Retiring and committing yourself to living the rest of your life off of a set sum of money is a scary prospect. As I’ve written before, both of my grandmothers asked “do I have enough money to last me for the rest of my life?”, so this is a source of anxiety for many people even when they’re well INTO retirement! One woman I know worries endlessly about money, constantly trying to cut costs everywhere possible. She said to me once that she’s one step up from putting her money in a mattress. I feel badly for her, as this anxiety clearly diminishes her enjoyment of life. Having an understanding of you finances and what you can expect from them in the future is a massive benefit in your life.

## How Much Do I Need?

I’ve written about it before, and likely will write about it again, but you can plan to live off of 4% of your net worth annually. What this means is, take your net worth, multiply it by 0.04. Divide it by 12, and that’s how much you can spend from a lump sum of money with the expectations that it won’t be depleted for longer than 30 years – see the linked to previous post for more information.

For example, say you had a net worth of $500,000. You can spend $20,000 per year (500,000 * 0.04) or $1,666.67 a month (20,000/12).

Looking at this another way, first figure out your monthly expenses. Multiple this by 12 (to get your annual expenses), then divide it by 4% to figure out how much you’d need to cover those expenses indefinitely.

For example, say your expenses were $2,200 per month. To be able to retire and cover this from your investments, you’d need to have a net worth of $660,000 (2,200*12/0.04).

## What About Inflation?

A great objection some people might have at this point is that inflation is a concern. Your monthly costs should go up every year, so what do you do with your ever increasing expenses. With the above calculations we’re working with real returns. This basically means we’re decreasing our return by the average inflation rate, so that we can think about future costs in terms of today’s dollars. I’ll write a full post in the future about this distinction, so do a search in the search bar on the right hand side if you’re reading this post well after the date it was posted on.

## What if I’m Not Sure About My Expenses?

It isn’t the simplest thing in the world to just say “my monthly expenses are $X”. Different months have different spending and with a few credit cards, an investment account or two, a checking and a savings account it can be hard to figure out what your actually monthly spending is. Both of these are simply a measure of what percentage of our paycheck we are saving vs. spending.

One technique I used, which worked great, was to keep a small notebook and a pen in my pocket (obviously this was before the days of smartphones). EVERY time I spent month for any reason or through any method (cash, credit card, online bill payments) I’d write it down. Every few days I’d copy these to a spreadsheet, assign them to a category and calculate my average monthly spending. A smartphone app or You Need a Budget makes this even easier.

Another technique is to look at all the times you transferred cash to an investment or savings account and figure out what the monthly average is based on this (divide the sum of the transfers by the time period they occurred in). Subtract this from your take home pay and you have (roughly) your monthly expenses.

## How Long Will It Take For Me to Get There?

In the previous section we figured out our monthly expenses. If we divide our *savings* (just net income – expenses) by our income, we have our savings rate. Another way to think of this is to divide your expenses by your net income to calculate a **spending** rate, then subtract this from 100 to get your savings rate.

For example, say I earn $3,300 per month (net after taxes, this is what shows up in my checking account via direct deposit). If I figure out my expenses are $2,800 per month, this means I have a spending rate of 85% (2800/3300) or a saving rate of 15% (either 100-85 or (3300-2800)/3300).

The math to then figure out how long until you have enough to retire off of is a LITTLE bit more complicated. You can either look up the value on the chart at this Mr. Money Mustache post, or plug your numbers into this early retirement calculator). In the above example, if we currently had $100,000 net worth, using the early retirement calculator linked to, we can expect to retire in 29.5 years.

## What Do I Do With All This?

I get that a post like this can seem like it’s in a foreign language for people not that comfortable with math. I think it’s worth the payoff of thinking through these calculations. If you understand what they mean, it will tell you if you can afford the lifestyle you’re currently living in retirement, it can tell you if you’re on track to retire when you hope to and it can tell you if when you could achieve financial independence based on different savings rates.

*What is your current savings rate? How long until you’re able to retire off of your savings? Is this before or after you anticipated retirement date?*

JD says

Something I wonder about when reading these sorts of things (like the Mr. MM post, which I’ve gone over before), is how to pick a withdrawal rate under the assumption that you could readily earn _some_ income in future.

For example, if I were to retire at 35, under a plan like Mr. MM suggests, it’s not like I would starve if the money ran out. I could certainly get some source of income, and it needn’t be very much to reduce my withdrawal rate to the point where the fund grows again.

It would be interesting to see a post that tries to assess that kind of thing in detail.

John Ryan says

@JD: I’ll certainly write such a post in the near future! I think the short version is that you just subtract your average expected monthly earnings from your expenses. If, in your comment, you mean that you’d start earning income if your portfolio started dropping, then I think you could just view this an insurance against the 5% failure rate – this is very worthwhile, and affordable, insurance that anyone attempting this should absolutely plan to use.

Robb Engen says

We’re currently saving about 25% of our income, which now that I write it seems low for a personal finance blogger. I’m shooting for financial freedom by 45, which would be in just under 10 years from now. That date would be well before my traditional retirement date, but it should give me the option to pursue financial planning / writing full-time rather than just doing it on the side.

John Ryan says

25% is crazy high compared to the population at large! I actually wonder what the savings rate *IS* for PF bloggers…

Have you plugged the numbers into a calculator (or a spreadsheet)? Does 10 years seem doable?

Robb Engen says

I’ve run a few scenarios and 10 years is pretty aggressive for us to have our mortgage paid off and be able to live off the income from my online activities. I’ll have to, you know, get a raise once in a while, and have some luck with our car not breaking down, or our house not falling apart, or my wife and kids not needing expensive medical or dental care. But it’s certainly doable.

Laura Beth says

Hi John,

I found the site on Yakezie and wanted to stop by and check it out. Love the site and your informative posts.

The guidance you’ve provided in this post is clear and useful.

Looking forward to reading more from the moneytimeblog!

Laura Beth

John Ryan says

@Laura: Thanks so much for your kind words!