Frequently asked question:
Trying to figure out when you can retire can seem like a daunting task. Determining how much that you need to have saved and what healthcare costs might be is a super big job. It's no wonder why there is an entire industry dedicated to helping you with retirement planning. Just because there are many variables it doesn't mean that you can't figure out what a good retirement would look like for yourself. Before we get started, make sure to have the basics ready to go. You're going to need to know at least the following:
You can ballpark a lot of these numbers already by looking at your financial picture. If you don't have every single item on this list, no sweat. You still should be able to do the exercise to get a rough estimate of when you might be able to retire. Now lets get into it.
If you are a numbers person, running the math to figure out your retirement date can be pretty easy. Essentially, what you want to create is what I call a retirement goal number. A retirement goal number is essentially the total amount you need to have invested for retirement to be comfortable.
To get our retirement goal number, we first need to know your spending habits. You can compute this number from rough estimates based on your current spending. Variables like how much you expect to spend in retirement, how much you need to live, etc. all factor into this number. Here is a rough outline of what you will need to get started:
base cost to live + healthcare costs (estimated) + any non-essential costs (gifts to family, travel, etc.)
That's it. You may have some other items to factor in based on your personal situation. One example could be having a child that still lives with you or taking care of another family member. Use the highlighted text above as a base line for your number.
You should also note that some people discount their spending number for retirement. The idea being that you will spend less in retirement because your house is paid off, kids are on their own, etc. For this exercise, we don't recommend discounting more than 25%. Meaning if you think you need $100,000 to live now, the minimum you should expect to spend in retirement is $75,000.
Subscribe to our mailing list to get the best content about retiring early and how to improve your finances.
Once you have determined your spending number, we now need to hink about income. We need to determine what sources of income you expect to have in retirement other than your investments. Some possible sources could be:
The point of knowing your sources of income is so you can estimate your total income per month. The total income per month is key. It gives you the whole picture of where you might stand in retirement. Take this list of income sources and estimate what you think you will be taking in per month. If you need an example, this is a possible scenario for retirement.
|Social Security||$1100 per month|
|Investment Property Cash Flow||$900 per month|
|Pension from Government Job||$1400 per month|
|Total||$3400 per month|
Note: if you are planning to retire before social security will kick in, don't count it in your income number!
We will get to your investment accounts in just a bit. Write down your other income number and we can move on to the next step.
Now that we have both our spending and sources of income, we can try to figure out your retirement date. What we are looking for is for our money to last our entire retirement. A basic version of this formula:
Monthly retirement income - monthly spending = monthly spending
If you do this formula and the number comes out larger than 0, congratulations! You could retire today if you wanted as your sources of income are larger than your spending. If the number is negative, this is the number that your retirement accounts will need to make up for. A quick example might be:
$3400 monthly retirement income - $6000 monthly spending = - $2600 per month
In the above example the person will need to draw $2600 from their retirement accounts every month. To figure out our safe retirement number, we should use the 4% rule. The 4% rule is where you take your total investments for retirement and times it by 4 percent to figure out what your "safe" retirement number is. At $1,000,000 invested, you can safely draw $40,000 a year and never run out of money. Continuing with our above example, they will need $780,000 ($3600 / mo X 12 months X 25) invested to safely retire. The graph below gives an example of reaching $780,000 when starting from $0 and saving $30,000 a year for retirement.
Future Amount: $780,000 | Additional yearly: $30,000 | Growth Rate: 6.0%
Value after 16 years: $816,386.4
In our hypothetical example, it takes just over 16 years of saving $30,000 with a 6% growth rate to get to $780,000. 16 years may seem like a long time, but if you start early this could still be well before "regular" retirement age!
Now lets jump into how you will do this for yourself. Here are the steps:
To use our savings goal calculator you will do the following:
Then, we do our magic and the number we give you is when you can retire! The calculator takes your information and figures out exactly when you reach your savings goal. Now you know how long you have at your current savings rate, assuming that your other estimates are correct.
It can be both exhilarating and a little daunting when you figure out your retirement date. If the process is going to take longer than you want, don't fret. You can move your retirement date up by trying to spend less or increasing your income with a side hustle. Check out other posts on our blog about getting started in some of those tactics.
Lets walk through the entire process for a hypothetical person. We will be using an example of Matt. Here is a little bit about Matt:
That is a lot of information, but we will need it all to do our calculations. Now, let's figure out how much Matt is spending.
Based on the above information we can now figure out how much Matt is spending per year.
|Total Income||$124,000 (salary + side income)|
|Pre Tax Investing||$18,500 (max 401k)|
|Total Before Taxes||$105,500|
|Minus Taxes (27%)||$28,485|
|Post Tax Investing||$24,000|
In our scenario, Matt is spending ~$4417 a month to live. His only source of side income brings in $2,000 a month, leaving him with a deficit of $2417 per month that his investments will need to make up for.
If we do the math on how much Matt needs to conservatively save to retire, we do:
$2417 X 12 = $53,015 X 25 = $1,325,375
Now, lets plug these numbers in to our savings goal calculator. As a reminder the numbers are:
|Total Investing Per Year||$47,500 (18,500 pre + employer match + $24,000 post)|
After running these numbers in our calculator, Matt still has 15.9 years until he can retire. The graph below outlines what his account will look like each year.
Future Amount: $1,325,375 | Additional yearly: $47,500 | Growth Rate: 5.0%
Value after 16 years: $1,398,204.89
If Matt wanted to shorten his path to retirement, he could either start spending less and saving more or increase his income. This seems simplistic, but those are the core tenets of becoming financially independent. Even saving small amounts more can shave years off of saving for retirement.
Here at Financial Toolbelt we are all about making your life easier. If you don't feel like doing the math from above, you could instead use one of our calculators. If you want to become financially independent, use our financial independence calculator. If you want to see how fast your investments can grow to reach your retirement goal number, use our savings goal calculator. We hope you find these useful in case you don't want to do the math yourself.
📈 Track your progress over time towards FI
🏆 Stay motivated with weekly reminders and earn achievements
🔬 Run "what if" scenarios in our data lab to simulate different paths to FI
🧠 Get insights on where you stand and how to reach your goals faster
🚫 We don't ask for any bank dataSign Up