How Long Until Financial Independence?

How Long Until Financial Independence?

Want to know how long it could be until you reach Financial Independence (FI)? The basic math is pretty simple and in this post I’ll show you how to forecast the answer to this really important question. And I’ve made some pretty nifty calculators that should be lots of fun for you to play around with.

Why is this question so important? Well… first of all, it’s good to know what you’re working toward. For some, this may also serve as a wake up call to re-evaluate their finances and goals. For others, I hope it serves as a reminder or even a first time ‘eye opener’ that you don’t have to plan on working your day job until you are 65 – 70 years old. Depending on how willing and able you are to increase your net savings (by spending less, earning more, or both), many people are finding that achieving FI early in life is actually very feasible. It’s not something that is easy or will happen overnight – but it can be done!

*Nerd Alert: technical stuff below. If you’re not interested and just want to play around with the calculators, skip on down to ‘The Calculators’ section! 

The Math

While the reality is that your time to FI will be impacted by a lot of things that are more or less out of your control (like the economy), the math behind FIRE (Financially Independent / Retire Early) is pretty simple and demonstrates that your time to FI is directly related to your savings rate, which is something you have much more control over. To guesstimate this, figure how much you can save, determine a reasonable rate of return and safe withdrawal rate (the rate of portfolio withdrawals to cover living expenses which should not deplete your portfolio before you’re done with it), and plug those numbers into a spreadsheet or financial calculator to see how long it should take to get there.

And while it really is that simple to get ‘the number’, there’s a whole lot that goes into each of those components – I’ll spend time on this blog digging into each. Of course, many of you already have some investments and adding those into the calculation is slightly more complicated, but not by much – and I’ve included this in the calculators below for you.

For those who are really interested in the mathematical formula behind the ‘years to goal’ calculation in the calculators below (or the internal workings of the spreadsheet functions) – here you go:

Time To Goal = LOG( Annual Savings / ( Annual Savings + Target Portfolio Size * Rate of Return )) / LOG(1 + Rate of Return) *-1.

To adjust the answer for the current portfolio size, use the same formula but substitute the current portfolio size for Target Portfolio Size and subtract the result from the first formula.

Have fun playing with these calculators! The sliders are neat  because they let you see in real-time how changing the variables changes the ‘Years to Goal’. Ultimately, we only have so much control over investment returns (economy) – but we have much more control over our savings rate.

Some Thoughts On The ‘Safe’ Withdrawal Rate

A commonly accepted rule of thumb for a safe withdrawal rate is 4%. For illustration purposes, the 4% rule essentially says this: if you have a $1,000,000 portfolio, you could start withdrawing $40,000 annually (adjusted each year for inflation) and probably not outlive your assets.

I may, in a future post, take a deeper dive into this and when I do and don’t believe its appropriate to use 4% for planning. For now, I’ll leave you with these tidbits on the safe withdrawal rate (SWR):

  • The ‘4% rule’ was designed around a 30 year retirement period. With life expectancy on the rise and the fact that a lot of people reading this are more interested in achieving FI earlier in life, I think it’s prudent to tune this down a bit. For someone looking to FIRE in their 40’s, that could leave sixty plus years ahead – which is a LONG time! Research suggests the first decade of performance is likely most important in predicting overall success. I say that because if you’re nearing your FIRE date now and looking at cutting the cord on your income, you should think about where we are in the current economic cycle and be wary of some of the larger systemic risks which are outside your control.
  • Its noteworthy to look at interest rates during the historical time periods that are used for supporting the 4% rule. We’re currently seeing rates at or near historic lows. Yields are being compressed in most every asset class. Lower interest rates make it harder to achieve the yields we need to sustain our ongoing expenses, which in turn increases the required portfolio size we need to maximize our chance of financial survival.
  • The 4% rule might be good for median results based on historical data and very generic planning / goal setting. But I’m not worried about being a median result, I worry about ‘tail risk’ – which is the risk that I’d fall in that subset of results which results in failure. Think of it this way – most people when traveling don’t plan their commute to the airport around average times. They allow for plenty of buffer to be as sure as possible they won’t miss their flight, just in case an accident causing traffic occurs at just the wrong time and place! The same logic applies here, but the consequences and magnitude of getting it wrong are quite a bit weightier than a missed flight. In the words of a brilliant friend in a recent discussion on this subject, “many a commentator has been swayed [regarding SWR] by the false allure of looking at only probabilities and not magnitudes”.
  • Ultimately, there’s no one-size-fits-all SWR. There are A LOT of individual factors at play to figure out an optimal number to use for this.
  • Historically speaking, research on SWR is insignificant in its time horizon. Even with market data going back to the 1871, that’s only 146 years of data – about two lifetimes. Show me that the 4% rule is truly safe going back at least a few dozen lifetimes and I’d feel much better about it! But even if you could do that, it probably wouldn’t be all that relevant anyway because the modern economy is, well, modern – its recent, economists are still very much figuring things out (in my opinion, anyway).
  • The research supporting the 4% rule is heavily influenced by 20th century S&P500 stock returns – which probably represent the greatest period of economic growth and innovation any country has ever experienced. I hope such growth and innovation can continue at the same (or even better) clip, but I also understand why Jack Bogle’s return expectations going forward are as low as they are.
  • And lastly, a lot of the debate around SWR is academic in nature. In reality, a person is unlikely to keep spending their portfolio down to zero – we can adjust spending, downsize, build a side income, work part-time, move somewhere with a lower cost of living, etc. But purely in an academic debate on the virtue of the 4% rule, I would personally argue its prudent to use a somewhat lower rate.

