How long do I need before I retire? Not very long actually

Let's have a thought experiment. How much do you think you need for retirement a month? $1,000 is a reasonable number if you live frugally. Assuming a withdrawal rate of 4% (more on this later), you would need $300,00 for retirement.

Working: $1,000 a month gives $12,000 a year, which means $300,000 in retirement sum because 4% x $300,000 = $12,000.

How long do you need to save up to $300,000? If I earn $5,000 a month (doing odd jobs and stuff), and spend $1,000 a month for 5 years, you can actually retire in 5 years! According to this post: here.

Actually, it doesn't depend on how much you need, but rather on how much you can save. Let me explain more.

The magic of savings

Try to go to this website, and key in some numbers for yourself: here. I keyed in my numbers (simplified), and here are my results.

How does it work? One word. Savings. If you are able to constantly spend $1,000 a month, and save $4,000 a month, the savings will go to work for you. In 5.6 years' time, the entire amount would be able to give you $1,000 a month, and not be depleted. Here is the breakdown.

Withdrawal rate

Take note at year 6, my net worth is $334,654. Assuming a withdrawal rate of 4%, I will be able to receive $1,116 a month (4% x $334,544 = $13,386, $13,386 / 12 = $1,116). This covers the $1,000 I had earlier assumed to be my living expenses during retirement.

Do note that the withdrawal rate is deemed as a rate of taking out money from the total sum that does not deplete the total sum. You can read that again to make sense of it. In other words, if you withdraw at this rate of 4%, the money will be there forever.

But, you might ask, what is this 4%? How is it derived? This was done in a study by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz of Trinity University. This study was also known as the Trinity Study.

I shall quote from The Pillars of Investing, where "they looked at the success rate of various withdrawal strategies over numerous historical periods and came to the conclusion that only at a withdrawal rate of 4% to 5% of the initial portfolio value do you have a reasonable expectation of success." Success is defined as the retirement egg not being depleted.

What this means is also that the retirement egg has to be used for investment. Take caution here that the study was conducted over a period of 7% real return, which might or might not be so in the future. I have written a blog post of how the 7% can be achieved in the past: here.

After thoughts

When I first read the post, I was very inspired but after thinking about it for some time, I realised it might not be entirely possible to retire in 5 years. Why?

Firstly, our expenses are unlikely to remain stagnant all the while. Furthermore, as we age, we need more insurance, especially of health, and will incur more expenses. Secondly, the assumed investment return of 7% might not be feasible in the future.

However, the concept between early retirement is still very sound. That is, the more you save, the faster you retire. You can use the website to calculate your time needed to retire using more conservative estimates by clicking on the "+show more options" button.

For myself, I am a prudent saver, and I like to save. Humans are naturally optimistic creatures, and I am not an exception. However, if you need some motivation to save more, perhaps you can take a look at this table which compares the savings rate to years needed for retirement, courtesy of this website: here.

Final thoughts

I think this is another interesting idea, hence I shared it with you. If you have any questions (for instance, what do you input for the various fields in the calculator), feel free to comment below or contact me!
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Write comments
la papillion
22 February 2016 at 15:25 delete

Haha, I think 1k a month is hard right? Need extreme measures and possibly include living with parents! Haha

la papillion
22 February 2016 at 15:26 delete

Haha, I think 1k a month is hard right? Need extreme measures and possibly include living with parents! Haha

23 February 2016 at 19:58 delete

Totally agree it's gonna be hard. I guess to achieve what others can only dream of, you have to do what others cannot imagine. Haha!