Categories PlanningRetirementSaving & Investing

# Early Retirement: Figuring Out How Much You’ll Need

I frequently find myself musing about the possibility of an retiring early. It’s not that I dislike my job. Rather, I’m just really, really attracted to the idea of total financial independence. While we have four relatively young kids, and thus have a few more obstacles than the average family, I’m still a big fan of running the numbers to see where we stand and how far we have to go. To this end, I wanted to point out yet another calculator that I recently ran across…

It’s called the Capital Needs Analysis spreadsheet, and it allows you to plug in a number of variables including years to retirement, years until retirement, current portfolio amount, inflation rate, investment return, and income required at retirement. It then spits out four different answers, ranging from how much you’ll need such that you’ll run your portfolio down to zero at the end of your projected retirement to how much you’ll need to maintain the same inflation-adjusted dollar amount in your portfolio throughout retirement. Keep in mind here that we’re really talking about net investable assets, and not true net worth.

## Running the numbers

While this is a completely deterministic calculation (i.e., it assumes perfectly equal returns over years, and thus doesn’t take into account potential variation in market returns), the answers are still enlightening (and a bit daunting). For example, assuming 4% interest and a 7% return on our investments, then…

If I continue working to the typical retirement age and assume a 30 year retirement period (taking me to age 95), then we’ll need just under \$7.5 million dollars to support a withdrawal rate of no more than 4% and still maintain income stream equivalent to \$100k in today’s dollars. The calculator then tells me that we’ll have to save \$4, 329/month to get there. But…

If I push things back to an early retirement at age 55 (and increase the retirement period to 40 years), then we’ll need to amass a nest egg of just over \$5 million. This strikes me as somewhat odd, in that the required nest egg is lower here than with the later retirement. But perhaps it’s because these numbers account for inflation, so our required income won’t have to be as high in 2026 dollars to give us \$100k in spending power? Regardless, we’ll have to get there in less time, so it’ll cost us much more per month to make it happen — nearly \$8, 300/month.

If I push things back even further, resulting in a retirement age of 45 (with an increase in the retirement period to 50 years), I learn that we’ll need a bit over \$3.4 million at retirement, and that we’ll have to save just shy of \$21k/month to get there. Yikes!

Of course, these answers are all highly dependent on the variables that you plug in. For example, is 4% inflation realistic? Or perhaps your cost of living is increasing more rapidly? What about a 7% rate of return? Too generous or too conservative? And will we really need \$100k/year, considering that our house will almost certainly be paid off prior to retirement, and that the numbers above assume no further investment contributions and no outside earnings?

Nickel :

• Anonymous says:

@ Ria Rhodes - I'm not sure why you think the concept of retiring 'real early' and living well is laughable. I plan to retire no later than age 50 (shooting for age 45) and maintain my current standard of living, which definitely isn't spartan.

Until then, I'm save save saving as well as working to get the mortgage paid off early. Of course I don't neglect the need to be well-insured (including disability insurance) and when the time comes I'll investigate LTC insurance.

• Anonymous says:

I put in a retirement at age 55 with inflation 3% and interest 9.5% and came out VERY close to what I'm already saving. Woohoo!

Nickel: I think that 8% is pretty conservative. I see your point about switching to more conservative investments over time, but I read that many of these conservative approaches should still earn you 8%, so the average should be a good deal higher than this. I also think historic inflation rates have been closer to 3%, though please correct me if I'm wrong.

• Nickel says:

MITBeta: You may be right, but I'd rather err on the conservative side. If things work out better, I'll just start loafing sooner. :-)

For the sake of reference, the CPI is currently running around 4.1%. Keep in mind that the "core inflation rate" excludes things like groceries and gas, so it actually appears to be lower than the CPI.

• Anonymous says:

There is no "historical" inflation number. historical numbers vary depending on the period of history used. 3% tends to be used often because it is based on more recent price history; however, I think that 3% is a little too low to base such important plans on.

Regarding investment returns, it is dangerous to use too high a return in a strait-line (using the exact same return each and every year) calculation. Real life does not happen that way, and you're ignoring investment volatility. In reality, pursuing a higher return usually results in greater short-term volatility, which increases timing risk, which leads to a greater number of possible outcomes from saving and investing over time.

Even if you are correct with your average return guess, your resulting wealth could be significantly less than what this calculation predicts. This is because *when* returns happen is much more important than *what* they average. Sure, it could also be much higher, but we're talking coin flip odds here. I wouldn't base such important plans on a coin flip either.

• Anonymous says:

I love ER calculators... mainly because I keep trying to see if we are going to pull off our 9 year plan. This one comes pretty close!

• Anonymous says:

@ Dylan

I'm guessing here, but there must be some way to time average the inflation rate over any period that would like, in the same way that the stock market gain can be averaged over any period.

It's all well and good to use conservative numbers in these calculations, but in doing so (using Nickel's numbers) I find that at the rate the I can currently afford to save, I cannot retire until age 70 (I'm 32 now.)

I consider myself to be an above average saver, and to think that all of the hard work that I'm doing is so that I can retire at 70 is incredible disheartening. So much so that I might ask, "Why bother?"

So I prefer to use numbers that are less conservative -- but not unrealistic.

Again, you need to put your "young" money in growth positions (ie relatively risky) to get the big returns. But relatively conservative investments should still earn a lot for you. If the market can average close to 10% over time, then your conservative investments should earn 7%-8% -- once you actually switch to them. This calculator easily shows why such a small difference in portfolio performance can have a huge impact on retirement age and income. So "risky" investments might only earn you a couple or even a few percentage points above "safe" investments, but those few points are crucial for the growth period of your (and MY) portfolio.

So yes, to project 7% or 8% over the whole lifetime of your portfolio is conservative, I really don't think that it's realistic and can even be detrimental if it shows people such bad news that they say, "Why bother?" and go out and spend that savings.

• Anonymous says:

Ahh the sweet thought of retiring early. It would be nice, but not sure if it's really possible. It's great to see that you did point out the possibilities of future variables like, cost of living increase.

Great article and I'll definitely have to check out that calculator.

Thank You.

• Anonymous says:

Well, if you can live on 40,000 annually, and you have 1 mln invested in high-yield dividend aristocrats whose dividend increases thend to beat annual inflation, you should not be concerned about the 4% withdrawal rate. Your withdrawals would be solely based off of dividend income. You might also add some fixed income for diversification in retirement, but I believe that this is the way to go.( in my opinion)

• Anonymous says:

Geez. I keep wondering who are all these frugal people who seem to need a gizillion to retire, early or otherwise.

• Anonymous says:

One could retire quite easily in say southern Mexico and live quite well on about \$2,000 a month. Add another \$500 a month (ca. \$6,000 a year) to cover things like plane tickets home, surprises, and rainy day dollars.

\$2,500 a month and that includes savings.

Social Security would cover much of this (about 40% if you begin drawing early).

So...\$1,500 a month or \$18,000 a year. Multiply this by 30 years and we are at \$540,000 without counting any amount of interest you may make on your retirement savings.

Why struggle in the U.S. when you can live very well overseas?