When Should I Retire? (Part 2)

In our previous post (here) we discussed how we define retirement. We define retirement not as slithering off to sloth-dom, but transitioning your active income to activities where you have more control over your schedule and activities you find more meaningful.

In this post, we would like to give you some “back of the napkin” considerations for when it might make sense for you to “retire”. The actual math that leads to your optimal retirement age varies greatly depending on how much active income you are still able to maintain, what kind of return you can earn, and of course how long you actually live. Since none of us really know when our time will be up in this world, we prefer to be conservative and assume you will live longer than you would think.

To create a more customized calculation for your specific situation, please feel free to reach out to us directly.

The biggest determinant that you can directly control is how big your nest egg of retirement assets is before you retire. This is the sum of all savings and investment accounts that you will withdraw money from when your active income is reduced (but hopefully not eliminated!) in retirement. We typically do not include the equity in your home in this calculation unless you definitely plan to downsize in the near future and will have substantial assets left over you can draw from.

In order to figure out how big your nest egg needs to be in order to retire, you need to understand what your living expenses are. How do you figure that out? It’s pretty easy… you track them (don’t be lazy). You can also look back over the last year and add up all of your credit card statements, and expenses from your checking account. Banks and credit card statements now allow you to download all of your transaction data into Excel where you could quickly sum it up. We also offer software where you can hook up your accounts and it will automatically start tracking your expenses for you.

Once you’ve figured out what your ongoing living expenses are going to be, and adjusted them for any additional travel and other expenses you might incur during retirement, take the sum of your retirement assets and divide them by your annual living expenses to get your retirement asset multiple.

Retirement Assets / Annual Living Expenses = Retirement Asset Multiple

Here’s how long we think your money will last based on your multiple:

20x = At least until death. You should be able to earn enough to live simply on investment income and maintain perpetual wealth.

15x = If you maintain any kind of active income at all and your spending doesn't balloon, you should have enough money until death.

10x = Things could get pretty tight near the end of your life. We would recommend working full time a few more years if you can bear it. You will likely need to rely on Social Security. 

5x = Sorry but you need to work full time longer and sock away as much income as physically possible into tax-deferred retirement accounts. Ensure you are maxing out your 401(k) match.

3x = Unfortunately you are quite a ways from being financial secure. If your kids are killing it or you are planning on dying young I guess you could roll the dice? 

When you retire depends on when you have saved up enough to ensure you won't outlive your money. If you want to be ultra sure, save up at least 20x your annual living expenses before "retiring."

It doesn't have to be complicated. But we can make it more precise for you if you would like. Just reach out to us and let us know your individual situation and we are happy to run the numbers and give you a sense of when you might be able to retire.

Disclaimer: This is just "back-of-the-napkin" math. Please don't make any life-alterating decisions based on this and don't sue me if the math doesn't work because of some large unforeseen expense that none of us could have planned for.