The woman looked at me with a curious expression. She asked, “Maybe you can help me with something I’ve always wanted to know… How do I know when I can retire?”
We had just finished an outdoor activity class with her. During small talk afterward, I had told her I write a financial blog as part hobby and business.
I wasn’t prepared to answer such a deep question about retirement as I stared back at her. Potential answers flashed in my brain like internet hyperlinks pointing to some of the best articles I’ve read on the subject. So many life-changing pieces of literature came to mind, like: the Trinity Study and the 4% rule in retirement planning. Mr. Money Mustache’s article, “The Shockingly Simple Math Behind Early Retirement.” JL Collins book, “The Simple Path to Wealth.” All these references impacted me deeply and did a great job explaining how, and when, a person can retire successfully.
As I thought about how to respond to the question, “How do I know when I can retire?” I didn’t want to spew everything I knew all at once like an exploding volcano. Too much information at once can overwhelm a person. I didn’t want to feel like I was aiming a flame-thrower right at her head, rather than sparking her curiosity and interest with a little talk about FIRE.
We’ve become so immersed in the financial independence community while writing this blog, that I sometimes forget that most American’s have questions like this floating around inside their brains with no answers. I have to remind myself that a lot of people haven’t yet found their answer to a question like, “How do I know when I can retire?”
At that moment, I realized I wanted to write a post that could tackle this question. As I started to write my response to, “How Do I Know When I Can Retire?” I broke my answer into the four sections listed below:
#1 Why Retirement is An Artform. Not A Science or Law.
#2 The Math behind Retirement.
#3 Why Do Most People Retire after 60?
#4 So When Can You Retire?
DISCLAIMER: Read our disclosure page before you take my advice as eternal truth or law. I’m only a creative writer who likes to experiment with money and share the lessons I’ve learned. In 6 years, I turned $10,000 into $300,000, so I have learned some things.
“How Do You Know When You Can Retire?”
The first response that floated through my brain is that there is no perfect answer on when you can retire. Retirements are like a dream date. It’s all in the eye of the beholder. All retirements are different, and all carry some unique risk. Therefor, discovering when you can retire is more of an art-form than a one-size-fits-all science.
My quick thought is that a person can retire whenever they want. But that doesn’t mean every retiree will experience a successful retirement. The real question to ask is, “How successful will your retirement be?” A successful retirement is just having income streams large enough to cover your annual expenses without having to go to work.
So now that we’ve defined retirement, how do you figure out when you can retire?
Since retirement is more of an art-form than a science, your ability to retire will mostly be determined by how easily you can design a lifestyle that you love to live, on a fixed investment-income that you can afford.
Meaning, if you’re extremely skilled at saving and investing, and designing an inexpensive lifestyle you love to live, you can retire rather quickly. But if you’re horrible at controlling your spending, investing, or living life on a modest salary, then retiring successfully will be much more difficult and take more time.
This is my favorite thing about experimenting with personal finance: It’s so personal and unique to each individual. Your financial future is determined by the financial decisions you make today. Want to retire a multi-millionaire? Achieving that is easy, as long as you make the financial decisions today which will transform your future into that dream. We all get to choose what retirement we experience by the decisions we make today.
Since retirement is really a personal choice, then the answer to the question of, “When can I retire?” comes down your ability to do the below three things:
#1 How skilled you are at saving money?
#2 How easily can you create happiness on a limited budget?
#3 Do you like learning how to invest to build new investment income-streams?
If you are good at doing the above three things, you can begin creating your retirement at any age.
Ultimately, personal finance and retirement is a lot like living in a choose-your-own-adventure novel. We create our financial futures by the financial decisions we make every day. The more skilled you are at budgeting, investing, and living frugally, the quicker and easier you can retire.
So Mathematically How Do I Know When I Can Retire?
Answer to the above question: The 4% Rule can tell you when you can retire, and the 4% rule was first published in the Trinity Study.
In 1998 three finance professors from Trinity College published a paper on retirement planning that has become a massively influential document in the financial world. You can read more details of the Trinity Study here. But in short, the study argued that a retiree could withdraw 4% of their investment portfolio per year and never run out of money.
