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When can you afford to retire?

August 6th, 2007 at 10:57 am

There are many retirement calculators available online, but it's interesting to look at the figures that pop out of a simple spreadsheet model to guage the effect of savings rate and return have on possible retirement age.

MODEL ASSUMPTIONS:

Start off retirement savings with $0 at age 20

Initially earn $30Kpa which increases 5%pa until hit $50K salary, then 1%pa increase until retirement

Retirement savings to be drawn down during retirement at 70% of final salary

Savings to last in retirement until death at age 85 - this is about the average lifespan for someone who has reached 65. The assumption being that you live long enough to retire!

Investment returns and salary rises are expressed as real, after-tax percentages. This avoids having to guess what inflation rate may apply.

No other retirement income aside from retirement savings eg. no government or company pension.

RESULTS: Table of possible retirement age where funds will last until death
SR = savings rate (% of salary put into retirement account each year)
ROI = avg return on investment

ROI --->
SR 3.0% 3.5% 4.0% 4.5% 5.0% 5.5%
8% 74 72 70 68 66 64
10% 72 70 67 65 63 61
12% 70 67 65 63 61 59
14% 68 65 63 61 59 57
16% 66 64 61 59 57 55
18% 64 62 60 58 56 54


CONCLUSIONS:

Early retirement before age 60 is a big ask - you either have to save a huge % of your salary, achieve a very high real return on your investments (which means higher risk of missing you target), or be willing to live on less than 70% of your pre-retirement income as a pensioner. To retire much before 60 you'd probably have to have other sources of wealth beside your retirement savings - such as a successful business or an inheritance.

Typical savings rates (10%-12%) and ROI (4%-4.5% real) result in a typical retirement age of 65

Investing too conservatively (3% ROI) or saving too little (8%) mean you couldn't afford to retire until your 70's if you want your retirement income to last until 85.

Copyright Enough Wealth 2007

3 Responses to “When can you afford to retire?”

  1. fern Says:

    Hey, Ralph, since you seem to enjoy crunching numbers in this way, what would you say to crunching MY numbers (current info on my blog page) to see if i could retire early? It would probably be interesting for readers here to see a real world example, just for fun.

  2. enoughwealth Says:

    There's not actually enough info available (eg. age: forty-something, income: non stated, risk-tolerance: unknown). You'd also need to state what inflation-adjusted, after-tax return you expect you retirement account to average from now until retirement (eg. if in domestic and foregn stock index funds and some bonds you might hope for around 4% real, after-tax return), and if you want your retirement income to last until 85 with no residual balance, and will keep your investment mix the same during retirement as you had while saving. It would also depend on whether you plan on using your non-retirement account investments to supplement your retirement income.

  3. fern Says:

    Let me answer those questions for you:

    age: 48.
    Income: Fluctuates a little, let's say $59K to be conservative.
    Risk tolerance: moderate
    As for expected return, I have about 80% now in moderate risk level stocks; balance in bonds and cash. I'd go with what you suggest.
    Would like retirement income to last til i'm 90 with no balance needed.
    Yes, i'm planning on depleting my non-retirement accounts first since they're taxable.
    While i'd like to retire early (age 60?) i would plan on working part-time for say 5 years, earning let's say $15K a year.
    I also will have no debt, no mortgage.

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