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When Can I Retire?

by Kate on January 24, 2011

in Money

Do you ever wonder when you might be able to retire, to live life on your own terms, indulge your hobbies, spend more time with your friends, and be yourself? I don’t know of anyone whose ambition it is to retire aged 65, when their body is tired. Who wants to work up until their last innings, only to spent their last years going about a sedentary routine?

Well, you can have your retirement at 65. Enjoy! That’s not for me. I want life to be an adventure. I don’t know exactly what yet, but I guess why that’s why they’re called adventures.

Is your approach to just keep saving or contributing to your pension and hope for the best? I’ll be honest, it was my strategy (if you can call it that), for a long time until I learnt the magic retirement formula. I’m going to divulge the magic formula so that you can work out exactly when you will be able to retire, given your current trajectory. So, without further ado, here is the magic formula:

Number of years to retirement = 25*(outgoing% / saving%)

Before we look at some examples let me explain this equation to you. The equation will show how many years you have to save before you can retire and continue to spend at your current rate. It assumes a 4% drawdown rate. This is the rate experts agree (and a Monte Carlo Simulation backs up) it is possible to spend each year from the amount you’ve saved without decreasing your money. Don’t worry about the 4% rule for now, it will be explained later on Curb Your Consumerism.

We take this 4% draw down rate (the 25 in the equation) and multiply it by the percentage of income we spend, divided by the percentage of our income we save. Making sense? Probably not, so let’s look at some examples:

Let’s begin with the extreme example. Suppose you save 70% of your income and only spend 30%, the equation, and its result, will look like this:

10.71 = 25*0.3/0.7

What this is saying is that at your current savings rate it will take 10.71 years before you can retire at the same level of spending. This means that your investments will earn you 30% of what you currently earn for the rest of your life. Of course, this doesn’t take into account the compounding of interest as you save, which will probably result in you being able to retire in under 10 years. Let’s look at another example which assumes we save 50% of what we earn:

25 = 25*(0.5/0.5)

This means that if you save 50% of what you earn it’s still going to take you 25 years before you can retire. Very, very scary indeed.

Of course, if you have some savings already you can accelerate this. For example, for the above example if you already have investments producing 25% of what you need to retire, then we can reach freedom 8 years earlier. The equation for this is below:

Number of years to retirement = 25*(outgoing% / (saving% + investment income %))


16.67 = 25*(0.5/(0.5+0.25))

Please play around with this equation to suit your personal circumstances and figure out when you’re going to be financially free. Let me know the answer you get and how you feel about that.

To Conclude
What can we take away from this equation? Well, you should be able to tell when you can retire given your current rate of saving. In all likelihood, even if you’re relatively careful with your money, this will be a long time away. Don’t panic! The real takeaway is that in order to be financially free as soon as possible, you’re going to need a two pronged approach – you need to cut your expenditure and boost your earnings. The good news is that Curb Your Consumerism will help you achieve both :)

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