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.
SEE ALSO: Over the past 6 years, I've fine-tuned a spreadsheet that has completely changed my finances
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)
1. I can’t retire until I’m 54 at this rate. Which really isn’t “early!!”
2. I need a nest egg of $2,250,000 in income-producing assets to do so
3. I’d have $1,383.53 to live off if I decided to retire *today* (not a lot, but VERY COOL TO KNOW!!)
4. 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…
See the rest of the story at Business Insider