The Simple Answer to: When Can I Afford to Retire?

I’ve mentioned before that one of my big financial goals is to retire at 50. Many plan to retire at the traditional age of 65. Fun fact: this “tradition” is due to Social Security payouts in the US starting at that age. However, if you were born after 1960, that age has been pushed back to 67 to receive full benefits. And every country defines the retirement age. But as I’ve learned more about my finances, I’ve realized that retirement isn’t an age, it’s a financial state of being. So…when can you afford to retire?

The Simple Calculation to Know When You Can Afford to Retire

Ok, are you ready for a stupidly simplistic answer to when you can afford to retire? You just have to save 25 times your annual spending. It’s that simple. Take this year’s spending, multiply it by 25, and BOOM, there’s how much you need to have saved up to retire.

Why multiply by 25? Well, in 1998, there was a study at Trinity University evaluating withdrawal rates from retirement plans that held stocks. The question they sought to answer was, “How much can a person withdraw and not run out of money before they die?”. The answer? 4%.

A Quick Note on the Trinity Study

Ok, so what does the Trinity study actually tell us? It concludes that, when someone retires, they can pull 4% of their retirement fund out. Every subsequent year, they can pull that same dollar amount, adjusted for inflation. The result is that the retirement fund will likely not run out of money after 30 years. There are a lot of assumptions baked into this. Stay with me, I’ll get to that.

The Basis of Understanding When You Can Afford to Retire

Ok, so what does this 25x thing mean for you? First and foremost, YOU NEED TO TRACK YOUR SPENDING.

This isn’t just me saying that spending is bad and saving is good. If you don’t track your spending, you don’t know how much you spend in a year, so you won’t know when you hit 25x that in savings. It’s that simple. So if you don’t already track your spending, I’d suggest getting started!

But isn’t 25x a HUGE number? YES. This is why retirement savings is so high in so many people’s minds. But the good news is that, once you’ve defined your goal, you can start working toward it. Don’t freak out: just start prioritizing your financial goals.

A Fun Aside

Sometimes, to keep my finances fresh and exciting, I play with the numbers. I like to look at my retirement savings, calculate what 4% of the current balance is, and figure out what parts of my budget I can cover. So like, if I had $100,000 saved, that means that I could pull out $4,000 per year. That’s ~$330/month. Hmm…that’s about my car payment + insurance. If all I needed was my car, I could retire right now! Fun, right? Just me? Ok.

Caveats to the 25x Rule

Ok, that study is all well and good, but we all know that life throws weird things at us. Let’s talk about exceptions to the rule.

How Can I Afford to Retire for More Than 30 Years?

The Trinity study only covers up to 30 years of retirement. So what if I retire at 50 and live to be older than 80? Based on my family history, that’s pretty likely.

The answer? Save more. Personally, I’m saving for a 3% or 3.5% withdrawal rate, just to be safe. That means saving 29-33x my current spending. You could also choose to work a little in retirement. Plenty of people find the void of retirement to be lonely, demotivating, or simply boring. Keeping a part time job could help fill the hours, maintain social interaction, and reduce the amount of money you need to pull out of your retirement accounts to live!

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What If I Want Money Leftover?

The Trinity study assumes that ANY balance at the end of 30 years is a success. This means that you could die with $1.12 in your account and that would be a thumbs-up from the researchers. But what if you want to leave money for your kids? Or spouse? Or grandkids?

Again, the answer is to save a little more. (Or work a little more in retirement)

What If I Want to Spend More in Retirement Than Now?

So you want to retire, but you want to do it in style. You’ve worked your whole life for this time off, after all, why would you skimp now?

Any idea what my answer will be? Maybe save a little more? It might make sense for you to calculate your retirement goal off of how much you make instead of how much you spend.

What If I Get Really Sick?

This is the scariest scenario, to me. I’m speaking mainly to my US folks here – healthcare can be devastatingly expensive in the US. Unfortunately, I don’t have a glib answer for this.

My personal plan is to consider maintaining at least part-time work in my retirement (I’ve learned in my time in Berlin that unlimited free time doesn’t agree with me). Perhaps that will bring health coverage. But I’ll be hedging that bet with a lower withdrawal rate, too.

Summary

The answer to, “When can I afford to retire?” starts easy, but has a LOT of caveats. Learn what you spend on your life now, multiply it by 25, and save toward that goal. It will take some time, so you’ll have time to think through the other considerations I’ve mentioned.