4 min read
One of my favorite new blogs is Engaging Data. The author has a handful of interactive data visualizations and calculators that are fun to play around with.
My favorite one is the Retirement Calculator. As described by the author:
“This early retirement calculator / visualizer is designed to project the number of years until you can retire, based upon a few key inputs such as annual income and spending, income growth rate, expected annual spending in retirement and asset allocation.”
Here’s a look at the calculator filled in with my own inputs:
Investments: $102,000 (this is the sum of all my cash and investments)
Post-Tax Income: $60,000 (my current post-tax income)
Current Spending: $20,000 (my current annual spending)
Income Growth: 1% (this is the default)
Retirement spend: $30,000 (this is how much I plan to spend each year in retirement)
Target WR (%): 4% (this is the default – it’s the percentage of my portfolio I plan to withdraw each year in retirement to support my lifestyle)
Allocation: 90% Stock/ 0% Bond/ 10% Cash
Projection Method: Fixed Percentage (this assumes stocks will have a real return after inflation of 8.2% per year and bonds will have a real return of 2.4% per year, which are the historical average returns for these asset classes from 1871 to 2015)
Based on these inputs, I would have 25x my annual expenses saved up in 9.2 years by age 33:
One of my favorite parts about this calculator is that you can tweak the expected stock and bonds returns. The defaults are set to 8.1% and 2.4% annual returns, which are the average real returns from 1871 to 2015.
To be a little more conservative, I’ll change the expected annual stock returns to 5%. I’ll leave the annual bond returns unchanged since I have a 0% bond allocation anyway. Here’s the impact of this change:
My expected time to retirement increased by 1.4 years.
Let’s try tweaking the income growth number. Currently it’s set to 1%, which means I expect my real income to grow (after inflation) at 1% per year. I feel confident that I can grow it by considerably more than that each year, so I’ll change that number to 5%. Here’s the impact of this change:
This drops my expected time to retirement down to just 8.8 years! This means if I can grow my income by 5% annually, I could shave off about two years of mandatory working.
Another feature that I love about this calculator is the option to make your current spending different from your retirement spending. This is particularly useful for me because I only spend about $20,000 per year right now. By the time I reach retirement I assume I’ll have a wife and kids, so let’s see the impact of changing my “retirement spend” to $40,000 annually:
This bumps my time to retirement back up to 10.9 years.
There’s one more input I’m curious about tweaking: the withdrawal rate percent. Suppose I want to quit my day job before I accumulate 25 times my annual expenses. For example, if I want to quit with only half that amount saved up – 12.5 times my annual expenses – I could simply increase my withdrawal rate by twice the amount to 8%.
Effectively I’m telling the calculator that I only want to save up $500,000 (12.5x my annual expenses) instead of $1 million (25x my annual expenses). Let’s see the impact of this change:
By choosing to save only $500k instead of $1 million, I could quit my day job in just 6.2 years. Granted, an 8% withdrawal rate is likely to exhaust my retirement portfolio well before I grow old, which means I would have to earn additional income through active work. Luckily I’m okay with this strategy and I do plan to earn income through doing work I enjoy once I quit my day job.
Yet another cool feature of this calculator is that you can change the “projection method”, so instead of making predictions about future stock and bond returns, you can use actual stock and bond returns over the past 131 years to see how soon you could have reached your savings goal based on historical returns.
Let’s see the impact of changing the “projection method” to “Historical Cycles”:
Using this projection, we get a range of values. The calculator tells us that based on the inputs I provided, over the past 131 years the median time to retirement would have been 5.8 years, while the range from the 10th to 90th percentile was 4.3 years to 7.7 years.
I like using historical data because it lets you see that the time it takes to reach your financial goal can vary based on market returns during different periods.
Check out the calculator yourself to see how your own inputs impact your time to retirement.
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- Things I’ve Learned from James Clear - June 24, 2020
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