When Can I retire? How to determine your FI number

If you ask google “When can I retire?” you will get the typical answer of between 62 and 65. You will be directed to all sorts of information about social security and 401 k withdrawl and yadda yadda blah blah blah…

It all BULLSHIT!

You can retire whenever you want depending on what you define as retirement. What kind of retirement do you expect to have?

You can architect a retirement where you sit in a room all day and never spend any money and retire tomorrow. In the words of Lawrence the neighbor in the movie Office Space “You don’t need a million dollars to do nothin man. Take a look at my cousin, hes broke, don’t do shit.”

If you expect to have a retirement filled with luxurious vacations and travel around the world, you might need to save a bit more money. This may take a bit longer thus increasing your retirement age.

Its not retirement, its Financial Independence

The first thing you need to do is eliminate the word retirement from your vocabulary. Whenever you say retire, people immediately think of the typical accepted retirement which is around age 62-65. this is when social security benefits kick in.

We are not talking about this type of retirement, we are talking about becoming financially independent and leaving the work force to pursue other interests. You do this by saving enough money so that your expenses are covered by your savings. More specifically, the money your savings will earn you.

Becoming FI (Financially Independent) is simply a matter of saving up enough money that the money that is earned through investing your savings covers your expenses.

In order to determine when you can “retire” you must determine your FI number. Your FI number is the total amount you will need in your accounts in order to comfortable cover your expected expenses for the remainder of your life.

There are really 2 simple steps to this.

Step 1: Determine what you expect your expenses to be in retirement

Seems simple enough right. get a pen and paper and start writing down what your expenses will look like. Mortgage, taxes, car, food, clothing, etc… add it all up. Don’t be afraid to include luxury items like travel and any toys or hobbies you will participate in during retirement.

For purposes of illustrating how this works, here is an example of someone who expects to spend $6500 a month in retirement or $78,000 a year. A luxurious retirement indeed. As these are early retirees, they have not yet paid off their mortgage but are otherwise debt free.

Hypothetical Monthly expenses in Retirement

Step 2: Determine FI number

Once you have your expenses figured out, it is simply a matter of determining how much money you need to accumulate in order to cover those expenses for the rest of your life.

This is done by applying the 25 x rule. Simply multiply your annual expenses by 25 and you have your FI number. So in the example above, our retiree would need just under $2 million.

Simple math right? Go do it for yourself and see what you come up with. Play with different scenarios and see how it works for you. Its like magic. But why?

The reason the 25X rule works

The reason the 25x rule works is directly tied to the 4% safe withdrawal rate. The 4% rule is a guide or general rule of thumb for the safe withdrawal rate of a retiree from their nest egg. The purpose of the 4% rule is to provide the retiree with a steady annual income stream with the lowest probability of depleting funds entirely.

Historical data tells us we can assume with some degree of comfort that you can achieve a 7% annual return on your money. If you are only withdrawing 4%, that leaves the other 3% as a security blanket to cover inflation and thus your money will never run out. Basically, your earnings cover your expenses AND inflation thus you never touch the principal.

Try this calculator that I use from Bankrate.com. Play with different numbers and see what you come up with. I have spent countless hours with this determining my FI number.

This calculator doesn’t take into account inflation but you can play with different interest rates to get an idea of how long your money will last with more conservative estimates.

To illustrate how this works with inflation, here is an example of a draw down of a $2,000,000 retirement fund at 4% per year earning 7% per year.

*Withdrawals are taken at the beginning of year before interest has accumulated

*Inflation is calculated at 3% and added to each year’s withdrawal

As you can see from the above chart, even with very liberal spending habits, you actually end up with more money at the end of the year than you started with each year. At the end of 50 years you have more than doubled your money and still have plenty left over for another lifetime. I feel the 4% rule uses very conservative estimates and leaves plenty of room for error, dips in interest earnings and unexpected emergency spending.

I know this is a short article but that is because it really is that simple. I could write another 10,000 words about the research that has been done to support the safe withdrawal rate but it wont change the simplicity of the math behind it.

Your FI number is a moving target

The one thing I will say is that you need to be able to change as needed. The 4% withdrawal rate is a guide. there is no way to predict the future with absolute certainty so you will need to adjust as needed. The FI number is a moving target. Life happens and sometimes unexpected circumstances arise that might throw a wrench into the plan. However, if you are prepared for the possibility of this, you will be fine.

Happy saving

Earl