the shockingly simple math behind early retirement reddit

#The shockingly simple math behind early retirement reddit series#

Just under half the time the gap is a year or less, about two thirds of the time it is under two years. We can see that for a lot of the starting years the gap between how long it takes to hit FIRE is actually very small even though another third more money is required. These targets would then generate an income of $30,000pa (lean FIRE) at a withdrawal rate of 4% and 3%. The table below shows the number of years taken to hit targets of $750k and $1m assuming an annual contribution rate of $30,000. I then also used annual savings rates of $30k for the $30k and $40k withdrawal rates and a $40k annual savings rate for the $50k withdrawal rate to calculate how long it would take to reach FIRE. The table above shows what amounts are needed to be able to withdraw the respective amounts at each withdrawal rate.

You may have different version of the dollar amounts needed and that’s fine, these are for illustrative purposes. I’ve used scenarios with $30k, $40k and $50k per annum as the targets for hitting FIRE to represent roughly speaking my versions of Lean, Regular and HIFIRE respectively (assuming a paid off home). Assuming the same variables for both a 3% withdrawal rate and a 4% withdrawal rate we can then see just how much longer it would have taken to get there. Obviously there are a few variables that need to be considered here, primarily what the actual additional savings each year will be as well as what the amount of income desired in retirement is. So using historical stockmarket data, how much longer would it have actually taken to build up the additional funds required to use a 3% withdrawal rate rather than a 4% withdrawal rate for the same amount of income? This is due to the returns on your existing investments being more of a factor than whatever additional amount you’re contributing, as I talked about in this article. Some years they’re up, some years they’re down, and as you get closer to your target it’s entirely possible that despite investing more money each year you might actually have less money at the end of that year. The reason for this is that as discussed in this article returns are not smooth and instead vary over time. Which as I said is simple and easy which is always nice, but more importantly it’s almost certainly wrong. The simplest and easiest way to try and figure this out is to put a bunch of assumptions into a compound interest calculator like this one at Moneysmart and let it do the math for you. How much longer it will take to get there though is much more complex. If you want to use a 3% withdrawal rate instead of a 4% rate then the simple math is that you need an extra third of the amount of money you needed previously.

$the shockingly simple math behind early retirement reddit$

And obviously you can do a combination of these two things as well.Īssuming that people want to be living a pretty comfortable life in retirement and don’t want to be starting out with less room to tighten their belt then they will likely be looking to save up more money before declaring FIRE. This means that you can have the same amount of money and retire at the same time as you would have otherwise but on a lower income, or retire later but on the same income you would have wanted at a 4% withdrawal rate but using a 3% withdrawal rate instead. So if you want to reduce the odds of running out of money in retirement then you need to be using a more conservative withdrawal rate. Which happily enough matches up with what some academic researchers found as well.

Obviously the safe withdrawal rate varies somewhat depending on the actual mix of investments but as a generalisation 3% seems to work pretty well across asset allocations where most of the money is in Australian shares. What we both find is that if you are only looking at Australian investments then you need to be more conservative with your withdrawal rate. I talked about it in this post here and Dan covered it in this post. One thing that has come out of this is that the magical 4% withdrawal rate using only Australian investments has not historically been 100% safe.

#The shockingly simple math behind early retirement reddit series#

Dan over at Ordinary Dollar has done some fantastic work with his series and I’d like to think that I’ve contributed something to the FIRE community with my work as well. There’s been a lot of work done recently on sequencing risk and safe withdrawal rates for Australian investors.