Wednesday, March 07, 2018

My Early Retirement Calculations

A commenter on the previous post asked if I'd share the calculations that made me feel confident about retiring early. I'll give you a simplified version!

There are a few different ways that people tend to look at retirement readiness. One of the simplest is the 4% rule. The idea is that if you can live on spending only 4% of your savings each year, you don't need to add to those savings, as investment gains should generally outpace what you are withdrawing. This is also sometimes expressed as a 25X rule-- multiply your annual spending by 25 to see how it compares to your savings.

My total net worth at the point of deciding to quit my job was somewhere around $1.2 million. (It has since been between $1.3 and $1.4 million due to stock market gains.) 4% of $1.2 million is $48,000. My lifestyle while living in NYC was costing me more than that, but by leaving the city, it was possible to realistically budget for a lifestyle where my half would be less than $48,000. And that doesn't include Sweetie's net worth, which is a little over $2 million (not counting the equity in the house we just bought and paid for in cash, as well as some money set aside for renovations). When taking both of us into account, 4% of $3.2 million is $128,000 and our combined yearly budget is well under that. (My current calculations have it as around $92,000 a year, including a generous travel allowance. We'll see how it plays out in reality as we adjust to our new life in the country!)

This method of calculation doesn't factor in Social Security benefits or other retirement income. My Social Security will end up being less than what they project because they don't take into account that I won't continue to make what I was making last year. (It will be interesting to see if the projections will update in the next year or two when my income goes way down.) Sweetie will get Social Security, as well as a defined benefit pension starting in about 7 years. The pension, which appears to be well-funded and safely on track to be able to pay out in full, will be additional income of about $87,000 a year. That obviously makes a HUGE difference in our projections for the future.

I also used the retirement calculator that is part of the Fidelity website (not sure if it's publicly accessible or if you have to have an account)-- it is a fairly complex tool that allows you to input all sorts of info for yourself and a partner, including life expectancy, assets on hand, sources of income, one-time events, budgeted retirement spending, and other goals like paying for college. It then uses a Monte Carlo simulation to model how things will play out under different market conditions, and projects your savings and spending until your "end of plan," which is their delicate way of saying "when you drop dead." You can see 3 versions of the results-- one assuming a "significantly below average" market, one "below average," and one "average." I plugged all our numbers into this, assuming we'd both live til 95, inflating our expenses (by about 50% over what they currently are budgeted at) to allow for plenty of fun and expensive healthcare, and keeping expectations of any future inflow from earnings or inheritance to an absolute minimum. When really pushing this to the absolute worst case scenario, it says I might run out of money in my early 90s after Sweetie is dead. But even by just changing the parameters to "below average" market instead of "significantly below" brings us back to having over $2 million left over after both of us are dead.

No prediction is 100% confident, and a lot of things could happen that would change these calculations, so of course I still have my moments of worrying about whether it will all work out as planned. But we're also allowing for so much leeway in our budgeting that there will be room for us to cut back if needed. And we'll naturally cut back on some things like travel as we age. The biggest worry is that we'll decide we hate living in the country and want to go back to NYC-- we wouldn't be able to afford to live as we did before, but we could most likely make it work if we really wanted to. I feel incredibly fortunate to have this kind of freedom-- Sweetie and I have worked hard and made good decisions, but I also know that pure luck is a lot of what separates us from the half of all Americans who say they can't come up with $400 in an emergency, let alone retire early.


bethh said...

Thank you for sharing! when I got to the bit about the pension I actually exclaimed "wow!" out loud. I feel like you are almost certainly going to be okay, though I know my opinion won't help feed you if I'm wrong :)

My plan is all in the 8-10 years timeframe: pay off my house, pass 1m in retirement savings, pull the work plug. That'll put me in my mid 50s or so, so I'll have to have cash/accessible savings to live on until I hit 59 1/2, but all indicators are that it'll work out.

Social Security is actually pretty interesting to read up on - they factor in your highest 35 years of earnings, so my first goal is to hit 35 years of reported earnings, and then hopefully work a few years to erase the late teen/early twenties years of making under 20k/year. But if I had the money in the bank I would definitely quit working and not worry about it!

I'll be curious to hear how it plays out for you!

Financial independence said...


Thank you for sharing. What a ride. I will be lucky if I will have $1.2 million in 30 years time!

Long time no see. I am glad that you returned back to the blogging arena.

The problem with the 4% rule that it does not take into account inflation, which I believe will be raging. Additionally to get 4% with the current P/E ration means you need to start selling your assets. This means you will start missing out on the bull market gains.
How do you going to compensate for that?

However looking how conservative you are (defined benefit pension and social security) there is confidence that it will work out nicely and you could really enjoy the financial independence.

I am also curious about moving out of NYC. Its cheaper elsewhere, but I would rather live in city during retirement, than in the country. Do you really want to look after a garden and a house? Appartments and a communcal garden or park near by is much preferred option for me (low maintenance).

Anonymous said...

Congratulations on the early retirement! I have been following the blog for a number of years and always appreciate your thoughtful and frank analysis. Although I’m a few years behind you, I hope to take the early retirement route myself and appreciate your chronicling your experiences here. Thanks very much for sharing.

vivici said...
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Janice said...

I like the 4% rule, which is a good measure to start when you think about planning your retirement. A good surplus window that is filling up from different sources should be the mantra, as I have found that to be more effective in the long-term.