After being inspired by Jeremy’s early retirement story, I decided to sit down and calculate once and for all how long it would take for us to retire early as well.
(And by retire early, I really mean “be financially independent” – ie not needing money anymore to survive whether you still want to work or not. In a way I feel like I’m already retired since I’d be blogging as I am now when officially free, only I very much need the money to live off right now, haha…)
As any good nerd would do in these times, I headed straight to Google for some early retirement spreadsheets to help plot my scheming. I came across a few good places that shared close to what I was looking for (the 2nd spreadsheet over at Reddit was helpful (and detailed!), as well as this fun calculator at Networthify.com), but I couldn’t find anything that was nice and simple where I could plug in a few numbers and get my snapshot without having my head explode..
So I decided to make one of my own :)
It took me a little extra effort and sharpening of Excel skills to put together, but I was happy to jump in and fully immerse myself in what early retirement looks like number-wise. And when you’re building stuff from scratch, you get to cater things to your own liking! Which to me meant simplicity and getting that overall *snapshot* of what the deal is here. I wanted to see exactly how far away FI (financial independence) is, and be able to easily play with the numbers to see how it affects the future.
This is what I came up with.
The Early Retirement / FI Spreadsheet
(You can download the spreadsheet here: Early Retirement Spreadsheet)
Here are the assumptions it makes:
- 4% withdrawal rate – This is the amount experts/bloggers often recommend as the “safe withdrawal” amount based on the Trinity Study. (That says historically you would have been fine spending 4% of your initial portfolio value and adjusting for inflation each year)
- 25 multiplier – This is the ratio that will tell you when you’ve reached financial independence – when you have 25x your annual expenses invested in income generating assets, which is based on that same 4% withdrawal rule.
- 8% return rate – This is another of those often quoted, yet highly controversial numbers, and is an average over the span of many years and not just a specific one. NOTE: Inflation will make this # not as sexy over time, but fortunately is already calculated in with the 4% withdrawal plan.
- 100% – The amount of an expert in Early Retirement I am not ;)
UPDATE: This spreadsheet gives you a snapshot for the future as things stand *today*. It’ll all change as time goes on, but if we update it along w/ it then in theory it should always be correct for any given moment in time :) If you want to adjust for future changes though, scroll down and check out v2!
Now of course none of these numbers are absolute since we can’t predict the future, so these are things you’ll have to decide yourself to keep or tweak depending on your own beliefs. I tend to personally agree with them since I’m getting these #’s from my friends who are *already* retired, but either of them can be changed easily in the spreadsheet to match your own situation.
Let’s break down the sections:
INVESTMENTS — This is where you put your *ahem* investments. No home equity, cars, property, collectibles, etc. Just straight up income-producing investments since this is where you’ll be getting your money to live off in ER (early retirement). Notice this is an adjustment from having our Net Worth be the center of attention! That gives you an overall snapshot of your entire finances which is also good to know, but doesn’t necessarily paint a good ER picture…
(I left out cash here on purpose since it’s just sitting in a savings account and not making a return, but I know others do like to include it… fwiw)
RETIRE NOW: YEARLY & MONTHLY — This tells you what you have to live off of *right now* should you decide to retire today. Again, based off the same 4% withdrawal rate.
AGE: NOW & THEN – This is where you plug in your current age which will be automatically adjusted in the “Investments” column to the right.
Unfortunately you have to match up your ER age manually as I couldn’t figure out how to have that match and automatically adjust w/ that right-side column. You can easily figure it out though :) It’s now updated and will automatically calculate for you thanks to an anonymous reader!
EXPENSES (CURRENTLY) — This is arguably the most important factor here as it determines exactly how much you need to have in order to retire *today*. The higher your expenses the bigger the pot – which is where this 25x number comes in. The total amount needed to live off your wealth is 25x your yearly expenses, one of the main variables we have control over! (BTW in the spreadsheet all you need to do is plug in your monthly expenses and it’ll auto-calculate the rest)
INVESTMENTS (GROWTH OVER TIME) — This is where the return rate plays its role, as well as the amount of money you’ll be investing yearly in the future as well. You can easily see how DRASTIC the numbers change by tweaking either area. Just 1 % point or $1,000 extra can make a huge difference! As it’s all about compounding over the years until you reach that sweet sweet nectar of freedom ;)
That’s it! Nice and simple right? You can easily plug in your own numbers in a matter of seconds (provided you know them off your head or can easily log in and copy/paste from your Net Worth spreadsheet which you’re tracking, right? ;)) and get a snapshot of your own situation.
It’s pretty humbling…
Here’s what the calculations are telling me:
(The numbers in that spreadsheet example are my own)
- I can’t retire until I’m 54 at this rate. Which really isn’t “early!!”