So, if I’m worried about the 4% rule, what is a better number to use for the SWR? Well, I think my main point in combining all of the above thoughts on the subject is there may not be a truly safe withdrawal rate we can bank on 100% of the time. If you want to roll the dice at 4%, go for it – but know that’s what you’re doing. If you want to play it a bit safer, that may be wise. Of course, if you play it too safe you might be shooting yourself in the foot!

It also depends on a person’s asset allocation and many other factors. Therefore, I’m hesitant to say “The safe withdrawal rate is x%”. But clearly I have my doubts on the 4% rule. I’ll leave you with this tidbit – my research on safe withdrawal rates always leads me back to the conclusion I wrote about in my first post which is that we have to enjoy the journey, not simply focus on the destination. Our pursuit of financial independence should not simply be about accumulating x dollars so we live happily ever after – it should be about adopting a mindset that helps us to get the most of life while simultaneously behaving in ways that increase our odds of attaining FI. But you came here for the calculators, not my soap box on the 4% rule or a life lesson!

The Calculators

This first calculator is the standard “% of income” approach. This is a good approach which is common among Financial Independence calculators, but the drawback is it makes the assumption your retirement spending will simply be the portion of your current income you are not saving. For example, a $100,000 income at a 30% savings rate assumes perpetual spending at $70,000.

For some, this approach may work just fine – and besides, this is mostly to illustrate a concept anyway. But if you want to instead specify the dollars you’ll spend in retirement and how much you can save in the meantime (probably more accurate) then skip on down to the next calculator which is called the ‘Specific Expense Method’. For instance, maybe you plan to have a paid off home before you ‘retire’, so you should have considerably less ongoing expenses.

Be sure to play around with the sliders and don’t forget there is an input for current portfolio size so you can see how that impacts the ‘Years to Goal’, as well. Below is a two-variable data table that shows how, at a 4% withdrawal rate and starting from nothing, the Years to Goal changes with savings rate and investment performance.

And here is a graph which illustrates the time trajectory to FI assuming we start with nothing, use 5% as the investment rate of return projection, and 4% as the withdrawal rate.

The Results

So, what can we glean from this? One of the first things I notice is that the traditional advice of ‘save 10% to 15% of your income’ is probably about right in terms of planning for a 40+ year career with a traditional retirement age of 65-70 or so. But what if someone wants to do it faster? According to this math, if you start with nothing and save 50% of your income then you could be Financially Independent in just 17 years. That is a HUGE difference.

Of course, the question is how on earth can someone have a savings rate of 50%??? Believe it or not, people do it – and some do it with incomes you might find remarkably average. Of course (psychology aside), it would certainly be easier for someone with a household income of $250,000 than someone making $60,000 (the median household income in the United States).

It really boils down to what you ultimately want out of life and… how well you can control your mindset around money. Did you think I was going to say ‘and how much you’re willing to sacrifice‘? Nope! And the reason for that is something we’ll talk a lot about on this blog, but it comes down to the idea that trying to save more than most other people requires much more than ‘sacrifice’. If someone attempting to save 50% of their income views it as a sacrifice then I highly doubt they’ll cross the finish line. It requires developing a certain mindset that appreciates and enjoys the journey, the challenge, and the self-improvement required to do it. It needs to be a joyful, life-giving, and thrilling pursuit of freedom in life.

I hope you found these calculators useful and interesting. It should go without saying, but just in case: all of these figures and calculations are simple estimates for informational purposes, not a guarantee of any kind. Past performance does not indicate future results. 

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