More Math

Note:  the post here is just plain wrong!  I have a more accurate approach to this issue here, please enjoy this one instead.

I got a question today about calculating the number of years until retirement. The question was based on the posts, “warning this post may change your life,” and “I was told there would be no math.”

My friend Julie asked me, “if I save 65% of my income this year then I should expect to retire in about 10/2 years. But what about the next year, if I keep the savings rate up, shouldn’t it be 9 1/2 years until retirement from that point?

And the answer was..”of course, you are right.”

The whole calculation is predicated upon the assumption that a 4% per year withdrawal of your retirement nest egg is sustainable given the expected future growth of the stock/bond market.

Put another way; you’ve arrived at financial independence when you have saved 25 times your yearly living expenses. (which is why it’s so important to save more, and spend less now.)

So if you want to calculate the number of years until retirement, taking into account your current accumulated savings , Then simply do this:

Figure out your yearly savings percentage. Then plug it in to the chart shown in the above linked posts. (ie if you save 50% of your take home income then you have an expected 17 years until retirement assuming a net worth of zero.)

Now subtract your outstanding debts from your current retirement savings. Then take that number and divide it by your yearly spending requirements. Now take that result and subtract it from your expected years to retirement.

So if you spend $50,000 a year and make $100,000 a year of take-home pay, and have $20,000 of student loans outstanding, and $220,000 invested, then….

You have 17 years until retirement (based on a 50% take-home pay savings rate) minus
(220,000$ saved – 20,000$ debt)/50000$ yearly living expenses.)

So 13 total years until retirement if you keep up your current savings rate.

This knife of course cuts both ways.

If you have a $100,000 in debt, and no current savings, and you spend $50,000 a year, for a 50% savings rate; then you’d have to add two years to the years calculated in the table. (So your expected years to retirement would be 19 years in that scenario , instead of 17. )

Or you could just kick up your savings by 5% (or an extra 96$/week)  and get your years to retirement right back down to 16.5.