I stayed home from work for nearly a month this summer. It took a while to adjust to the slower pace, to find meaning and accomplishment in my day, but I did. I very much enjoyed waking up without an alarm, spending time with my husband, and getting chores done around the house. On the eve of returning to my regular, full-time work week, I found myself asking: can I retire yet?
What does the map say?
The rule of thumb is that you need to have 25 times your yearly expenses saved to retire; this would correspond to withdrawing 4% of your nest egg each year. If you have your money invested in a reasonable portfolio (say, 60% stocks and 40% bonds), over a 30 year retirement, you are very, very unlikely to run out of money.
Some people prefer to be a bit more conservative, especially if they hope to have a retirement that lasts longer than 30 years. They may be very concerned about the sequence of returns risk (SORR), which is to say: what if you retire right before the next big recession and your investments lose value just when you need them? These people with suggest withdrawal rates of 3 to 3.5%, which means saving 28 to 33 times your yearly expenses.
As you can see, the basis for deciding if you are financially ready to retire is knowing how much you spend each year. Then you can decide what multiple of that amount to save.
The best way to figure out your yearly expenses is to actually track them. (I know, an earth-shattering revelation!).
Happily, I have been keeping track of our expenses. Every year, at the beginning of the year, one of my financial tasks is to go through the check book and credit card statements to tot up our spending. I have been doing this for many years, and for the past 5 years, I have put our numbers into a computer spread sheet.
Based on that spread sheet, our net worth (on a good day) is about 25 times our 2019 expenses. So that means we can retire, right?
Are we sure we know where we are going?
Unfortunately, though the spread sheet has been helpful for looking at discretionary spending and building a budget, it doesn’t actually capture all of our spending.
I purposely left out all the money we sent to our mortgage company, because the lump sums I sent in to pay it down made it hard to compare expenses year to year. We don’t have a mortgage anymore, but we do have to pay taxes and insurance, and those aren’t in the spreadsheet so far (though I suspect they will show up for 2020).
A good amount of our charitable contributions come from cash and gifts of stock from the investment account. Somehow that also has not been put into my yearly spending review, again, for reasons I can’t really articulate (maybe I didn’t want to feel like I was giving away too much?).
After 3 years of international trips, we voluntarily cut back on travel in 2019. Most of the travel we did was to go to work meetings and/or to see family. As a result, our travel spending last year was about half of our usual; however, in retirement, we hope to travel much, much more. I think if we make plans based on the 2019 travel budget, we will be sad.
Other unaccounted-for expenses include: taxes on our investments, anticipated repairs or replacement costs of large items (think roof, central air, kitchen appliances), and the big daddy, health coverage.
Some of these are far enough away that it’s not even clear what to budget. For example, if I could retire tomorrow, we would have to pay for private insurance for both of us for at least 6 years, and for me a few more years after that. If I don’t retire for another 14 years, then we just have to figure out our Medicare costs. Medicare isn’t free, but is much cheaper than private health insurance.
Another example: if we sell the house and move to a condo, many housing related costs will change. Our utilities and taxes will be cheaper, hopefully our upkeep and repairs would also be less, but we would have to add condo or HOA fees.
Some of these costs are too up-in-the-air for me to feel comfortable estimating what they will run in retirement.
I do have a pretty good idea of other costs, and would estimate that we would want $26,000 a year to spend on three items left out of our spending records: house costs (taxes and insurance), charitable giving, and travel.
Using the 4% rule/guideline, that means I still need to save an additional $26,000 x 25 or $650,000 to fund those costs in retirement.
How long will it take to save that much money? (I am not even looking at the other costs, like health care, for now.)
How fast can we go?
I can run the numbers if I just save money in the bank
I could just save the money in a new account. Under these conditions, it becomes obvious that I would have to save a ton of money to retire before I turn 65 in 14 years.
Just to be clear, I put this in a chart with different options for saving:
- Maxing out a 403(b) means putting aside $19,500 (this year’s limit) for the younger crowd.
- Maxing out the 403(b) if you are 50+ years old means you can save $26,000 a year.
- If you can save a little more, you could also save in an IRA (traditional, ideally then converting to a Roth IRA). That’s $7000 per year for the over-50 crowd, for a total of $33,000 a year.
- If you are married, you can also contribute to a spousal IRA (again, traditional, with the option to convert to a Roth). Another $7000 per year if the spouse is over 50, to make the family total $40,000 a year. This is starting to feel a little like crazy money, it’s more than I earned as an intern.