- I need a nest egg of $2,250,000 in income-producing assets to do so
- I’d have $1,383.53 to live off if I decided to retire *today* (not a lot, but VERY COOL TO KNOW!!)
- Our expenses are ridiculously high right now…
[UPDATE – our expenses are now roughly $5,200 a mo (yeah no more daycare!!) so we’re looking at needing “only” $1,600,000 now which chops down the years left by 6 and granting us financial freedom at age 48 :) At least in theory – hah.]
So pretty much the opposite of what I wanted to see, haha… Which means that if I’m serious about reaching financial independence early FOR REAL, I need to either drastically cut our expenses, or drastically start saving more again. Something we used to do like crazy before the Perfect Storm hit of income losses, house renovations, baby producing (big factor), and just general change in business.
That’s the bad news.
The good news? Our current situation is only temporary and by this time next year (and probably much sooner actually), we’ll have an extra $40k-$80k a year coming in to completely speed things up again. Something I’m VERY much looking forward to ;) And many of our expenses like daycare and rental property losses will be gone in a matter of time as well – freeing up $2,500 off the bat.
**Which leads us to the other important thing to consider: What we spend NOW can/will/should be different than what we spend in actual retirement.**
Depending on how far away this is, it could affect mortgage/car payments (or lack there of), commuting expenses, healthcare expenses, food budgets, entertainment and the list goes on. Something that Jeremy brought to my attention when I shot him my first “go” at the retirement spreadsheet above.
He made some edits and shot it back to me…
Introducing The Early Retirement / Freedom Spreadsheet v2!
(You can download this version of the spreadsheet here: Early Retirement Spreadsheet v2)
That’s right! We already have a 2nd version! Haha…
It’s not as pretty/simple as my first one, but it does include a handful of new things to consider:
- Hourly income
- Amount of *daily* expenses
- Principle mortgage payment (right now these are “expenses” but might not be in retirement)
- After-tax income
- Savings rate off of that after-tax income
- Years to FI
- Years to FI based on reduced monthly spending in retirement
- Budget area to compare expenses now vs in retirement (or in the future in general)
- Amount of money needed *per line item in budget* for FI
(FI = Financial Independence)
That last one is a whopper! For example, if your cell phone costs you $50/mo right now, and you want to keep it in early retirement, you will need $15,000.00 banked to cover that alone! (25 x $50.00 x 12 mos) How powerful/scary is that?
Now FYI – those budget areas are totally made up from Jeremy just to give us a working area. He did get our $2,000/mo expenses for daycare correct though (ugh) which means if we were to keep it around for 10 years+ (which of course we wouldn’t), we’d need $600,000 just to continue paying that area itself. That’s more than ALL my investments combined right now! And you’ll see in his examples that shaving that off plus some other areas drastically reduces the amount of $$ needed in retirement by over $1 million dollars. Which then cuts the # of years to FI down by 10 and allows me to retire in 9 years when I’m 45 instead of 54.
That’s a big difference.
So it’s good to play around with these numbers and see how the changes affect the future. Which shows the importance again of getting your monthly expenses down, as well as continuing to plow money into investments at the same time to improve both sides of the equation. None of which is all that easy, but it is do-able. As countless others outside of Jeremy have proven time and time again. (And who we’ll also be featuring here in our new Earl Retirement Series as time goes on…)
Here’s something else cool to consider: once you have enough money for FI you don’t have to save anymore if you don’t want! EVER!! You still can, of course, but what a different mindset than we’re used to having OUR ENTIRE LIVES, haha… How do you even comprehend this? :)
What this all means…
What all this means is that if you want to get serious about reaching financial independence and/or retiring early if you choose to do so, you need to be aware of where you currently stand and what needs to be done in order for you to get there (just like with budgeting). I joke all the time about how I WANT financial freedom and that I’ll reach it one day, but the truth of the matter is I never sat down to actually play with the numbers (at least seriously) until today. And boy what a shock that was.
I’ve always considered $400k banked to be a major milestone, but in the grand scheme of independence it’s anything but. At least with our current expense ratio and wanting to retire sooner than later. As you can see from either spreadsheet we’ll reach $1 Million in investments in 9 years as-is, but unless we get our expenses in check we’ll continue having to work quite a bit longer until we don’t need to anymore. You already know I’ll still be blogging or doing something online regardless of our money, but the fact remains it’s a necessity and not an *option* until reaching FI!
So the pursuit to get there is growing larger in my heart than ever :) And hopefully these are things you start considering as well. We’re all in different stages of our financial journey, but having a better grasp of what the future does hold, and CAN hold, is a really important one to pay attention to. Hopefully these spreadsheets help you put things in better perspective.
