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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!
The answer? It depends…
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?
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