Let’s wrap up this week with one last article about net worth. I hope I’m not boring you too much by talking about the same subject this whole week. It is fun to track your net worth if you are doing well and see it increase year after year.
Today we’ll see if you’re on track to retire by 40, 50, 60, or later. I spent a few hours cranking numbers and hopefully it will be useful for some of you. I wanted to make it more general, but the math is way too complicated for my current ability. I’m sure I could have worked it out when I was in college, but that was a long time ago…
How much do you need to retire by 40, 50, or 60?
I used a bunch of different retirement calculators and made a few assumptions. I will use our household as an example.
Assumptions – retire early and start drawing down right away
- Withdraw about $4,000/month in today’s dollars (2013.) This is a key assumption here. If you need much more or less, then the numbers will be wildly off base.
- Life expectancy = 85 years old, yes I am an optimist. Retiring at 40 means 45 years of withdrawal.
- After retirement, our investment ROI will beat inflation by 1%.
The calculators said I need about $1.75 million dollars if I want to retire by 40 and withdraw $4,000/month for 45 years. From here, I extrapolated backward to see where you should be at your current age. I also ran the same calculation for retire by 50 and 60. In those cases, you would need less money because you’ll spend less time in retirement.
Let’s make a table so you can see where you are.
Table 1 – start withdrawing as soon as you retire
Here is how to use this table.
First, you need to figure out your household net worth. Yes, I’m using net worth here. You can always sell your house or take a reverse mortgage.
Then find which track you are on. For example, if you’re 30 and have $200,000 net worth, then you’re closer to Retire by 50 than Retire By 40. OK, so you can see this is a ridiculously difficult undertaking. How many of us can save up almost 2 million dollars by the time we’re 40 years old? The graph is quite steep. You’d need to be making a lot of money and save most of it to be able to fit into this graph. Retire by 50 or 60 are more realistic options here. Even in those cases, you still need more than a million dollars to retire early.
It’s Not Hopeless
Don’t Panic (one of my favorite quotes, by the way.) Let’s see if we can make it a bit easier by changing some key assumptions. For me, I left my career before I was 40, but I’m still working part time on my blog. Mrs. RB40 is also still working because she likes being in the workforce. The income is enough to pay the expenses so we don’t have to withdraw from our retirement account until later. Let’s use this model and see if we can make it more palatable. We’ll also assume our investment is doing better than 1%.
Assumptions – retire early, but don’t start drawing down until you’re 65
- At 65 years old: withdraw about $4,000/month in today’s dollar (2013.)
- Life expectancy = 85 years old. By putting off withdrawal, we only need to withdraw for 20 years.
- After retirement, our investment ROI will beat inflation by 4%.
Table 2 – don’t start drawing down until you’re 65
This is still difficult, but doable now.
Of course, the assumptions are also more severe. You will have to figure out a way to make some money to pay the bills so you don’t have to start drawing down until 65. Most people will have to work part time for this to work. You also need to invest wisely and beat inflation by 4%. This is not easy considering the house, cars, bonds, cash, and other low yield assets in your net worth.
Now it’s time for you to give me some feedback. Which model do you like better?
- Retire early, stop making money, and start withdrawing right away.
- Retire early, work part time, and start withdrawing when you hit 65.
Option 1 is an extremely difficult target to hit. Option 2 is not easy, but it’s more manageable.
For me, I like model 2 much better since that’s the model I built my exit strategy upon. Currently, we are doing well and we are beating the Retire by 40 track according to table 2. Table 1 is too difficult for us and we are somewhere between Retire by 40 and 50.
Let me know in the comments which table you choose and where you are on that table. You can comment anonymously if you’d like. I would love to see some data. Don’t forget we assume you’d like to withdraw about $4,000/month. If you need more, then the amount will increase quite a bit. I’m not sure how to make the table more flexible with the withdrawal amount. If you have an idea, let me know.
Have a great weekend!
Disclaimer – This really is just for fun. The math is complicated so the tables probably aren’t very accurate. I over estimated my mathematics ability when I first started this article and quickly ran into trouble. I used quite a few retirement and inflation calculators to make the tables.
If you need help keeping track of your finances, try using Personal Capital to manage your budget and net worth. It can help you keep track of your income, expenses, and net worth, all in one place. Personal Capital is geared for investors and has many great tools. See my review of Personal Capital and how they helped me reduce what I’m paying in investment fees.