- You can download the simple version here: early retirement spreadsheet v1
- And the modified by Jeremy version here: early retirement spreadsheet v2
Good luck! Would love to hear any and all thoughts on this stuff, and what your numbers look like as well if you’re willing to share :) Big thanks to Jeremy for not only taking the time to add to my spreadsheet, but for opening my eyes up more in general to this ER stuff. It’s funny how all of a sudden things can “click” and you want to start taking action now.
And I’m about to action the crap out of this stuff!!!
PS: None of this incorporates social security or other benefits from the government down the road. Mainly because you don’t get access to it when you’re retiring early, but also because nothing’s guaranteed in life. If we get these addtional income streams later – great! More money to play with! But by focusing on what IS in our control you won’t come across too many nasty surprises hopefully.
PPS: If you’ve found/made any great spreadsheets or calculators on ER calculating, please send them over so we can check them out too! I’ll start a little list here :)
- “When can I retire?” calculator @ Networthify
- The Crowdsourced FIRE Simulator @ cfiresim.com
- Expense / Net Worth / FI Spreadsheet (Google Doc) @ The Fire Starter
- “A different kind of retirement calculator” @ FIRECalc.com
- Retirement Calculator w/ graph @ The Four Percent Rule
- The FI-o-Meter @ The Escape Artist
Tweaked Early Retirement Spreadsheets:
UPDATE: Here are a few more spreadsheets readers of this blog have since shot over to improve my simple one. SO COOL to see people tweaking and updating this thing – we are such nerds! Haha…
- Early Retirement + Real Estate + Pension [Spreadsheet] – This one was put together by Hannah J. who updated my original spreadsheet to include “Present Value” of Pensions and the “Present Value” of the Cashflow from Real Estate. She adds “Present Value is just a fancy of way of saying how much should you be willing to pay for the future cash flow if you bought it right now. (Or conversely if you were offered a lump sum for the asset, what is the minimum amount you would want to get for that)” and “Present value hinges on the idea of a discount rate which is for all intents/purposes how much money you could get if you deployed this money elsewhere” and lastly, “The FIRE Present value basically tells me how much is this worth if I use a discount rate of 4%.”
- Monster Retirement Budget [Spreadsheet] – This is by Robert R. who factored in the following: Taxes, Medicare, Medicare supplements, Medigap, healthcare coverage pre-Medicare, dental and vision, Social Security, and using Roth IRA Contributions and the 72t rule for pre-tax accounts to cover budget expenses prior to age 59.5 as well as calculating the required minimum distribution on pre-tax accounts (after age 70.5) and checking to make sure withdrawals exceed RMD. He also states, “The effect of a Health Savings Account on your medical expenses in retirement is HUGE,” as well as “In some situations, taking Social Security early actually increases your account balances in the long run,” and “Having money in a brokerage account (or any non-retirement account) is important if you want to retire before age 59.5 to avoid penalties for early withdrawal, but there are some loopholes for using pre-tax retirement account money if you retire earlier than 59.5 without penalties.” Running his own calculations also showed him that he’ll be paying Uncle Sam and the state of Arizona over 1.3 million dollars while in retirement – ouch! So maybe you won’t want to use this spreadsheet? ;)
- Early Retirement + Dividend Investing + Passive Income [Spreadsheet] – Here’s another tweaked version of my original spreadsheet that fellow blogger Tawcan just posted about on this site. This one incorporates dividend investing as well as other passive income streams you may have (and some Canadian references as well, for you Canadians out there ;)). Hope this helps!
- Early Retirement + Taxes/Distribution Simulations + Roth Ladder – A more expanded version of my spreadsheet by Kate S.. She added in a cell for Roth contributions to date (since these can be withdrawn at any time), what withdrawals would look like using the 4% rule and 3% to be conservative, and then some extra tabs. The second tab is a simulation of distributions, as well as an estimate of tax owed. This tab assumes that funds from tax deferred accounts will be converted to a Roth, with a minimum being the amount of the standard deduction and exception since this would be tax-free (based on Gocurrycracker’s info). It also assumes that you’ll first withdraw money from a brokerage account, then Roth, then tax deferred accounts. The third tab is a simulation of what the distributions would look like if you were to try to convert all tax deferred accounts prior to 70.5 years old, to avoid taxes due to required minimum distributions. The fourth tab is a simulation of a 5-year Roth ladder, as Justin at RootofGood.com advocates. The last tab shows the tax brackets and is for information only. The simulation tabs pull the standard deduction and exemption info from this tab (based on filing status) but the tax % must be entered on the second tab to calculate any estimated tax due.
And here are other articles I wrote on financial freedom that might help out:
[Photo cred: ToGa Wanderings // Tweaked by J$]