Retirement Math Made Simple…Expanded Edition

There are dozens, hundreds, probably thousands of retirement calculators out there. Some are simple and bake in common assumptions. Others let you drill down into every fine detail customizing the calculation to your exact criteria. But one I found wasn’t a calculator at all. It was a spreadsheet that asked you one simple question, What is your savings rate? The blog post comes from Mr Money Mustache and his article The Shockingly Simple Math Behind Early Retirement

It was a neat article that asks one question, your savings rate, as a percentage of your take-home pay, and then uses that to extrapolate when you can retire. The goal was to show you, based off your savings rate, how long it would take you to retire. If the date wasn’t soon enough for you, then you would know how much you would need to increase your savings rate in order to be able to retire when you want too. The article did make some assumptions of course.

– Your investments would earn 5% after inflation. The after inflation part is key because most of the market returns you hear thrown around are pre inflation. Post inflation returns are the only true way to figure out what your returns will be.
– Once in retirement you will withdraw 4% each year. This is a common withdrawal number but many disagree with it. I’ve seen 3% used more and more. After all, you don’t want to run out of money with no other income source to rely upon.
– That nice segway leaves us with the last bullet point, the money has to last forever. Running out of money isn’t an option so being conservative is important.

If you visit his site you will see his chart but I’ve also included it below because you might be saying to yourself, “Man, 5% seems really low even for after inflation returns.” After all, over the last 100 years or so the US market has returned about 10% per year, 7% after inflation. How does that change the numbers? Your wish is my command, an expanded table is below:

 11%
(Real 8%)
10%
(Real 7%)
9%
(Real 6%)
8%
(Real 5%)
7%
(Real 4%)
5%4853586677
10%3842465159
15%3336394349
20%2931343741
25%2628303236
30%2324262831
35%2022232527
40%1819202223
45%1617181921
50%1415161718
55%1314141515
60%1112121313
65%1010101111
70%899910
75%77778
80%66666
85%44444
80%33333
95%22222
S&P 500
Avg
Return

The most important thing to note is that the two things you can control, how much you spend and how much you save, effects the numbers more than your rate of return, something you can’t control. Beyond that, pay close attention to how your timeline changes less and less based off your market returns as you save more and more. This is good news because you can focus on what you can control knowing that market return isn’t as pivotal as your savings and spending is.

You might be saying, that using 4% is absolute rubbish. Why risk 4% when I need this money to last forever? So next is a chart with an assumed 3% withdrawal rate. Now that might not sound like a big change but there is a big difference between the two. Your going from having to save 25 times your expenses to 33 times your expenses. A dramatic increase in your savings indeed.

 11%
(Real 8%)
10%
(Real 7%)
9%
(Real 6%)
8%
(Real 5%)
7%
(Real 4%)
5%5257637283
10%4246515765
15%3640434855
20%3235384247
25%2931333741
30%2628303336
35%2325272932
40%2122242628
45%1920212325
50%1718192022
55%1516171819
60%1414151516
65%1212131314
70%1010111112
75%999910
80%77778
85%55566
80%44444
95%22222
S&P 500
Avg
Return

The first thing that I noticed was the flattening of the graph the higher your savings rate. This is the same thing that happened in the previous table. The second thing I noticed is the amount of years until retirement is stretched by a significant length of time. For example, at 50% savings rate and a 7% real rate of return it would take 15 years to retire at a 4% withdrawal rate but 18 years at a 3% withdrawal rate. That is a 20% increase in time, not a small chunk of change but you will have better odds of your nest egg lasting with the smaller withdrawal rate. It is all about balancing risk and reward. You can’t have your pie and eat it to with retirement calculations. Your going to have to research each assumption and make the best decision for your individual case. Pick what makes you the most comfortable.

The good news is, how much you spend versus how much you save is the biggest factor to look at. I know that I’ve said this before but this one thing has the biggest effect on the numbers. It gives you the biggest bang for your buck if yo will.

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