Estimating Retirement

In honor of Labor Day, I spent a few hours this weekend reading up on strategies for estimating all things retirement.

It was an interesting exercise to mull over our family’s numbers and start thinking about what financial independence looks like to me and my family. I don’t consider myself a die hard FIRE evangelist, but I am hoping and planning on retiring sometime before I reach my mid-60s and qualify for social security (if that is still around by the time I’m eligible).

So, how do you calculate all this stuff?

The 4% Rule

The 4% rule was originally introduced by MIT graduate and financial planner William Bengen in 1994. Then again in 1998, a group of professors performed a similar analysis and confirmed the 4% rule in the Trinity study.

Essentially, both groups were trying to determine how much retired individuals could “safely” withdraw from their retirement accounts without running out of money before they die (or approximately 30 years, if you’re comfortable pinning a date on something like that). What both groups determined is that a person has sufficient savings and are ready to retire if 3 to 4% of his or her assets are sufficient to cover a year’s worth of expenses.

How much will I spend in retirement?

This is a tough number to estimate. The most logical place to start is with how much you are spending today. So first, get a solid understanding of your budget and where are you sending each of your dollars each month/year.

Then, you have to make some guesses at how you plan to spend your time and money in retirement. Do you plan to by-in-large live the same lifestyle? Or maybe you need to increase the amount you are budgeting for travel if you intend to spend more time away from home.

And healthcare expenses are a huge guessing game. A USA Today article from earlier this year estimated that a 65 year old couple retiring in 2019 will spend approximately $285,000 in healthcare expenses out-of-pocket, beyond what is covered by Medicare.

Shockingly Simple Math Behind Early Retirement

In 2012, a blogger known as Mr. Money Mustache wrote a fantastic article trying to demystify a few calculations that determine how far away you are from retirement. He boiled everything down to a single factor — your savings rate, as a percentage of your take home pay. Breaking things down a bit further, your savings rate can be calculated by two factors: (1) how much you take home each year, and (2) how much you can live on.

So based on the percentage of your take home pay you are saving each year, you can easily determine how much longer you will have to save before having enough money to retire. The chart breaks down like this:

Savings Rate (%)	Years Working Until Retiring
5	66
10	51
15	43
20	37
25	32
30	28
35	25
40	22
45	19
50	17
75	7
100	0

Now, this table makes a number of assumptions, but you’ll have to decide for yourself if you agree with these or not:

1. You’ll earn 5% annual return on your investment after inflation.
2. You’ll live off the 4% safe withdrawal rate after retirement (including lowering spending during times of recession).
3. You want your savings to last forever.

Mr. Money Mustache then published a subsequent article in 2015 regarding calculating your net worth. In the bottom third of this article, he further explains how to calculate what he calls your “take home pay.” This is different from your net income. You still subtract your income taxes from your gross income, but then you add back in your employer 401k match to get your total take home pay.

Then, to determine your savings rate, you total up your annual spending, and subtract that from your take home pay. Then, divide the result by your take home pay, and multiply by 100. This gives you your savings rate as a percentage.

Find your savings rate on the table above to determine your years of work remaining until retirement. Or, for a more graphical view of this, simply take a look at the calculator over on networthify.com.

What Does This Mean For Us?

In totaling up our current expenses and estimating our expenses in retirement, my wife and I have set ourselves the goal of building a retirement saving of $1,250,000. We believe this will allow us to live comfortably off the investment income extending the principal balance beyond our years.

So how old will we be when we retire? Well, this is bit tougher number to calculate. To determine our take home pay, spending rate, and savings rate, we had to do quite a bit of work with the numbers.

You see, our goal is also to have our house paid off by the time we retire. Definitely a lofty goal that is going to take good bit of patience and dedication. It will also depend on a ton of factors, like if we end up staying in our current home long term, if we’re able to be more aggressive in paying down the principal, etc. But, it is still our goal, and will have the effect of reducing our monthly spending in retirement rather significantly.

In addition, when living off of our investments in retirement, our income will be significantly lower than it is today. So, while our goal is to continue to be generous, we will likely be significantly reducing the amount we are tithing each month.

After all these calculations, as best we can tell we have approximately 18 more years of working until retirement, putting both my wife and I somewhere between 50 and 55 when we reach those golden years. Not too shabby! And, if we can increase our income or decrease our spending, we potentially could accelerate that timeline even more.

Now, life certainly has a whole lot of time out in front of us and any number of things can change these calculations drastically. God may have different plans for us and our number one priority is to faithfully follow whatever path He is laying out in front of us.

But, it was a fun exercise to learn and crunch through the numbers. And I hope/plan to revisit this every few years as a check in to see how we are progressing.

Feel free to comment below on your own journey, or poke holes in the theories or logic behind any of this. And finally, thanks for taking the time to hear our story!