- If you can save even more, that’s great. Investing $1000 per month leads to annual savings of $52,000; if you can manage $2000 per month, you will put aside $64,000 a year. Alternatively, you might have a yearly bonus which comes out to those amounts.
- Lastly, if you are a super saver, putting aside money into all those accounts plus saving $2000 per month from your take home pay, and also getting a large annual bonus of $20,000 after tax; well, then you could save $84,000 a year. For me, this is super-crazy money; I don’t think I could save that much even with a doctor salary, although I suppose it would be worth trying.
Below is the chart of how much I could save over time using each option. It takes a long time to save $650,000. In fact, it takes so long, I just hid the first 6 years of saving so the table was small enough to fit on the page.
Investing the savings works better
Of course, I could also invest the savings, and then guess (or project) my investment return.
I have no idea what stocks will return over the next few years, plus some of that money might go into other investments, like bonds. I decided to assume a yearly return of 6%, and, using this lovely compound interest calculator, ended up with this chart:
As you can see, I decided to focus on how many years it would take to get me to goal. Getting a 6% return on my money cuts the time frame significantly, especially if I am not putting gargantuan amounts of money away. For example, maxing out the 403(b) from a younger age–say 31–shows that if the money is kept in cash, I would hit my current goal at age 64 or 65; by investing, I can reach my goal by age 45. That is a huge reduction in time.
As it is, it would likely take me at least a decade to reach my desired amount, so I am hoping to find a short cut.
Don’t ignore the money you already have saved
Thankfully, I am not starting from zero. By age 51, I have already saved (and invested) for a while, and have a decent nest egg. A nest egg that is still increasing thanks to my growing investments.
If I add the return on that money (using an assumed annual return of 6%) to the money saved each year (also returning 6% per year) then I end up with a chart like this:
This looks a lot better. Depending on how much I already have invested, and how much I save, I can reach my savings goal anywhere from 4 to 10 years from now
What are some conclusions I can draw from a chart like this?
One. It is much easier to make money once you already have money. Recall that putting aside $19,500 year meant I would need to wait 19 to 33 years to hit my target. If I have a nest egg producing more income to help boost my savings, depending on the size of that nest egg, I only need to wait 5 to 10 years to reach my goal. That is a huge help and puts my desired retirement within range.
Two. The bigger my nest egg, the less it matters how much I save each year. If I already have $3 million saved, it will take me 4 years to save the rest of what I need, whether I put away $33,000 a year or $84,000 a year. With a nest egg of half that amount, there still isn’t that much difference between putting away $40,000 a year and $84,000 year–just 1 year’s difference to make my goal.
Another way to look at it is: if I saved well as a young attending, I could have a very large nest egg as a tired 51 year old. So I could work less, make less, save less, and still end up with the money I need in about the same amount of time.
Three. The more you rely on your nest egg’s earnings, the more your progress relies on market returns. When the nest egg is a half-million dollars, how much more you put aside each year more directly affects how long it will take to reach the goal. When the nest egg is $2 or $3 million, most of the progress is really return on that saved sum; so your speed to reach goal will depend much more on your actual returns, which are most certainly not going to be a steady 6% every year, as projected in the chart. A bear market will delay your retirement by a few years if you are at the far right of that chart.
Stop, and Get Your Bearings
My head is spinning with all my assumptions: how much my bonuses might be over 5-10 years, the return I can get on investments, whether we’ll be OK with a 4% withdrawal rate.
That’s not even counting the costs we haven’t saved for yet.
With all these assumptions, I can see I am not comfortable stating that I will be ready to retire on a certain date.
What I might do, though, is set my sights on an intermediate target.
I suspect that in 5 years I will not have all of this extra money saved, but I should be getting close. At that point, I will be able to see how much money is actually invested, between monthly savings and yearly bonuses (if they happen). I will be able to see what the market has done to boost returns.
Pay attention to the road and enjoy the ride
I can also see what changes life has brought: a lot can happen in 5 years. My eldest nephew should be a senior in high school with college on the horizon. How many of our 4 parents will still be living, and how much attention they will need, is a total unknown. We could have grandkids! (Not that there is any hint of that now, but you never know.)
I thought it would take 5 years to pay off the mortgage once we got serious, and we beat that goal by a year.
I think 2025 will be a good time for me to stop and look around, review our spending and compare to our savings. We can see how close I am to hanging up the stethoscope for good, if I wish.
In the meantime, I will keep saving and investing, so that I can retire at some point. And I will keep working on my work and personal life, so that maybe in 5 years, I will be having too much fun to want to retire (that would be a win!)
Any thoughts? Advice? Corrections of my assumptions?