI movement and then to set up this ENTREFINEUR blog and community.
And here is the good news…
There are plenty of examples of people in the FI community who are retiring or have retired on much less than $2.5m even much less than $1.5m.
Some have even managed to retire on amounts as lows as $0.500m and in their early 30’s.
“Wow!” you say, “That’s pretty low… and how is that possible, wouldn’t their money run out?”
I’m going to get to answering that, it’s all in the math! But before I do, I want to introduce you to the Retirement Grid!
Retirement Grid
The retirement grid is a colour coded grid to help illustrate (very broadly) how many years until retirement.
On the ‘y’ axis is Annual Spending and on the ‘x’ axis is After Tax Annual Income. The assumed return is an average real rate of return of 5% (after tax and inflation).
Red and Orange – This is bad! This is where you don’t want to be, that is, a long time to retirement!
Dark and light green is good! This is where you want to be, i.e. years until retirement is close, maybe closer that you thought!
Figure 1: Retirement Grid – Showing how many years until retirement.
Assumption: Savings are invested and receive an average real rate of return of 5% per year (after tax and inflation).
Key Takeaways From the Retirement Grid
Message 1 - Get Uncomfortable & Start Thinking...
If I keep doing what i’m doing now I will be retiring at 67. That is I have 28 years until retirement! Am I ok with that?
If I’m not ok with that number of years util retirement, then I need to start asking myself some better questions.
For example, “when do I want to retire?”, and “how many years until retirement is ideal for me?”
Ok so how much do I need in my pot to retire in that many years?
These are all questions I’ve asked myself and coached others through.
By the way, if you’re interested in 1-on-1 coaching on this, reach out by scrolling to the bottom of this post and click ‘Schedule a Call’ or click here.
Message 2 - The Size of Your Pay Cheque Matters!
The size of your pay cheque matters!
For example look at hypothetical Person A, earning $25k per year and spending $20k per year.
This person will theoretically take 36.7 years to reach retirement.
Compare this to hypothetical Person B who is earning $100k per year and only spending $20k per year. Person B will only take 5.6 years until retirement.
This is a huge difference and the only variable is their income.
So get your creative hat on and start figuring out how to make a second active income.
Even better figure out how to make some passive income so you can reduce the number of years until retirement.
Message 3 - Savings Rate Is Even More Critical!
How much you save is even more critical!
There are a few great things about increasing your savings rate.
Firstly, increasing your savings rate is essentially a pay rise.
And it requires much less effort and time to achieve than it does to get a pay raise or promotion in your career.
Secondly, as you increase your savings rate you reduce your expenditure rate. Over a short period of time you become accustomed to lower spending rate.
This has a double effect because now you are spending at a lower rate you don’t need to save as much for retirement. Hence the number of years until retirement is less.
Thirdly as you start relying on money to bring you happiness you start to appreciate the simpler things in life again even more.
That is the stuff which is most important, the free stuff like going to the park with family and spending time with your wife, kids, family and friends.
Message 4 - Don't Fall Trap to Lifestyle Inflation
Don’t fall trap to lifestyle inflation.
The more folks earn the more they tend to spend. Just because you are earning $100k does not mean you need to spend $95k.
Lifestyle inflation keeps good folk chained to their desk jobs for years and years. Sadly these are the best years of most people’s lives.
Wouldn’t you rather retire in your 30’s or 40’s?
Imagine being able to spend your summers down at the pool or beach with your kids. Living your best years staying fit and active, hiking and travelling overseas on educational experiences…
Find a way to cut back on the expenditure rate.
Message 5 - Find a Way to Bank Your Pay Rises
Find a way to bank your pay rises.
Think about when you were at University, College or just into your first couple of years as a professional. I bet you were living on a pretty skimp salary.
Find a way to re-adopt that mindset (within reason) and claim back some of your income.
Ok, above I promised I would get to explaining how those 3o somethings were able to retire on $500,000, well here’s how…
The Retirement Maths!
There are two key rules to the basic retirement maths.
These two rules are well documented and followed in the FI community, they are the Multiply by 25 rule and the 4% rule. I go into detail about the two rules below.
Multiply by 25 Rule
The Multiply by 25 Rule estimates how much money you’ll need in retirement.
The equation is to multiply your expected annual spend rate (or desired retirement income rate) by 25.
For example, if you withdraw $40,000 per year from your retirement portfolio, you will need $1 million dollars in your retirement portfolio.
That is, $40,000 x 25 equals $1 million.
This rule of retirement estimates the amount that you can withdraw from your pot.
It does not factor in other sources of passive income, e.g. pensions, rental property income, or other active income.
This rule also assumes you’ll be able to generate an average annual real return of 4 % per year.
It assumes that the stock market, over the long term (15 to 20 years), will produce annualized returns of roughly 7 percent.
The inflation rate is assumed to be at roughly 3 percent per year.
Resulting in a “real return”—after inflation—equals close to 4 percent.
The 4% Rule
The 4 Percent Rule, is a guide for how much spending money you can withdraw each year after retirement, that is without drawing down your principal.
As the name implies, this rule of retirement suggests you should withdraw 4 percent of your retirement portfolio the first year.
For example, let’s say you retire with $700,000 in your freedom fund. In your first year of relaxation, you draw down $28,000. ($700,000 x 0.04 = $28,000.)
The second year of relaxation you would withdraw the same amount and adjust for inflation.
If you have a 3% inflation rate, you would draw down $28,840 (i.e. $28,000 x 1.03 = $28,840.)
Note: $28,840 might be more than 4 % of your remaining freedom fund, because of market fluctuations during your first year of relaxation.
Don’t worry about this the rule says you only need to calculate the 4% once, withdraw 4 % during your first year of retirement.
Then continue drawing down the same amount, adjusted for inflation, every year after
Summary
There is always a better and fast way to FI. That’s what this community is about, that’s what I am passionate about finding.
I’m always tweaking and find a better way to free up my time so I can spend it with loved ones during my best years!
To be an Entrefineur is to hack everything assumed and find better ways of doing things, to get my goals faster and while having more fun along the way!
If you want some inspiration for how to get to FI faster check out this post:
10 Hacks to Kick-Start Your Financial Independence in 2020…
If you want some coaching in this space, give me a call and we can have a free half hour chemistry chat by clicking on the button below to ‘schedule a call’.
