If you google when to retire, you're likely to get bad information.
When you can retire has nothing to do with age!
When you can retire has nothing to do with anyone's laws or benefit amounts - it is all up to you!
You get to choose when you retire and I will show you how to know, for sure, when you are ready to join the ranks of the free.
First though, if you still have debt - stop reading this blog and get back to work on solving that! I believe that the piece of mind that you gain from being debt-free far outweighs the benefits of reading this blog (as awesome as I think it might be). So get to work! Debt is a challenge that you must overcome for yourself.
Your past self borrowed money that your current and future self is now working hard to pay off. Every single dollar that was not spent on paying down your debts in the past was likely wasted.
Was that $4 coffee really worth it? Could've put that $4 to work against your debts....multiplied by how many forgettable coffees? That adds up.
How about that videogame? Still as happy about it as you thought you'd be? You could've been that much closer to being debt-free.
G.et
O.ut
O.f
D.ebt
Your choices. Your results.
Nagging over.
OK - You're debt free? GOOD.
Look back at my post on Slavery:
In it, one of the first things you had to do was write out your expenses. This is a vital step both for crafting a Spending Plan, as I described in that post, and for knowing when you can retire in this exercise.
Step one: List all your monthly expenses. Include ones that come quarterly, biannually, or yearly like water bills, insurance, and real estate taxes (you can break those less-frequent bills up into their monthly components; so a $2400 yearly real estate tax bill would be $200 per month).
There should not be any debt payments in here! If there are, kick yourself in the shins for me and get back to Getting Out Of Debt!
Also, leave out any recurring payments/debits/transfers you make to investment accounts, or savings out of this. We only want to count money that leaves your ownership.
You can choose whether you plan to keep charitable giving in your expenses, and plan on continuing to give in retirement, or you can choose to exclude it - just know that if you exclude it, it won't get factored into this calculation.
Step two: Find out how much medical care insurance is going to cost you in retirement, when it is not subsidized by your employer. Try EHealthInsurance or Obamacare.
Once you have that monthly figure (its probably a lower cost than you first feared) add it to the list you got from step one.
Step three: Add the monthly expenses up. This should be a surprisingly small number.
Step four: Multiply that total by 12.
We want to know with some certainty what your yearly expenses are.
Step five: Multiply that total by 25.
This new grand total is your Freedom Figure.
Once you have that much saved up in your investment accounts, you can retire.
Simple.
The reason this works is that with a multiplier of 25, it assumes that with a 4% yearly withdrawal rate, that you'll never run out of money. This has been historically back-tested and confirmed.
Some people like the feeling of a little more conservative 'padding' in their retirement accounts. Some people like to use a multiplier of 30 times their total annual expenses to feel safer.
On average, most average Americans total monthly spending should be around $2,000 to $2,500 per month. (If you're spending a lot more than that, there's likely plenty of fat in your budget that can be trimmed. Re-read step 5 and step 8 in the Slavery post.)
That's $24,000 to $30,000 per year.
Multiplied by 25 that's a Freedom Figure of $600,000 to $750,000.
Multiplied by the even safer 30, that's a Freedom Figure of $720,000 to $900,000.
You can do that.
That's not some big, scary, pile of multiples of millions of dollars.
You can do that in a few years if you have a lot of excess income!
It will take longer, if your current income is lower and therefore closer to your level of expenses. Most people can still do it within a decade if they focus on this goal.
This also assumes that you have no other income in retirement.
I strongly encourage you to keep some form of active income coming in, even just a few hours a week. It keeps you sharp, active, engaged with other people, and even just a little extra income has the effect of making your retirement accounts seem even larger than they actually are.
The extra income lets you withdraw less from your investments, allowing them to keep working hard for you for longer.
- Work at that comic shop you always liked.
- Start that business you've always dreamed about - the one where you get paid for doing your hobby.
- Volunteer at Habitat for Humanity until you have enough skill to work occasional construction jobs. Building something real with your hands always provides a satisfying feeling of accomplishment. Coupled with a little extra cash in your pocket - very cool!
- Do what you want...
Every dollar over and above your Freedom Figure just adds to your retirement lifestyle possibilities.
Larger retirement accounts mean more options.