The findings of the study advocated that if you could happily live off 4% of your investment portfolio per year, you could in theory retire at any point in life.
To keep the math simple, if a person invested a portion of their paycheck every week for years into a retirement account, (Here are some of my favorite low-fee investment funds that anyone can buy to help prepare for retirement.) and all those little investments added up to a million dollar portfolio after 10, 20, or 30 years of compounding growth, a person could withdraw 4% of that million-dollar portfolio annually and never run out of money.
What’s 4% of $1,000,000? $40,000! Could you live on a firm budget of $40K a year? If you could, and you had a million-dollar portfolio to withdraw 4% annually, then you could theoretically retire today. You’d never have to go to work again because you’d have a steady investment income-stream making money for you that could support you without needing to work for a paycheck.
Do you dream of a lifestyle with a budget bigger than $40K annually in retirement? Then just keep doing the math and work longer to save a $2 million dollar portfolio. 4% of $2,000,000 = $80,000 per year. Want a retirement bigger and flashier than an $80K budget per year? Then keep increasing your income, saving and investing rates, and build a portfolio worth $3,000,000+. A 4% withdrawal-rate on $3 million dollars, is $120,000 per year. As long as you can live happily off 4% of your investments, you can theoretically retire at any time and never run out of money.
Why do Most People Retire in Their 60’s?
If retirement is as easy to figure out as the 4% rule, why don’t more people retire much earlier? Here’s a few major reasons most people delay their retirement until the “normal” age of 60 or 70 years old:
#1) It’s NOT easy to save a million dollars quickly. Most people don’t want to live the majority of their best years on extremely tight budgets, just so they can retire a decade earlier. Most people need decades to save enough money. They need to allow their retirement accounts to compound into sums that are large enough to provide significant income streams in retirement.
#2) It gets easier to retire the older you get. At age 59 1/2 years old, you can start withdrawing money from your retirement accounts without paying an early-withdrawal 10% penalty. Therefore, if you delay your retirement until after 59.5 years of age, you’ll be able to withdraw more money, penalty free, than if you tried to retire before 59.5. (The early-retirement blog, Mad Fientist, is a great resource for strategies to access retirement-account money to retire early without having to pay penalty fees.)
#3) More Government programs start to help you retire the older you get. Programs like social security kick in at age 62, creating new income streams to retirees to help fund their retirement.
#4) Medicare becomes a possibility at age 65. Un-affordable health care is one of the biggest reasons most people don’t retire early. But medicare helps make health-coverage more available and affordable to retirees who no longer have access to employee-sponsored insurance plans. Once you no longer have to worry about paying inflated prices for health insurance, your cost of retirement becomes a lot easier to figure out and balance. Again, it’s just easier to retire when you’re older.
#5) Risk is scary!! Most people avoid risk like it’s a billion-tooth monster ready to devour them every time they screw up, and early-retirement is a huge risk! It’s a risk, because the earlier you retire, the longer you are depending on an uncertain economic future to support you. A million dollar portfolio is a huge accomplishment anyone should feel proud of. But it’s still a risky gamble to think a million-dollars can support a person in retirement that needs to last 40 or 60 years if you retire in your 40’s or 50’s. The mathematics work a lot better when you retire at 60 or 70, and a retiree only has to depend on their million-dollar nest-egg to support them for 20 or 30 years.
So When Can You Retire?
As I’ve shown in the above paragraphs, discovering your unique retirement-date is a 3-part equation to figure out. A successful retirement is part art-form, part mathematical-equation, and part personal-tolerance for risk.
But if you’re creative with your outlook on life, disciplined with your finances, and ambitious with your pursuit of inexpensive happiness, you can find a way to retire at any age you want.
If you want to retire earlier than later, the logic is simple: Be more ambitious during your working career to increase your salary, so you can save more, invest more, and build a portfolio that can support you using the 4% rule sooner.
The quicker you build an investment portfolio that can cover your expenses, the quicker you can unlock the mystery of what retirement date is right for you, your family, and your personal dreams.
So after reading all of that, when do you think you can retire?
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