Photo by Erick Palacio via Unsplash.com
I’ve been focused on being in control of my finances month-to-month, but I’ve put off thinking about a longer-term goal: my (early) retirement.
Don’t get me wrong, I know exactly how much I want to be investing each month once I get my emergency fund fully built, and I even started investing a tiny bit while I was repaying debt. I have been feeling the pressure to start early, get as much time in the market as possible, and start taking advantage of that magical compound interest.
But knowing all of that, I never actually looked at how much I would need in investments by the time I retired (and what age that would put me at with my current investment numbers). I decided to finally do this, and the results surprised me.
I used two calculators that gave me similar results: This Omni early retirement calculator and this FIRE age calculator. For ease of explanation, I’ll just include my results from the Omni calculator.
I multiplied my current monthly take-home pay ($2,900) by 12 to get my yearly net income (about $35,000). After I added the monthly investment of $800 (what I plan to invest each month once my emergency fund is built up), it left me with about $25,400 in yearly expenses. Given that my current investments are about $2,500, and assuming an $8 return rate (the average) and a 4% withdrawal rate, it turns out I would only need $635,000 to retire. Which, if I remained putting away $800 per month, would take me 22 years and 9 months– or until age 45.
I say “only” $635,000 because I always thought I would need at least $1 million in retirement. Obviously, that was completely arbitrary, but also seemed to be the goal a lot of people in personal finance threw around– the idea of being a millionaire, while living happily in moderation, appealed to me. But I suppose that’s the thing about our cultural ideals– they are arbitrary.
Am I pleased with my retirement number and age?
To be honest, not quite. While $635,000 is the number I would need to retire, I would have to live exactly as I currently do, with the same number allotted for each line in my budget. My rent, travel, eating out, and gift money, for example, would have to stay the same– and I’m not sure I’m satisfied with that. Contrary to how I used to see things, I now believe that lifestyle inflation is a good thing for me, and not something to be avoided (this only applies, though, to those who are happy with where they are with their money. Lifestyle inflation is not good if it keeps you in debt or living paycheck-to-paycheck).
Especially considering I’ll probably be working less and on my own time during “retirement,” I know for a fact I’ll want to travel more often. I also know I’ll want to put more money towards gifts, I may want to live in a nicer apartment with higher rent, and I’m sure there are more lines on my budget that I would want an increase in as well. But I also know I’ll put more that my investment contributions will increase from $800/month as I go.
As far as the age, I’m not very concerned. I used to think I wanted to retire very early, but I also know myself well and understand that I very much enjoy working. I am obviously new to teaching and definitely fear the dreaded teacher burnout, but for now (assuming I’ll only get better at my work), I don’t foresee it being a problem at all.
So let’s do some (rough) hypothetical math.
Travel: Once my emergency fund is built, I’m planning on putting $150/month into my travel fund. This adds up to $1,800 per year, which is perfect (for me) for one big trip or several smaller ones during the year. Considering I work most of the year now, it’s a reasonable amount. But if I want to take 2-3 big trips per year when I’m no longer in my career, I’ll triple the number to put it at $5,400/year. This will increase my yearly spending by $3,600.
Rent: This is a tough one– I’m not quite sure how to estimate an ideal rent for myself. I currently pay $900/month for my half of rent, and I love my apartment. I think that when I retire, I will probably want a little more space and better amenities, though. Let’s just say $1,300/month for now. This puts me at $15,600 for the year, which is a total increase of $4,800
Gifts: I currently have $30/month budgeted for gifts. I’d like to increase that to $100/month, to be able to spend more on gifts for family and friends. This totals $1,200 per year and would increase my yearly spending by $840.
Other: Now I’d just like to add a buffer for good measure. Let’s call it $300/month, for a total of $3,600/year.
Also: Once I’m able to replace my car and get a longer-term, more reliable vehicle, my monthly sinking fund savings for car replacement will go down from $300 to $100, for a total yearly spending decrease of -$2,400
So let’s recalculate. If my current yearly spending is at $25,400, adding and subtracting these new totals puts it at $35,840. Let’s call it $36,000 for good measure. Here are the new results, if my investment stays at $800/month.
This puts my required balance at $900,000 and my retirement age at 49. Really not too bad– 4 more years of working is not much of a trade off for all of these lifestyle changes, but I’m planning on increasing my investments as I go along. My goal right now is to increase them to $1,000/month before I inflate my lifestyle any more. Assuming I’ll continue to increase it, let’s call $1,000/month the average and recalculate.
This seems to me like the most realistic scenario, and puts my retirement age at exactly 47. I understand that using an average doesn’t make perfect mathematical sense considering that this is a compound interest formula, but I’d rather get a rough and dirty estimate than get super deep into the math right now.
I’m very pleased with this goal– It also motivates me to want to put even more into retirement contributions (I still need to be getting that emergency fund built, though!). Of course, it assumes a LOT: that I won’t have children, buy a property, get married, change careers, or run into unexpected financial changes like medical bills or caring for a relative. These are big assumptions, but I have to go off of what I know about my life as it is today.
These numbers show me how possible early retirement is. I see why folks in the FIRE community (particularly ones who don’t like their jobs or the idea of working for someone else) retire very early with much less money invested and live frugally. I truly respect that, but I’m working towards an unfrugal life for myself, and I’m in no rush to leave my teaching career.
Go and calculate your numbers and let me know in the comments what you find out! 🙂